Sebi Proposes New Rules for Credit Rating Agencies: Detailed Reasons for Rating Actions Required

On Thursday, the Securities Exchange Board of India (Sebi) suggested new rules for credit rating agencies (CRAs) to explain in detail the reasons for their rating actions. This is especially important in cases where there are defaults or when default ratings are upgraded. In a consultation paper, Sebi recommended that CRAs remove the term “technical default” from their policies because it can send negative signals to the market and trigger covenants.

CRAs have pointed out that operational issues, like natural disasters or bank strikes, should be taken into account in their policies.

The proposed guidelines should also consider events like force majeure (unforeseeable circumstances), incorrect investor accounts, or government freezes, in addition to significant changes in a company’s credit risk profile.

Currently, according to the guidelines, any delay of just one day or a shortfall of even Re 1 in payment (either principal or interest) from the scheduled repayment date is considered a default unless the lenders reschedule the payment before the due date.

Right now, CRAs can classify some minor delays due to operational issues as technical defaults. Sebi is asking for public feedback on these proposed changes until August 15 to make sure CRA policies are clear and consistent.