On May 21 the Securities and Exchange Board of India (SEBI) issued a circular relaxing the post-default curing period for credit rating agencies (CRAs) to upgrade the ratings of debt instruments of entities from “default” to “non-investment” grade. Previously, through a circular dated November 01, 2016, SEBI had prescribed a 90-days’ curing period for CRAs to upgrade the ratings of entities from “default” to “speculative” grade and 365 days’ period for “default” to “investment” grade.
The decision to relax the above period was taken by SEBI after taking into account recent cases where the ratings of certain entities could not be upgraded even though such entities were able to correct the default within less than 90 days. In view of the same, and in the wake of the covid-19 pandemic, where there is a likelihood of resurgence of such cases, SEBI has decided to permit CRAs to deviate from the aforesaid 90 days’ period for upgrading the ratings of entities from default to non-investment grade, after such default is cured and the payments are regularized. SEBI has stated that such decisions of deviation from the 90 days’ period may be taken by the CRA on a case-to-case basis and subject to a detailed policy framed by the CRA in this regard.
Further, such cases of deviations from the stipulated 90 days’ curing period are required to be placed before the Ratings Sub-Committee of the board of the CRA, along with the rationale for such deviations, on a half-yearly basis. CRAs are also required to frame a policy for upgrading the ratings of entities from default to investment grade and place the same on its website. According to SEBI, such policies for upgrading the ratings, as stated above, may include scenarios such as technical default, change in management, acquisition by another firm, sizeable inflow of long-term funds, benefits owing to regulatory action, etc., which may fundamentally alter the credit risk profile of the entity.
Typically, instances such as technical defaults, etc. resulted in lower credit ratings which made it difficult for entities to raise funds, and such entities were required to wait for a period of at least three months before their ratings could be upgraded, even after the defaults were rectified. The above decision not only provides a say to the CRAs as to when and how the ratings of such defaulting entities could be upgraded, but will also enable entities to easily access funds in the current circumstances. At the same time, while upgrading the ratings of such defaulting entities, CRAs will ordinarily be required to gauge whether such defaults are of a recurring nature.
