Capital markets regulator Securities and Exchange Board of India (Sebi) has asked credit rating agencies to share information on all corporates whose ratings are propped up with promoter or parent guarantees and pledge of shares, The Economic Times reported.
The capital market regulator has also sought details on companies which have been refusing, often for years, to share data with rating firms.
Companies lower cost of borrowings on bank loans and bonds through mechanisms like ‘letter of comfort, ‘letter of undertaking’, and stock collaterals which improve 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 central bank, 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.
“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,” a senior industry official said.