Uncertainty Over Ratings of Unlisted Securities Worth ₹1 Lakh Crore

Strategic Insights -

The uncertainty surrounding the future ratings of unlisted securities, including corporate bonds and securitized papers, has led credit rating companies to seek intervention from the ministries of corporate affairs and finance. These instruments, worth an estimated ₹1 lakh crore, fall outside the regulatory domain of the Securities and Exchange Board of India (Sebi), which only has jurisdiction over listed securities. The Reserve Bank of India (RBI), on the other hand, has allowed credit rating agencies (CRAs) to rate certificates of deposits (CDs) but has not provided clarity on ratings for securitized papers like pass-through certificates (PTCs) and unlisted corporate bonds.

Key Takeaways:

  • Credit rating companies are seeking guidance from the ministries of corporate affairs and finance on rating unlisted securities worth ₹1 lakh crore.
  • The Securities and Exchange Board of India (Sebi) has jurisdiction over only listed securities, while unlisted debts raised by corporates are outside the domain of the Reserve Bank of India (RBI).
  • Sebi has allowed CRAs to rate CDs but has not provided clarity on ratings for securitized papers like PTCs and unlisted corporate bonds.
  • The rating industry body is awaiting a response from the corporate affairs ministry on whether CRAs can follow the Sebi guidelines on listed securities while carrying out the rating of unlisted securities.
  • Some CRAs have sensitized issuers of unlisted securities and investors that ratings of these instruments may have to be withdrawn in the absence of clarity from the government or regulators.
  • Institutional investors may keep away from unrated securities, including banks, who save on capital as unrated loans and investments carry higher risk weights.
  • Rating helps in investment decision making by capturing the risk and pricing of an instrument, but a lack of rating can have implications for the wholesale debt market.

Statistics:

  • ₹1 lakh crore worth of unlisted securities require ratings (exact duration not specified).
  • 95% of pass-through certificates (PTCs) are unlisted (estimated based on industry official's statement).
  • Ratings of unlisted papers account for a small slice of credit rating agencies' earnings (exact percentage not specified).

Sources:

  • "Credit rating companies seek ministry's help on ₹1 lakh crore of unlisted securities" - Business Standard, [undated]
  • Statement by an industry official, Sugata Ghosh, Mumbai (exact quote: "More so, with Sebi reminding CRAs a few months ago that the issue needs to be sorted out.")
  • Statement by another official, (exact quote: "If RBI gives a green signal for PTCs, then the issue related to rating of unlisted corporate bonds has to be resolved.")
  • Statement by an analyst, (exact quote: "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.")