HEADLINES:
December 10 2018
After IL&FS, SEBI tightens norms for raters
14 November 2018

Factors such as cash flow and asset-liability mismatch must be considered

The Securities and Exchange Board of India (SEBI) has tightened the disclosure norms for credit rating agencies (CRAs) that will now have to take into account various factors, including asset-liability mismatch, liquid investments, cash flows and capital infusion from parent or group entities while performing any rating action.

In a circular issued on Tuesday, the capital markets regulator enhanced the quantum of disclosures by introducing additional norms that are largely based on the learnings from the IL&FS episode, which has affected the overall liquidity scenario, especially in the non-banking financial company (NBFC) segment.

 

“When a rating factors in support from a parent/group/ government, with an expectation of infusion of funds towards timely debt servicing, the name of such entities, along with rationale for such expectation, may be provided,” the circular said.

“When subsidiaries or group companies are consolidated to arrive at a rating, list of all such companies, along with the extent (e.g. full, proportionate or moderate) and rationale of consolidation, may be provided,” it added.

List of subsidiaries

Based on the learnings from the IL&FS episode, the regulator has also made it mandatory for rating agencies to disclose full list of subsidiaries or group companies if such entities form part of the consolidated ratings.

While welcoming the new disclosure norms, Somasekhar Vemuri, senior director, Crisil Ratings said that Crisil always analysed aspects on parent support, consolidation, liquidity and factored them in the rating analysis.

“Enhanced disclosures on parent support, approach towards consolidation and liquidity will give investors more clarity on the rating drivers and assist in their own analytics,” he said.

SEBI also mandated CRAs to include a specific section on “liquidity” to highlight parameters like cash balances for servicing maturing debt obligation.

 

 

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