Issuer non-cooperation (INC) - problem is getting bigger.

 

 

Understanding the Impact of Issuer Non-Cooperation (INC) on Credit Rating Agencies and the Economy

 

The issue of "Issuer non-cooperation (INC)" with credit rating agencies (CRAs) has been a growing concern in the Indian financial landscape. The number of INC cases is on the rise, prompting regulatory bodies and market participants to examine the implications of this trend on the capital market and the broader economy.

 

One of the key players in addressing this issue is the Securities and Exchange Board of India (SEBI). In its May 16, 2024, MASTER Circular for CRAs, SEBI emphasised the importance of reporting any suppression of information or non-cooperation by the issuer to SEBI. Failure to do so may result in violations of the Code of Conduct of CRAs and SEBI regulations. This underscores the regulatory scrutiny and measures being put in place to address the challenges posed by non-cooperative issuers.

 

Issuers' reluctance to share crucial financial information with CRAs has raised questions about the transparency and accuracy of credit ratings. This lack of cooperation has led to a significant number of rated entities being categorised as INC, with reports indicating that as many as 45-50% of the rated entities fall into this category across all rating agencies. The implications of this trend are far-reaching and have prompted a closer examination of the underlying reasons and potential consequences.

 

The impact of the rise in INC cases is multifaceted, affecting the functioning of CRAs and the broader economy. One of the immediate consequences is the decline in resources flowing to commercial activities. When crucial financial information is not disclosed, it hampers the ability of investors and lenders to make informed decisions, leading to a potential slowdown in capital allocation and investment.

 

Moreover, the adverse effects of INC are particularly pronounced in the micro, small, and medium enterprises (MSMEs) sector. Reports indicate that over 13,000 MSMEs were forced to shut down in the fiscal year 2023 due to non-cooperation with CRAs, a trend that may persist if left unaddressed. This poses a significant challenge to achieving the government's target of increasing the MSME contribution to GDP and exports, as Union Minister Nitin Gadkari outlined.

 

Furthermore, unreliable data stemming from non-cooperation with CRAs can dampen the growth of small companies, exacerbating the challenges faced by this vital segment of the Indian economy. As small companies are a significant contributor to the Indian economy, any impediments to their growth can have broader economic repercussions.

 

The INC issue has implications beyond the realm of credit rating agencies. It has the potential to disrupt the flow of resources, stifle the growth of MSMEs, and hinder the achievement of economic targets. In this context, it is imperative to delve deeper into the underlying causes of INC and explore potential solutions to mitigate its impact.

 

While SEBI has taken steps to address INC through regulatory measures, it is crucial to consider the perspectives of both issuers and CRAs in finding a balanced solution. Issuers' reasons for non-cooperation need to be understood and addressed, and a collaborative approach involving regulatory bodies, CRAs, and issuers is essential to tackle this complex issue effectively.

 

 

In conclusion, the rise in INC cases poses a significant challenge to the integrity of credit ratings and the stability of the capital market. It is imperative to address this issue with a multi-faceted approach that considers the regulatory, economic, and market dynamics at play. By fostering transparency, accountability, and collaboration among all stakeholders, we can work towards ensuring the smooth functioning of credit rating agencies and safeguarding the interests of investors, lenders, and the broader economy.