Sebi asks rating agencies to swiftly recognise correction of defaults

Securities and Exchange Board of India (Sebi) on Thursday asked credit rating agencies to upgrade the rating of a paper post a period of 90 days after payments are regularised.

“After a default is cured and the payments regularized, a credit rating agency (CRA) shall generally upgrade the rating from default to non-investment grade after a period of 90 days based on the satisfactory performance by the company during this period,” said the capital market regulator.

The circular came after Sebi received representation from various stakeholders. The watchdog noted that in a few recent cases of defaults the rating could not be upgraded to investment grade even though the rated entity was able to correct the default within a relatively shorter span of time due to extant rules.

Current rules stipulate a post-default curing period of 90 days for the rating to move from default to speculative-grade and generally 365 days for default to investment grade.

“There is a possibility that such cases may increase in the wake of COVID-19 pandemic. A need has been felt to review the existing policy on post-default curing period with a view to providing some flexibility to CRAs in taking appropriate view in such cases,” Sebi said in the circular.

The regulator added that CRAs may deviate from the 90-day-policy on a case to case basis, subject to framing a detailed policy in this regard.

“The policies framed as above may include scenarios like technical defaults, change in management, acquisition by another firm, a sizable inflow of long-term funds or benefits arising out of regulatory action, etc. which fundamentally alter the credit risk profile of the defaulting firm,” Sebi directed.