SEBI Regulations Pertaining To Relaxation Of 90-Days Rating Upgradation Period For Cras

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The SEBI vide Circular dated May 21, 2020 reported that Credit Rating Agencies (“CRA”) can defer from the stipulated 90 days period that are required to upgrade the rating of any firm from default to non –investment grade, in light of the COVID-19 Pandemic.

CRAs are companies that that give credit ratings to debtors based on their capability to repay debts by making timely payments. Some of the top credit rating agencies operating in India are CRISIL, CARE, ICRA, etc. Generally, the rating agency takes an observation period of 90 days before it can improve the debt ratings of any company, while analysing the company based on its recovery performance.

In view of the COVID uncertainties, realising that chances of defaults may be higher at any moment, SEBI directed the above relaxations. This was also done with a view to providing some flexibility to credit rating agencies in taking appropriate time-bound action in such cases. It stated that there have been a few recent instances where, even though the debtor was able to correct the default in a relatively shorter period of time, his ratings didn’t change because of the prevailing 90-days provision on post curing period. This automatically casts a mark on the reputation of the rated entity.

The CRAs may deviate from the 90-days period as on case to case basis, adding that the cases of deviations from the stipulated 90 days need to be placed before the ratings sub-committee of the CRA board on a half-yearly basis. The CRA will have to frame a policy regarding upgradation of default rating to investment grade and place it on its website. The policies framed may include scenarios like technical defaults, change in management, acquisition by another firm, sizeable inflow of long-term funds or benefits arising out of a regulatory action, among others, which fundamentally alter the credit risk profile of the defaulting firm.

This can be considered to be another step towards easing the regulatory compliances for companies as a part of the initiative to encourage ease of doing business in India by the government.

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