SEBI revises the framework in relation to post-default cure period and provides flexibility to credit rating agencies
The Securities and Exchange Board of India (“SEBI”), by way of a circular dated May 21, 2020, has revised the framework in relation to post-default cure period and has provided flexibility to credit rating agencies (“CRAs”) and permitted them to upgrade a company in certain cases from default to a higher grade after the default is cured and payments are regularized (“SEBI Circular”).
Until now, a rating could not be upgraded and continued to be under sub-investment grade due to the extant provisions on post-default curing period of 90 days for the rating to move from default to speculative grade and generally 365 days for default to investment grade.
The key features of the revised framework are as under:
- 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.
- The CRA shall frame a policy in respect of upgrade of default rating to investment grade rating and place it on its website.
- 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