DNA Money Edit: Sebi's rule for credit rating agencies – Better late than never

The move by market regulator, Securities and Exchange Board of India (Sebi), to tighten disclosure and review norms for credit rating agencies (CRAs) is likely to address concerns of investors and other market participants. CRAs in India, majority owned by the three global biggies - Moody's, Standard & Poor's and Fitch – had come under immense pressure after the IL&FS collapse recently. Though there have been several instances where CRAs failed to raise timely red flags, their oversight in IL&FS was spectacular.

The regulator has now ordered CRAs to analyse deterioration in the liquidity conditions of an issuer while monitoring its repayment schedules and taking into account any asset-liability mismatches. While reviewing the performance, rating agencies will treat sharp deviations in bond spreads of debt instruments vis-a-vis relevant benchmark yield as a material event.

To help investors make more informed investment decisions, the regulator has also asked rating firms to make specific disclosures in the section on analytical approach. This includes infusion of funds from the parent group or government for servicing debt and providing rationale in case subsidiaries or group companies are consolidated for rating action.

Now, CRAs have also been asked to disclose parameters such as liquid investments or cash balances, access to unutilised credit lines, liquidity coverage ratio and adequacy of cash flows for servicing maturing debt obligation. It's better late than never.