Market regulator Securities and Exchange Board of India (SEBI) has tightened rating guidelines, including the probability of default benchmarks, to strengthen disclosures made by credit rating agencies and uplift standards. SEBI said it will prepare and share standardised and the 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.
The regulator's move comes after a series of defaults at Infrastructure Leasing and Financial Services (IL&FS) last year. SEBI also introduced disclosure of rating sensitivities in its press releases. "The disclosure of factors to which the rating is sensitive, is critical for the end-users to understand the factors that would have the potential to impact the creditworthiness of the entity," said SEBI in a circular.
Thus, rating agencies will have a specific section on rating sensitivities in each press release explaining the broad level of operating and financial performance levels that could trigger a rating change -- upward and downward. Besides, the regulator expects rating agencies to make meaningful disclosures regarding liquidity using simple terms such as superior or strong, adequate, stretched or poor, with appropriate explanations to help the end users understand them better.
Rating agencies may treat sharp deviations in bond spreads of debt instruments corresponding to the relevant benchmark yield as a material event, said SEBI. Moreover, rating agencies will now assign the suffix 'CE' (Credit Enhancement) to the rating of instruments that have explicit credit enhancements.
The standardised and uniform probability of default benchmarks should be disclosed on the website of each credit rating agency for long-term and short-term instruments on a consolidated basis for all financial instruments by the year-end, said SEBI.
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