Executive Summary:
This circular, effective immediately, amends Para 15 of the Master Circular for Credit Rating Agencies (CRAs) dated May 16, 2024, regarding the definition of default and post-default curing periods. It addresses concerns raised by the Working Group of CRAs for Ease of Doing Business, specifically concerning technical defaults. The circular provides guidance on handling specific scenarios of non-payment and mandates disclosure requirements.
Key Points / Main Content:
* **Definition of Default:** The original definition of default remains unchanged: a delay of even one day or one rupee in principal or interest payment constitutes a default, except in cases of prior rescheduling.
* **Post-Default Curing Period:**
* CRAs should generally upgrade a rating from default to non-investment grade after 90 days of satisfactory performance following the curing of a default.
* Deviations from the 90-day period are permitted on a case-by-case basis, subject to a detailed policy placed on the CRA's website and review by the Ratings Sub Committee.
* CRAs must have a policy on upgrading default ratings to investment grade and place it on their website.
* **Treatment of Specific Non-Payment Scenarios:**
* If non-payment of debt principal or interest is due to reasons beyond the issuer's control (e.g., incorrect investor information, frozen accounts), CRAs must verify:
* Availability of adequate funds with the issuer.
* Proof and reasons for the failure.
* Payment of the required amounts into a separate escrow account on the due date.
* **Disclosure Requirements:**
* For instances of non-payment as described above, CRAs must furnish specific details (Name, ISIN, Amount Due, Date of Payment, Amount Paid, Reasons for Failure) to Stock Exchanges, Depositories, and Debenture Trustees on the same day as disseminating the rating press release.
* Stock Exchanges, Depositories, and Debenture Trustees must disseminate this information on their websites.
* **Client Sensitization:** CRAs should encourage issuers to use penny-drop verification and other measures to prevent payment failures.
* **Amendment to Para 15.3:** The term "technical default" is removed from Para 15.3 of the Master Circular. The paragraph now only includes "scenarios like change in management, acquisition by another firm, sizeable inflow of long-term funds or benefits arising out of a regulatory action, etc., which fundamentally alter the credit risk profile of the defaulting firm".
Impact Analysis
* **Credit Rating Agencies (CRAs):**
* *Impact:* CRAs must adhere to the new guidelines for handling specific non-payment scenarios, implement disclosure requirements, and modify their policies regarding post-default upgrades.
* *Action Required:* Update internal policies and procedures, sensitize clients, implement new disclosure processes, and ensure compliance with the amended Master Circular.
* **Issuers of Non-Convertible Securities, Securitized Debt Instruments, Security Receipts, Municipal Debt Securities, or Commercial Paper:**
* *Impact:* Issuers are affected by the revised guidelines for treatment of specific non-payment scenarios and are encouraged to adopt preventive measures to avoid payment failures.
* *Action Required:* Implement penny-drop verification or other measures to avoid payment failures, and ensure timely reporting and escrow account management in case of eligible non-payment events.
* **Debenture Trustees:**
* *Impact:* Debenture Trustees are now recipients of information from CRAs regarding payment failures and must disseminate this information on their websites.
* *Action Required:* Update website procedures to disseminate information received from CRAs regarding payment failures.
* **Stock Exchanges:**
* *Impact:* Stock Exchanges are now recipients of information from CRAs regarding payment failures and must disseminate this information on their websites.
* *Action Required:* Update website procedures to disseminate information received from CRAs regarding payment failures.
* **Depositories:**
* *Impact:* Depositories are now recipients of information from CRAs regarding payment failures and must disseminate this information on their websites.
* *Action Required:* Update website procedures to disseminate information received from CRAs regarding payment failures.
Key Entities Referenced
Securities and Exchange Board of India (SEBI): The regulatory authority for securities markets in India, responsible for protecting investor interests and promoting market development.
Credit Rating Agencies (CRAs): Entities registered with SEBI that provide credit ratings for debt instruments.
Debenture Trustees: Entities registered with SEBI that act as trustees for debenture holders.
Master Circular for Credit Rating Agencies CRAs dated May 16, 2024: A comprehensive document issued by SEBI that consolidates and updates regulations and guidelines for Credit Rating Agencies.
SEBI Credit Rating Agencies Regulations, 1999: Regulations established by SEBI governing the operations and conduct of Credit Rating Agencies.
COVID19 pandemic: The global pandemic that influenced regulatory decisions, including providing flexibility to CRAs regarding defaults.
Working Group of CRAs for Ease of Doing Business: A committee formed to identify and recommend measures to improve the efficiency and effectiveness of Credit Rating Agencies' operations.
Securities and Exchange Board of India Act, 1992: The legislation that established SEBI and defines its powers and functions.
CIRCULAR
SEBI/HO/DDHS/DDHS-PoD-3/P/CIR/2024/160 November 18, 2024
To,
All Registered Credit Rating Agencies,
All Registered Debenture Trustees,
Issuers who have listed and/or proposed to be listed Non-Convertible
Securities, Securitized Debt Instruments, Security Receipts, Municipal Debt
Securities or Commercial Paper
Recognized Stock Exchanges,
All Depositories registered with SEBI
Madam/ Sir,
Sub: Amendment to Para 15 of Master Circular for Credit Rating Agencies
(CRAs) dated May 16, 2024 (“Master Circular”)
1. As per Annexure 11 of the Master Circular, definition of default for debentures/
bonds is specified as “A delay of 1 day even of 1 rupee (of principal or interest)
from the scheduled repayment date”. No exemption is provided from the above,
except in case of rescheduling of the debt instrument by the lenders prior to the
due date of payment. Therefore, any other instance of a one-day delay in payment
or one-rupee shortfall in payment shall be recognized by the CRA as default. Such
requirement is reiterated and remains unchanged from since the notification of
the SEBI (Credit Rating Agencies) Regulations, 1999.
2. In the wake of COVID-19 pandemic, with a view to providing some flexibility to
CRAs in taking appropriate view in cases of defaults corrected by the rated entity
within a relatively shorter span of time, the following provision on post-default
curing period was introduced vide SEBI Circular
Page 1 of 4SEBI/HO/MIRSD/CRADT/CIR/P/2020/87 dated May 21, 2020, which is contained
in Para 15 of the Master Circular:
“15.1 After a default is cured and the payments regularized, a 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. CRAs may deviate from the said period of 90 days on a
case to case basis, subject to the CRAs framing a detailed policy in this regard.
The said policy shall also be placed on CRA’s website. Cases of deviations
from stipulated 90 days, if any, shall be placed before the Ratings Sub-
Committee of the board of the CRA, on a half yearly basis, along with the
rationale for such deviation.
15.2 The CRA shall frame a policy in respect of upgrade of default rating to
investment grade rating and place it on its website.
15.3 The policies framed as above 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, etc. which
fundamentally alter the credit risk profile of the defaulting firm.”
3. One of the recommendations of the Working Group of CRAs for Ease of Doing
Business is to provide specific policy guidance on treatment of ‘technical defaults’
so that the policy is applied uniformly across CRAs.
4. In this regard, the Working Group has highlighted that the following scenarios of
non-payment of debt (principal and/ or interest) may arise due to reasons beyond
the control of the issuer, namely, failure to remit payment due to absence of
correct information or due to incorrect or dormant investor account furnished by
the investor(s) or due to notice/ instruction received from a government authority
to freeze the account of investor(s).
Page 2 of 45. It has been decided that in the aforesaid scenario, the CRA shall confirm and
verify the availability of adequate funds with the issuer and also confirm and verify:
5.1. the proof of failure of the required payment of debt (principal and/ or interest),
5.2. the reasons for failure being as specified above, and
5.3. the required amounts being duly paid into a separate escrow account
maintained with a scheduled commercial bank by the issuer on the due date
of payment.
6. For all such instances, the CRA shall furnish the following details to the Stock
Exchanges, Depositories and Debenture Trustee on the same day as the
dissemination of the rating Press Release on the CRA’s website:
Name ISIN Amount Due Amount Amount Reasons
of the to be date of of of for
security paid payment payment payment failure of
made failed payment
The Stock Exchanges, Depositories and Debenture Trustees shall disseminate
the above information on their websites.
7. CRAs shall sensitise their clients, i.e. the issuers, to avail of the penny-drop
verification facility offered by banks to avoid occurrence of failure to remit the
required payments of debt (principal and/ or interest) and/or other suitable
measures to prevent such occurrence.
8. Accordingly, the term "technical default" is hereby omitted from Para 15.3 of the
Master Circular and the said para stands modified as under:
“The policies framed as above may include scenarios like change in
management, acquisition by another firm, sizeable inflow of long-term funds
Page 3 of 4or benefits arising out of a regulatory action, etc., which fundamentally alter
the credit risk profile of the defaulting firm.”
9. The circular shall be applicable with immediate effect.
10. This circular is issued with the approval of competent authority, in exercise of the
powers conferred by Section 11 (1) of Securities and Exchange Board of India
Act, 1992 read with the provisions of Regulation 20 of CRA Regulations to protect
the interest of investors in securities and to promote the development of, and to
regulate, the securities market.
11. This Circular is available on the website of the Securities and Exchange Board of
India at www.sebi.gov.in under the category “Legal” and under the drop down
“Circulars”.
Yours faithfully,
Sarika Kataria
Deputy General Manager
Department of Debt and Hybrid Securities
Tel No.022-2644-9411
Email ID - sarikak@sebi.gov.in
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