Guidelines for provisional ratings by credit rating agencies
In November 2016, the Securities and Exchange Board of India (SEBI) issued a circular requiring rating agencies to put in place provisional rating policies. In order to “standardize and strengthen provisional ratings policies”, after consultation with stakeholders, SEBI issued instructions in its circular of April 27, 2021 to further regulate the allocation of provisional ratings by rating agencies to rating instruments. debt. The 2021 circular also includes specific provisions on the ratings of Real Estate Investment Trusts and Infrastructure Investment Trusts.
Circular 2021 requires the term “provisional” to precede rating symbols in all provisional ratings. Provisional ratings must be converted to final ratings within 90 days of issuance of the debt securities. This period may be extended up to 90 days by the rating agencies on a case-by-case basis. No provisional rating can be issued by the rating agencies after 180 days from the issuance of the debt securities.
To obtain the final rating, certain conditions prescribed in the circular must be met, such as the execution of the term sheet and transaction documents, the settlement of the transaction and the opening of any relevant account. While this may reduce the risks associated with failure to meet the conditions after the final rating has been granted, it also creates practical difficulties for issuers of listed debt securities.
Such a requirement gives the impression that the SEBI rule-making process lacks internal departmental coordination. For example, the listing of debt securities must now be completed within four trading days of the closing of the issue. Final listing approvals typically require final scoring, which in turn requires the signing of transaction documents.
These requirements are in contradiction with the provisions of the SEBI Debt Listing Rules, which prescribe up to 90 days for the execution of transaction documents. While not unmanageable, some of the requirements prescribed by Circular 2021 and their conflict with other SEBI regulations may lead to avoidable setbacks when closing listed debt instrument issues.
Circular 2021 prescribes that no rating, including provisional, can be assigned by a rating agency to any client evaluating strategic decisions such as “the financing of a project, the acquisition, the restructuring of the debt, the ‘scenario analysis in refinancing a loan’.
This requirement follows the rating reports provided to debt securities offered for issuance under resolution plans under the Indian Insolvency Code. Although SEBI regulations prohibit providing indicative ratings to debt instruments without entering into a written agreement with issuers and without disclosing such indicative ratings on their websites, this clarification is likely to terminate any alternative interpretation for providing ratings. in the absence of a current transaction.
The circular also prescribes additional information to be provided by rating agencies when granting provisional ratings. These include the disclosure of any steps or ongoing documents that were taken into account in assigning the provisional rating, the risks associated with the provisional nature of the rating, and the rating that would have been assigned in the absence of the steps or pending documents.
When assigning a provisional rating to a debt instrument, rating agencies should indicate in their press releases that the provisional rating should be converted to a final rating within the prescribed time frame and associated implications. If a provisional rating assigned by the rating agency is not accepted by the issuer, this rating and certain additional information must also be published on the rating agency’s website.
If the 2021 circular has the laudable objective of standardizing the practices of rating agencies while providing ratings, including provisional, to debt instruments, now is the right time to consider an overhaul of the SEBI regulations on debt instruments. debt capital markets to ensure alignment. From a market perspective and to foster continued growth in debt capital markets, stakeholders prefer regulations to be complementary and not contradictory.
Sawant Singh and Aditya Bhargava are partners of Legal phoenix. Sristi Yadav, an associate, also contributed to this article
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