Securities and Exchange Board India ,SEBI) has asked credit rating agencies to provide details about companies that are refusing to share data with them. According to an ET report, it also sought information on all corporates whose ratings are linked to promoter or parent guarantees and pledge of shares.
‘Letter of comfort’, ‘letter of undertaking’ and stock collateral are used by companies to reduce the cost of borrowing on bank loans and bonds, thereby improving their credit rating to some extent. According to the report, SEBI will analyze the data in the wake of the Reserve Bank of India (RBI) voicing its reservations on these arrangements – describing them as “thin and un-prudential support structures”.
The RBI has said that clearly more enforceable backing and widely used structures such as ‘corporate guarantees’ from the parent holding entity or group flagship can be used to enhance credit ratings when Have a strict timeline on the invocation of the guarantee.
A corporate guarantee is a promise by a parent to assume the debt obligation of a group company if the latter fails to repay or service the loan.
The report quoted a senior government official as saying, “The rating companies have already submitted data on the number of companies with ‘credit enhancement’, the nature of support taken for the purpose and the names of the companies. RBI’s The directive is for the banks it controls, while the rules on rating of other traditional debt instruments like debentures are framed by SEBI, which has allowed improvement in ratings by way of backing… There is a debt of thousands of crores.
Rating agencies had earlier sought SEBI’s intervention due to the contradictions that emerged after the RBI directive. Ignored, this causes a confusing situation in the market where listed debentures (regulated by SEBI) of a company will command a higher credit rating than bank loans (which are under the purview of RBI).
“I think the differences between SEBI and RBI are temporary, and will soon be resolved with a common set of rules on credit enhancement for loans as well as debentures. But now it is clear that a company that is undisputed corporate Unable to submit guarantees, which examine the legal due diligence of rating companies, cannot reduce their borrowing costs – something they have been doing for years,” the report quoted a compliance chief as saying. has gone. Large private banks.
The risks associated with rating businesses that refuse to share their financial and other information is an issue that rating agencies expect SEBI to address. This is a matter of concern, especially for unlisted companies that are not required to provide data and sensitive information to the stock exchanges on a regular basis. In addition to withholding information from rating agencies, these businesses are protected by their bankers, who are reluctant to discuss a loan failure that only consortium banks are aware of.
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