SEBI tightens Disclosure Norms for Rating Agencies

The Securities and Exchange Board of India (SEBI) has introduced a strict disclosure framework for credit rating agencies (CRAs).

New Norms

• CRAs must disclose a probability of default (PD) benchmark for the companies rated by them.
• CRAs must also disclose sensitive factors which can potentially impact the rating of the instruments which include financials and sector-specific information.
• In consultation with SEBI, CRAs are required to prepare and disclose a uniform Standard Operating Procedure (SOP) in respect to tracking and timely recognition of default. The same must be disclosed on the website of each CRA.
• CRAs must disclose liquidity conditions by using simple terms like superior or strong, adequate, stretched or poor, with proper explanations to help the end users understand them better.
• SEBI also mandates a specific section on rating sensitivity from the CRAs to indicate possible trigger for an upward or downward rating change in a simple language rather than like a general risk factor.

SEBI s has issued the directives following a series of defaults involving IL&FS and Jet Airways. It must be noted that the rating agencies had given AAA rating to IL&FS at a time when the firm was in dire financial conditions.