SEBI Proposes Stricter Guidelines for Credit Rating Agencies to Enhance Transparency

The Securities and Exchange Board of India (Sebi) has proposed new guidelines for credit rating agencies, demanding detailed explanations for rating actions, particularly defaults and upgrades. The guidelines aim to eliminate 'technical default' classifications and mandate the consideration of events like force majeure. Public feedback is sought by August 15.

The Securities and Exchange Board of India (Sebi) proposed new guidelines for credit rating agencies (CRAs) on Thursday, emphasizing the need for detailed explanations behind rating actions, especially in cases of defaults and upgrades.

In its consultation paper, the market regulator recommended removing the term 'technical default' from CRA policies, citing the potential for negative market signals and covenant triggers.

CRAs have highlighted operational issues such as force majeure events or bank strikes, arguing that these should be considered in their policies. The proposed guidelines also take into account situations like force majeure, incorrect investor accounts, or government freezes, alongside significant changes in the company's credit risk profile.

Under the existing guidelines, any delay of even one day or a minor shortfall in payment must be recognized as a default, unless rescheduled by lenders before the due date. Currently, CRAs can identify some situations, including minor delays due to operational issues, as technical defaults.

The Securities and Exchange Board of India has invited public feedback on the proposed changes to CRA policies, aiming to ensure clarity and consistency. The deadline for submissions is August 15.

(With inputs from agencies.)