The Securities and Exchange Board of India (SEBI) has amended Paragraph 15 of the Master Circular for Credit Rating Agencies (CRAs), which addresses default ratings for debentures, bonds, and other debt securities. Initially, any delay of even one day or a shortfall of one rupee in payment was considered a default. The amendment comes in response to recommendations from a SEBI Working Group aimed at improving the ease of doing business. The revised guidelines focus on the treatment of “technical defaults,” where the failure to make debt payments is due to reasons beyond the issuer’s control, such as incorrect investor details or government instructions to freeze accounts. In these cases, the CRA is required to confirm the issuer’s ability to pay, verify the failure’s cause, and ensure the amounts are deposited in an escrow account. The circular also omits the term “technical default” from the Master Circular, reflecting a shift in how these situations are handled. CRAs are now obligated to disclose details of these payment failures to stock exchanges, depositories, and debenture trustees. The updated provisions are effective immediately and are aimed at providing more clarity and uniformity in the treatment of default scenarios.
Securities and Exchange Board of India
Circular No.SEBI/HO/DDHS/DDHS-PoD-3/P/CIR/2024/160 Dated: November 18, 2024
To,
All Registered Credit Rating Agencies,
All Registered Debenture Trustees,
Issuers who have listed and/or proposed to be listed Non-Convertible
Securities, Securitized Debt Instruments, Security Receipts, Municipal Debt
Securities or Commercial Paper
Recognized Stock Exchanges,
All Depositories registered with SEBI
Madam/ Sir,
Sub: Amendment to Para 15 of Master Circular for Credit Rating Agencies (CRAs) dated May 16, 2024 (“Master Circular”)
1. As per Annexure 11 of the Master Circular, definition of default for debentures/ bonds is specified as “A delay of 1 day even of 1 rupee (of principal or interest) from the scheduled repayment date”. No exemption is provided from the above, except in case of rescheduling of the debt instrument by the lenders prior to the due date of payment. Therefore, any other instance of a one-day delay in payment or one-rupee shortfall in payment shall be recognized by the CRA as default. Such requirement is reiterated and remains unchanged from since the notification of the SEBI (Credit Rating Agencies) Regulations, 1999.
2. In the wake of COVID-19 pandemic, with a view to providing some flexibility to CRAs in taking appropriate view in cases of defaults corrected by the rated entity within a relatively shorter span of time, the following provision on post-default curing period was introduced vide SEBI Circular SEBI/HO/MIRSD/CRADT/CIR/P/2020/87 dated May 21, 2020, which is contained in Para 15 of the Master Circular:
“15.1 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.
15.2 The CRA shall frame a policy in respect of upgrade of default rating to investment grade rating and place it on its website.
15.3 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.”
3. One of the recommendations of the Working Group of CRAs for Ease of Doing Business is to provide specific policy guidance on treatment of ‘technical defaults’ so that the policy is applied uniformly across CRAs.
4. In this regard, the Working Group has highlighted that the following scenarios of non-payment of debt (principal and/ or interest) may arise due to reasons beyond the control of the issuer, namely, failure to remit payment due to absence of correct information or due to incorrect or dormant investor account furnished by the investor(s) or due to notice/ instruction received from a government authority to freeze the account of investor(s).
5. It has been decided that in the aforesaid scenario, the CRA shall confirm and verify the availability of adequate funds with the issuer and also confirm and verify:
5.1. the proof of failure of the required payment of debt (principal and/ or interest), 5.2. the reasons for failure being as specified above, and
5.3. the required amounts being duly paid into a separate escrow account maintained with a scheduled commercial bank by the issuer on the due date of payment.
6. For all such instances, the CRA shall furnish the following details to the Stock Exchanges, Depositories and Debenture Trustee on the same day as the dissemination of the rating Press Release on the CRA’s website:
| Name of the security | ISIN | Amount to be paid | Due date of payment | Amount of payment made | Amount of payment failed | Reasons for failure of payment |
The Stock Exchanges, Depositories and Debenture Trustees shall disseminate the above information on their websites.
7. CRAs shall sensitise their clients, i.e. the issuers, to avail of the penny-drop verification facility offered by banks to avoid occurrence of failure to remit the required payments of debt (principal and/ or interest) and/or other suitable measures to prevent such occurrence.
8. Accordingly, the term “technical default” is hereby omitted from Para 15.3 of the Master Circular and the said para stands modified as under:
“The policies framed as above may include scenarios like 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.”
9. The circular shall be applicable with immediate effect.
10. This circular is issued with the approval of competent authority, in exercise of the powers conferred by Section 11 (1) of Securities and Exchange Board of India Act, 1992 read with the provisions of Regulation 20 of CRA Regulations to protect the interest of investors in securities and to promote the development of, and to regulate, the securities market.
11. This Circular is available on the website of the Securities and Exchange Board of India at sebi.gov.in under the category “Legal” and under the drop down “Circulars”.
Yours faithfully,
Sarika Kataria
Deputy General Manager
Department of Debt and Hybrid Securities
Tel No.022-2644-9411
Email ID – [email protected]
