Uncertainty Over Ratings of Unlisted Securities Worth Rs 1 Lakh Crore

Strategic Insights -

The crisis in India's corporate bond market has worsened due to a regulatory ambiguity regarding the rating of unlisted securities worth over Rs 1 lakh crore. Credit rating companies (CRAs) are seeking guidance from the ministries of corporate affairs and finance to resolve the issue, as they are uncertain about the future ratings of corporate bonds, securitised papers, and other unlisted instruments. This lacuna has arisen because the Securities and Exchange Board of India (Sebi) regulates only listed securities, while unlisted debts are outside the domain of the Reserve Bank of India (RBI).

Key Takeaways:

  • The unlisted securities worth over Rs 1 lakh crore include corporate bonds, securitised papers, and certificates of deposits (CDs), which are critical components of the financial market for debts.
  • The CRAs are awaiting clarity from the corporate affairs ministry regarding the application of Sebi guidelines on listed securities to unlisted securities, particularly the rules for default recognition, grading scale, disclosures, and press releases.
  • The RBI has allowed CRAs to rate CDs, but the ratings of securitised papers, such as pass-through certificates (PTCs), and unlisted corporate bonds remain unclear.
  • The ambiguity in ratings may lead to a loss of confidence among institutional investors, including banks, who may avoid unrated securities due to higher risk weights.
  • The industry officials point out that issuers may refrain from listing their securities to avoid compliance and reporting requirements or to strike bilateral deals with investors.
  • The ratings of unlisted papers are a small slice of CRAs' earnings, but the lack of rating can have implications for the wholesale debt market.

Statistics:

  • The outstanding PTCs are largely unlisted, with a significant portion being issued by non-bank finance companies (NBFCs) and banks.
  • The assets of Alternative investment funds have surged in the last 5-6 years, with many of these funds investing in unlisted papers.
  • The CRAs are awaiting a signal from the corporate affairs ministry regarding the application of Sebi guidelines to unlisted securities.
  • The issue has been highlighted by Sebi, reminding CRAs that the issue needs to be sorted out.

Sources:

  • "Unlisted securities worth over Rs 1 lakh crore face uncertainty", The Times of India, Mumbai.
  • Government and regulatory bodies, including the Securities and Exchange Board of India (Sebi) and the Reserve Bank of India (RBI).
  • Industry officials and analysts, speaking on the condition of anonymity.