Sebi needs to revise this master circular for CRA.

 

 

Sebi needs to revise this master circular for CRA.

 

The SEBI Master Circular for CRA is dated May 16, 2024, and the subsequent circular is captioned "Measures for Ease of Doing Business for Credit Rating Agencies (CRAs)", dated July 04, 2024.

 

I want SEBI to consider the following points listed under three headings seriously.

 

CRA perspective,

 

The financial ratios used by credit rating agencies (CRAs) should adhere to uniform standards. Consistency is crucial, and the data used for the numerators and denominators in these ratios should be based on widely accepted and universal practices. Financial analysis is one part of the rating process used to measure repayment capacity.

 

The total amount borrowed by a company may not be clear to investors when multiple credit rating agencies are involved in the rating process. Instead of providing the total amount borrowed, each credit rating agency only offers the amount they have rated. This can create confusion for investors who want to know the company's total borrowing. If one credit rating agency bases its financial analysis on only the amount it has rated, without considering the total borrowing partially rated by other agencies, the reliability of such a rating is questionable.

 

For Example, MTNL was rated by two CRAs, the CARE Rating rated with an amount of Rs 27,839 and the CRISIL Rating with Rs 13,028. Which number should investors use to understand MTNL market borrowing?

 

Investors often face confusion when different CRAs publish conflicting information about the same issuer. For instance, when one CRA withdraws its rating for a particular issuer, while another reaffirms its rating, investors are left uncertain. This lack of harmony in ratings can lead to uncertainty and challenges for investors seeking confirmation.

 

There have been instances where two CRAs published matching ratings for the same issuer at a given point in time. Such indices are many. In such cases, investors may question the reliability of the ratings, suspecting potential issues in terms of accuracy and consistency.

 

Furthermore, there are material events that are not always considered when assigning ratings. For example, when a non-banking financial company (NBFC) was directed by the income tax authority to restrict cash loans to no more than Rs 20,000, this was not factored in by any CRA. Such events, which can significantly impact the risk profile of an NBFC with a high reliance on cash-based business, should be incorporated into the final ratings.

 

Finally, there is a need to regularize the fees charged by CRAs. These fees should be based on the amount and maturity of the instruments. Just as the National Stock Exchange (NSE) restricts brokerage charges on secondary market deals in corporate bonds, there is a call for the Securities and Exchange Board of India (SEBI) to regulate the fee structure for CRA services.

 

 Issuer perspective

 

The worrisome point here is that the issuer pays for rating service, and there is a strong cartel between the Issuer and CRA. If the fee is regulated, the cartel can be a broker to bring transparent and professional service in rating.

Once the fee structure is in place, the issuer can be given an option called feedback, the most Issue-waited, which the Issuer can use to give feedback on the CRA, which rated its issue.    

 

Investor Perspective.

 

CRA should publish daily ratings under 3 categories: one. All bank facilities, second, issuer not cooperating -INC, and all their other ratings, including the rating for the structured obligation.