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SEBI seeks information on companies whose ratings are enhanced with promoter or parent guarantees and pledge of shares

Through techniques like "letters of comfort," "letters of undertaking," and stock collaterals, businesses can cut the cost of borrowing on bank loans and bonds while also raising their credit ratings a few notches.

July 04, 2022 10:36 IST | India Infoline News Service
Credit rating companies have been directed by the Securities and Exchange Board of India (SEBI) to submit information on all corporates whose ratings are supported by promoter or parent guarantees and share pledges. The capital market regulator has also asked for information on businesses that have consistently refused to disclose data with rating agencies, frequently for years.

Through techniques like "letters of comfort," "letters of undertaking," and stock collaterals, businesses can cut the cost of borrowing on bank loans and bonds while also raising their credit ratings a few notches. After the Reserve Bank of India (RBI) expressed its concerns about these arrangements, describing them as "diluted and non-prudent support systems," Sebi sought data from the companies.

According to the central bank, even supports that seem to be more enforceable and commonplace, like "corporate guarantees" from the parent holding companies or group flagships, can be used to improve credit ratings only if there is a clear deadline for lenders to use the guarantees.

"The data on the number of enterprises with "credit enhancement," the type of support used for the purpose, and the names of the companies have already been submitted by the rating companies. The RBI's instructions are just for the banks that it oversees, while Sebi, which has permitted rating improvements through supports, sets the standards for rating other marketable debt instruments like debentures.

As a result, two authorities now have opposing views on the ratings that corporations use to raise thousands of crores of debt,” stated a source familiar of the event.

The risks associated with rating businesses that refuse to share their financials and other information are another issue that rating agencies expect SEBI to address. It's a concern, especially for unlisted companies that aren't required to provide data and sensitive information to stock markets on a regular basis.

In addition to withholding information from rating agencies, these businesses are protected by their bankers, who are reluctant to discuss a loan failure that only consortium banks are aware of.

Nearly 90% of the 50,000 debt ratings are for bank loans. Banks choose rated loans since they can earmark a bit less capital and increase their capital adequacy ratio due to a reduced regulatory risk weightage on such rated assets.

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