Issuer Not Coopering (INC) - SEBI, RBI, Issuer and Investor Vs CRA

 

 

Issuer Not Coopering (INC) - SEBI, RBI, Issuer and Investor Vs CRA

 

 Amish Mehta, Managing Director and CEO, Crisil told BusinessLine “We are talking with the regulators on tackling this challenge and how we can help improve the entire ecosystem.”.

The country's central bank is now keen on understanding the extent of this issue. They want to know key information such as how many ratings fall into this category, why these borrowers have not disclosed the required information, and how long they have been uncooperative, among other related details.

The three questions below help to resolve the INC issue; before that, read the brief about SEBI as CRA regulatory and its relation with CRA.

SEBI regulates credit rating agencies in India to ensure industry integrity, including registration, a code of conduct, and inspections. However,  SEBI's supervision of agencies is primarily passive in dealing with INC, and credit rating agencies' conflict of interest can be an issue. To address this, SEBI has introduced measures such as mandatory rotation of rating agencies and enhanced disclosure requirements. It is essential for investors to be aware of the limitations of credit ratings and to conduct due diligence before making investment decisions. Regulatory guidelines for INSI should also be followed to ensure proper self-conduct.

SEBI's supervision of credit rating agencies is a complex issue that requires a delicate balance between regulation and expertise support.

Issuer, not cooperation – INC

The phrase "Issuer not cooperation (INC)" would be better if it was changed to "Issuer not sharing information (INSI)" to reflect the situation accurately.

In India, there are around 40,000 companies that have been rated by credit rating agencies (CRAs). A report by RBI states that about half of these companies do not cooperate with the CRAs. However, our sources reveal that 95% of the companies that Acuite Rating Research and Brickworks rate are labelled as INC. Additionally, 2,500 companies from one of the four large India CRAs have also been categorised as INC, though the other CRAs refused to share such data with us.

Question 1

The question should be asked: Why are Issuer/Companies not sharing information with CAR, not why Issuer/Companies hesitant to disclose required information to Credit Rating Agencies (CRAs)

Is it due to the high fees they have to pay for CRA services?

Credit Rating Agencies (CRA) are willing to provide rating services to issuers as long as they are paid for it. These agencies also know that better ratings can help issuers get competitive interest rates from banks and other funding sources. Therefore, it is possible that CRA may charge more for better ratings, which could make such rating facilities too expensive for borrowers.

In such a market, therefore, the regulator also needs to hear the Issuer's perspective instead of relying solely on the information provided by CRAs to find a solution for INCs.

Question 2

The second set of question should be asked.

Why has RBI taken a step to address companies failing to disclose financial information for the first time in 2023?

Is there a timeline for INC issues, or is the question of how long it takes the regulator to fix the Issuer of “uncooperative?

 

What are the major Consequences if INC is not resolved sooner or later

 

 

1.       Resources flow to commercial declining.

2.       13,000+ MSMEs shut down in FY23; trend may continue.

3.        Difficulty achieving target to increase MSME contribution to GDP and exports. (Union Minister Nitin Gadkari said that the government aims to increase the MSME contribution to the GDP from 30 per cent to 50 per cent and from 49 per cent to 60 per cent in exports in five years)

4.       Regulations relying on unreliable data dampen the growth of small companies.(Report: small companies' contribution to the Indian economy)

 

Conclusion

 

Is “Issuer non-cooperating” with CRA the only reason the INC case has risen as many as 45-50 per cent of the rated entities falling in this category according to all rating agencies or something else?

Regulators should revise some of their direction to CRA on the INC issue,  as those guidelines are not based on the Issuer's single viewpoint such as the market regulator, in 2020, had said if an issuer has an outstanding rating as non-cooperative for more than six months, credit rating agencies would downgrade it to non-investment grade with the Issuer Not Cooperating status.

Since there is no coordination between the Credit Rating Agencies (CRAs) in terms of gathering and presenting data, including reasons the Issuer gave for their non-cooperation, the data available on the Issuer Non-Cooperating (INC) platform lacks transparency and clarity. This highlights the challenges in regulating CRAs and ensuring their smooth functioning.