The Securities and Exchange Board of India (Sebi) has asked credit rating agencies to provide details on companies that have been denying to share data with them. It also asked them for information on all corporates whose ratings are propped up with promoter or parent guarantees and pledges of shares, according to an ET report.
‘Letter of comfort, ‘letter of undertaking’ and stock collaterals are used by companies to lower cost of borrowings on bank loans and bonds, which also improve their credit ratings by a few notches. Sebi would analyse the data in the wake of the Reserve Bank of India (RBI) voicing its reservations on these arrangements – describing them as “diluted and non-prudent support structures”, according to the report.
The RBI has said that even the apparently more enforceable supports and widely used structures like ‘corporate guarantee’ from the parent holding entity or group flagship can be used to enhance credit rating only if there is a strict timeline on the invocation of guarantee by lenders.
A corporate guarantee is a promise by the parent to assume the debt obligation of a group company if the latter fails to repay or service a loan.
The report quoted a senior government official saying, “The rating companies have already submitted the data on the number of companies having ‘credit enhancement’, the nature of support taken for the purpose, and the names of the companies. The RBI directive is to banks which it regulates while the rules on ratings of other tradable debt instruments such as debentures are framed by Sebi which has allowed rating improvements through supports…So, this has created a situation where two regulators have divergent stands on ratings based on which thousands of crores of debt are raised by companies.”
Rating agencies earlier sought Sebi’s intervention due to the contradictions that have surfaced following RBI’s directive. Left unaddressed, this causes a confusing situation in the market where a company’s listed debentures (regulated by Sebi) would command a higher credit rating than bank loans (which are under RBI’s purview).
“I feel the differences between Sebi and RBI are temporary, and would soon be sorted out with a common set of rules on credit enhancement for loans as well as debentures. But it’s now apparent that a company which is unable to furnish watertight corporate guarantee that stands the scrutiny of legal due diligence of rating companies cannot reduce its borrowing cost – something they have been doing for years,” the report said quoting the compliance head of a large private bank.
The risks associated with rating businesses that refuse to share their financials and other information is an issue that rating agencies expect Sebi to address. It’s a concern, especially for unlisted companies that aren’t required to provide data and sensitive information to stock markets on a regular basis. In addition to withholding information from rating agencies, these businesses are protected by their bankers, who are reluctant to discuss a loan failure that only consortium banks are aware of.