SEBI Considers Tightening Its Norms In Order To Ensure Complete Disclosure About Loan Defaults To Rating Firms

The Securities & Exchange Board of India (SEBI) plans to tighten its norms in order to make it mandatory for companies to disclose all details to credit rating companies.

The move has come amid concerns about banks citing “client confidentiality” in order to withhold sharing details with credit rating firms regarding delayed loans repayments and possible defaults by borrowers.

It may be recalled that in cases like Infrastructure Leasing and Financial Services Ltd (IL&FS), credit rating agencies have come under the scanner for failing to flag potential credit risks of securities and entities rated by them.

There have been instances when some entities have taken the benefit of certain regulatory gaps like banks being regulated by the Reserve Bank of India (RBI) while rating agencies and listed companies are under the SEBI’s jurisdiction, to withhold important information from rating agencies.

As a result of this, the SEBI plans to fill this regulatory gap and tighten its regulations.

The proposal is likely to be presented for approval by SEBI’s board at its meeting shortly.

The move is aimed at helping credit rating agencies get timely information about the rated entity's financial strength and incorporate the impact of these details in their ratings.

Incidentally, provisions of the rating agreement between a rating agency and its client or issuer of securities are governed by the SEBI (Credit Rating Agencies) Regulations, framed in 1999.

This regulation provides that every rating agency needs to enter into a written agreement with each client whose securities it proposes to rate and mentions detailed provisions that every such agreement should include.

As per these regulations, rating agencies are required to continuously monitor the rating of securities during the lifetime of such securities.