Is SEBI Strict Enough About Rating Agencies?

SEBI Has Tightened Rating Guidelines

Introduction

Is SEBI Strict Enough About Rating Agencies in India? Market regulator, Securities and Exchange Board of India (SEBI) and RBI has decided to tighten the rating guidelines and issue stricter norms for rating agencies to uplift standards.

Is SEBI Strict Enough About Rating Agencies in India?

Issue of Strict Norms for Rating Agencies by SEBI

• SEBI and RBI has come up with the strict guidelines for rating agencies in India including probability of default benchmarks. It is to strengthen disclosures made by credit rating agencies and uplift standards.
• Under the tightened guidelines, SEBI will prepare and share standardized and uniform probability of default benchmarks for each rating category for one-year, two-year and three-year cumulative default rates – both for the short run and long run.
• SEBI also introduced disclosure of rating sensitivities, which is critical for the end-users to understand the factors that would have the potential to impact the credit worthiness of the entity.
• Still in the past few months, India has seen companies like IL&FS and DHFL that enjoyed the highest credit rating, default on their payments on debt. The regulator’s move came after a series of defaults at Infrastructure Leasing and Financial Services (IL&FS) last year.
• So there might be a question raised – is SEBI strict enough about these rating agencies?

Is SEBI Strict About Rating Agencies | IL&FS Case

• IL&FS has debt burden of almost Rs.1 Lakh Cr with a no doubt in the bankruptcy of the company.
• Just 15 days before the IL&FS default in September 2018, rating agencies like ICRA, Care Rating, India Ratings & Research had assigned AAA/AA+ ratings to various Non convertible Debenture (NCDs) of Infrastructure Leasing and Financial Services (IL&FS).
• We have seen an adverse cascading impact of this IL&FS default on Indian debt market. DHFL default also added fuel to the fire.
• Post this NBFC crisis, negative sentiments are build in the market and it had impacted adversely Debt market in India.
• There was a great liquidity crunch across NBFC sector. Due to the constraints came over the credit flow and fund raising, the Auto sector which has been supported by NBFC sector gets affected badly.
• About 70-80% of auto sale, dependent on the credits, adversely impacted. Total Automobile sector impacted very badly.
• And in the last week, SEBI imposed a fine of Rs.25 Lakh only each on these credit rating agencies – ICRA, CARE, India Ratings etc.
• So there is a big gap over the accountability of the Regulator.

What a Retail Investor Should Do?

• As a retail investor, how much should we depend upon the ratings assigned by such rating agencies to any corporate.
• In case of Debt funds, investors rely upon the ratings while investing the funds.
• If we don’t understand such investment instrument, then it is always advisable to park your money in safer FD options, pure liquid funds where investment is genuinely done in the government securities. You should check such options also.