Market regulator Sebi (Securities and Exchange Board of India) has tightened regulations for credit rating agencies, asking them to formulate a uniform benchmark, under which they will be required to reveal "probability of default" for each of their instruments in advance. The new directions come at a time when the country is reeling under several debt defaults and rating downgrades. Experts believe it would lead to enhanced disclosures, thereby helping investors in making better investment decisions.
In a circular issued on Thursday, Sebi said credit rating agencies, in consultation with Sebi, will prepare and disclose standardised and uniform "probability of default" benchmarks for each rating category on their website, both for short-run and long-run. It added the rating agencies also needed to flag factors that could affect the overall ratings of a particular instrument.
The circular will play a crucial role in ensuring no conflict of interest arises between the rating agencies and issuers. Since rating agencies are paid by these issuers to rate their instruments, rating agencies have, sometimes, failed to flag 'defaults' on time. The case in point is recent defaults by a major non-banking finance company, Infrastructure Leasing and Financial Services Ltd and Dewan Housing Finance Corporation (DHFL). In the case of IL&FS, the government had to form a panel to revive the debt-ridden company. Last week, shares of Dewan Housing Finance Corp Ltd took a plunge as it missed payments on bonds.
As per Sebi, the new benchmarks will be prepared using a new methodology of Marginal Default Rate (MDR), which will comprise a monthly static poll for the past 10 years. "The short-run benchmarks may account for spikes due to economic cycles or unforeseen events, and hence, may have a wider band," said the circular, adding that all default benchmarks should be disclosed on the website of each credit rating agency by December 31, 2019.
Edited by Manoj Sharma