SEBI asks credit rating agencies to provide liquidity status, historical average transition of companies being rated
Moneylife Digital Team 13 November 2018
Market regulator Securities and Exchange Board of India (SEBI) has asked credit ratings agencies (CRAs) to include a specific section on liquidity in their reports to highlight the company financials. 
 
In its guidelines, SEBI said, "The press release shall include a specific section on 'liquidity', which shall highlight parameters like liquid investments or cash balances, access to unutilised credit lines, liquidity coverage ratio, and adequacy of cash flows for servicing maturing debt obligation. CRAs shall also disclose any linkage to external support for meeting near term maturing obligations."
 
To help investors understand underlying rating drivers better and make more informed investment decisions, CRAs are asked to make specific disclosures in the section on analytical approach. This includes, infusion of fund from parent group or government for servicing debt and providing rationale in case subsidiaries or group companies are consolidated for rating action.
 
For reviewing rating criteria, SEBI has asked ratings agencies, to assess inter-linkages of holding company and subsidiaries, holding company’s liquidity, financial flexibility and support to the subsidiaries.
 
"While carrying out 'monitoring of repayment schedules', CRAs shall analyse the deterioration in the liquidity conditions of the issuer and also take into account any asset-liability mismatch. While reviewing 'material events', CRAs may treat sharp deviations in bond spreads of debt instruments vis-à-vis relevant benchmark yield as a material event," SEBI said.
 
The market regulator has also asked credit rating agencies to publish information about historical average rating transition rates across various rating categories, so that investors can understand the historical performance of the ratings assigned by the CRAs. 
 
"Accordingly," SEBI said, "CRAs shall publish their average one-year rating transition rate over a five-year period, on their respective websites, which shall be calculated as the weighted average of transitions for each rating category, across all static pools in the five-year period." 
 
CRAs are also required to furnish data on sharp rating actions in investment grade rating category to stock exchanges and depositories on half-yearly basis, within 15 days from the end of half year on 31st March and 30th September.
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