To further strengthen the disclosures made by Credit Rating Agencies ('CRAs') and enhance the rating standards, SEBI by way of circular dated June 13, 2019, has issued certain guidelines regarding enhanced disclosure requirements for CRAs. Some of the key guidelines are:
i. Computation of Cumulative Default Rates ('CDRs') will be calculated issuer wise using the Marginal Default Rate ('MDR') approach, using monthly static pools. Accordingly, CRAs should annually disclose (on a consolidated basis for all financial instruments rated by a CRA), the average 1 year, 2 year and 3 year CDRs for the past 10 financial years (long run average default rates) and 24, 36 and 48 most recent cohorts (short run average default rates).
ii. CRAs in consultation with SEBI are required to form a Standard Operating Procedure in respect of tracking and timely recognition of default which are required to be displayed on each CRA's website.
iii. CRAs in consultation with SEBI are required to prepare and disclose standardized and uniform Probability of Default benchmarks for each rating category on their website, for 1 year, 2 year and 3 year CDRs, both for short-run and long-run.
iv. CRAs are required to assign the suffix 'CE' (Credit Enhancement) to the rating of instruments having an explicit credit enhancement.
v. CRAs are required to have a specific section on 'Rating Sensitivities' in the Press release which should explain the broad level of operating and/or financial change that could trigger a rating change (upward and downward).
Furthermore, the SEBI (Credit Rating Agencies) Regulations, 1999 were amended on September 23, 2019 to include certain changes in its Regulation 14 governing contracts between CRAs and their clients. The clients are now required to cooperate with the CRAs when the latter is carrying out periodic reviews of the ratings during the tenure of the rated instrument. Further, the clients are now required to provide explicit consent to the CRAs to obtain from them and other entities specified therein complete details about their existing and future borrowings along with information regarding repayment and delay or default of any nature.
Published In:Inter Alia - Quarterly Edition - September 2019 [ English
Date: September 30, 2019
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