New Delhi: Markets watchdog Sebi Thursday came out with a strict disclosure framework for credit rating agencies wherein they will be required to provide the probability of default for various rated instruments.
The regulator's move comes against the backdrop of rising instances of debt defaults and concerns over the role of credit rating agencies in assessing the possible risks. Credit rating agencies have also come under the scanner in the IL&FS case.
"...CRAs (credit rating agencies), in consultation with Sebi, shall prepare and disclose standardized and uniform probability of default (PD) benchmarks for each rating category on their website, for one-year, two-year and three-year cumulative default rates, both for short-run and long-run," the circular said.
Issuing guidelines for enhanced disclosures by CRAs, the watchdog has called for having a uniform Standard Operating Procedure (SOP) in respect of tracking and timely recognition of default. The same has to be disclosed on the website of each CRA.
Sebi has also mandated a specific section on 'rating sensitivity' in the press releases from the agencies to indicate possible trigger for an upward or downward rating change in a simple language rather than like a general risk factor.
Besides, the regulator expect the rating agencies to make meaningful disclosures about liquidity conditions by using simple terms like superior or strong, adequate, stretched or poor, with proper explanations to help the end users understand them better.
