In November 2016, the Securities and Exchange Board of India (SEBI) issued a circular, requiring credit rating agencies to put in place policies on assigning provisional ratings. To “standardise and strengthen the policies on provisional ratings”, after consultation with stakeholders SEBI issued directions in its circular of 27 April 2021 to further regulate the assigning of provisional ratings by rating agencies to debt instruments. The 2021 circular also prescribes specific provisions on ratings for Real Estate Investment Trusts and Infrastructure Investment Trusts.
The 2021 circular requires the term “provisional” to precede rating symbols in all provisional ratings. Provisional ratings are to be converted into final ratings within 90 days from the issuance of the debt instruments. This period may be extended by up to 90 days by rating agencies on a case-by-case basis. No provisional ratings can be issued by rating agencies after 180 days from the issuance of the debt instruments.
To obtain the final rating, certain conditions prescribed in the circular must be completed, such as execution of the term sheet and the transaction documents, settlement of the transaction, and opening of any relevant accounts. While this may reduce any risks associated with non-completion of conditions following the providing of the final rating, it also creates practical difficulties for issuers of listed debt instruments.
Such a prescription gives the impression that SEBI’s rule-making process is bereft of internal departmental co-ordination. For instance, the listing of debt instruments must now be completed within four trading days from the closure of the issue. Final listing approvals generally require a final rating, which in turn requires transaction documents to be executed.
These requirements contradict the provisions of the SEBI debt listing regulations, which prescribe up to 90 days for execution of the transaction documents. While not unmanageable, some of the requirements prescribed by the 2021 circular and their conflict with other SEBI regulations may result in avoidable hiccups in closing issuances of listed debt instruments.
The 2021 circular prescribes that no ratings, including provisional ratings, may be assigned by a rating agency for any client evaluating strategic decisions such as “funding mix for a project, acquisition, debt restructuring, scenario-analysis in loan refinancing”.
This prescription follows reports of ratings provided to debt instruments proposed to be issued in respect of resolution plans under the Indian insolvency code. While SEBI’s 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 end any alternate interpretations for providing ratings in the absence of a transaction actually taking place.
The circular also prescribes additional disclosures to be made by rating agencies when assigning provisional ratings. These include disclosing any ongoing steps or documents that were considered in assigning the provisional rating, risks associated with the provisional nature of the rating, and the rating that would have been assigned in the absence of the pending steps or documents.
When assigning a provisional rating to a debt instrument, rating agencies must disclose in their press releases that the provisional rating has to be converted into a final rating within the prescribed time period and the related implications. If a provisional rating assigned by the ratings agency is not accepted by the issuer, such rating along with certain additional disclosures are also to be published on the website of the rating agency.
While the 2021 circular has the laudable aim of standardising rating agencies’ practices while providing ratings, including provisional ratings, to debt instruments, this is a good time to consider overhauling SEBI regulations on debt capital markets to ensure alignment. From a market perspective and to foster continued growth of debt capital markets, stakeholders prefer regulations to be complementary, not contradictory.
254, Okhla Industrial
Estate Phase III
New Delhi – 110 020
Vaswani Mansion, 3/F
120 Dinshaw Vachha Road, Churchgate
Mumbai – 400 020
Tel +91 11 4983 0000 / +91 22 4340 8500
Fax: +91 11 4983 0099 / +91 22 4340 8501