MUMBAI: From April, transparency with regard to finances of top corporates is set to increase with 450 of them being forced to raise a quarter of their borrowings through bonds under markets regulator Sebi’s guidelines.
At the same time, rating agencies have been asked to provide enhanced disclosure with regard to liquidity mismatches and where agencies are giving more weightage to parent support. These disclosure guidelines have been introduced in the wake of the ILFS default crisis.
In November last year, Sebi had directed all corporates with a double-A rating and borrowing of above Rs 100 crore to raise at least 25% of their requirement from the bond market. The RBI is also nudging large corporates to move to the bond market.
There are around 450 companies that fall in the double-A category. While the rule does not apply to outstanding loans, all incremental debt will have to be partly raised from the bond market. At the same time, reacting to the ILFS crisis, Sebi said that rating agencies should disclose the liquidity position of the company and whether the rating has been ‘notched up’ because of parental support.
“Of the 450 companies, 230 whose total debt is around Rs 45 lakh crore are already meeting a quarter of their borrowings from the bond market,” said Crisil president (ratings) Gurpreet Chhatwal. The remaining 220 companies, whose borrowings are around Rs 6 lakh crore, will have to issue more bonds next year. According to Chhatwal, this would mean incremental bond issuances of Rs 50,000 crore.
But more than adding depth to the bond markets, the new norms will increase transparency. In the case of bank loans, corporates do not need to disclose failing to meet any payment deadline. Delays in repayment result in a bank internally classifying the corporate as a ‘special mention account’ with rankings starting from one depending on the extent of delay. However, in the case of any delay in interest payment on a bond, the issuer is immediately downgraded to ‘D’ and investors get a warning. Sebi had initially asked corporates to declare when they are classified as non-performing assets by banks, but this requirement was later withdrawn.
According to Chhatwal, rating agencies cannot use the Central Repository of Information on Large Credits (CRILC), which gives them the exact status of repayments by a large borrower. This information is, therefore, not available to other market investors as well. The lack of information on delay in loan repayments has resulted in large corporates staving off a default rating. For instance, 38 of the 40 top corporates named by the RBI for insolvency enjoyed an investment-grade rating a year before they were picked up by the central bank. This was despite these corporates being distressed and short of liquidity to repay loans. Additionally, the stress in a company is often hidden because the rating is ‘notched up’ on the basis of the strength of the parent. The RBI has now said that such ‘notching up’ should be divulged by rating agencies.