Credit rating firms seek govt intervention over regulatory void on ₹1 L cr unlisted debt

Time of India

22-06-2025

Mumbai: Credit rating companies have sought the intervention of ministries of corporate affairs and finance amid an uncertainty over the future ratings of more ₹1 lakh crore of
unlisted securities
.
The rating of these instruments, like
corporate bonds
and securitised papers, which comprise an integral part of the financial market for debts, has fallen between the cracks of two regulatory authorities.
The ambiguity stems from the fact that the
Securities and Exchange Board of India
(Sebi), the primary regulator for the credit
rating agencies
(CRAs), has jurisdiction over only listed securities while unlisted debts raised by corporates, including company fixed deposits, are outside the domain of the
Reserve Bank of India
(RBI).
SEBI had last year told rating firms to get a non-objection certificate from RBI for rating the unlisted papers. Since then, the central bank has allowed CRAs to rate certificates of deposits (CDs) - instruments floated by banks to raise short-term funds. But, there is no clarity on ratings of securitised papers like
pass through certificates
(PTCs) and
unlisted corporate bonds
. This is where CRAs want the ministries to step in.
Issued against a basket of loans and the interest flows from them, PTCs enable lenders like non-bank finance companies as well as banks to convert relatively illiquid loans into marketable papers and create headroom to lend more while letting investors - like corporate treasuries, financial institutions, and fund houses - hold a diversified pool of assets and sometimes generate a higher return. A predominant portion of the outstanding PTCs are unlisted.
Under the circumstances, the CRAs are awaiting a signal from the
corporate affairs ministry
that they can follow the SEBI guidelines on listed securities while carrying out the rating of unlisted securities. Thus, CRAs want to know whether they can continue to use the same rules of default recognition, application of grading scale, disclosures, and issue of press release for unlisted papers as well. The ministry is yet to respond to the letter from the rating industry body.
With New Delhi is yet to give the go-ahead, some of the CRAs, in the course of various meetings, have sensitised issuers of unlisted securities as well as some of the investors that ratings of these instruments may have to be withdrawn in the absence of any clarity from the government or regulators.
"More so, with SEBI reminding CRAs a few months ago that the issue needs to be sorted out. This could well be a nudge from SEBI to list more securities and thereby promote transparency. However, many issuers refrain from listing either to avoid the compliance and reporting that come with it or strike bilateral deals with investors and do not feel the urgency to list," said an industry official.
Many institutional investors may keep away from unrated securities, including banks who save on capital as unrated loans and investments carry higher risk weights. But while there are takers for unrated instruments, rating helps in investment decision making by capturing the risk and pricing of an instrument.
"Some are expecting RBI to clear the air for PTCs which are mostly issued by NBFCs (entities regulated by RBI). If RBI gives a green signal for PTCs, then the issue related to rating of unlisted corporate bonds has to be resolved. Company FDs are a small market," said another official.
Earnings from ratings of unlisted papers, said an analyst, is a small slice of CRAs' earnings, but a lack of rating can have some implications for the wholesale debt market. For instance, CRAs' periodic reports on the PTC market are closely tracked by investors.
"There are adequate regulations on investments in these unlisted securities but there is not enough regulation about their rating. SEBI understandably wants rating of any instrument to be cleared by some authority. It doesn't want to be blamed for a big loss or default which inevitably raises questions on ratings," said the person. "The market too is evolving. The assets of Alternative investment funds have surged in the last 5 to 6 years and many of these funds put money in unlisted papers," she said.
Earlier, CRAs could choose on what it would rate, but those days are long over with the role and rules agencies coming under scrutiny since the IL&FS default in 2018.