The parliamentary standing committee on finance, chaired by Jayant Sinha, has asked regulators Securities & Exchange Board of India (SEBI) and Reserve Bank of India (RBI) to review their regulations in the face of serious default crisis at Infrastructure Leasing & Financial Services (IL&FS). The committee also asked ministry of finance to seek factual report from the regulators on enforcement of credit rating agencies (CRAs) regulations, particularly action taken against CRAs who gave 'stable' rating to IL&FS prior to the default crisis.
Explaining rationale for fresh evaluation of the credit rating framework, the committee says the regulations should be suitable modified or tightened, benchmarking them on greater objectivity, transparency and credibility in the credit rating framework and process.
"The committee would recommend that the disclosures being made by the CRAs should henceforth include important determinants such as extent of promoter support, linkages with subsidiaries, and liquidity position for meeting near-term payment obligations. The committee desire that the general investors should also be able to get a coherent 'big picture' about the entity and its associates or subsidiaries from the credit rating," the report says.
The committee, headed by Mr Sinha, also called for systemic review by the regulators to pre-empt IL&FS kind of crisis that involves systemically important entities.
Noting the resolution of IL&FS remains sub-judice before the National Company Law Appellate Tribunal (NCLAT), the committee says, "...it feels delays in the resolution process not only brings a steep value erosion to the bankers and other creditors but more importantly leaves the understanding of the lacunae in the system evasive."
"It is necessary to plug these loopholes as the defaults jeopardised hundreds of investors, banks and mutual funds associated with IL&FS and several non-banking finance companies (NBFCs) also faced default scare, until the government's timely intervention in the matter while taking note of various investigations being undertaken and subsequent penalties being imposed for the failure in exercising due diligence, the committee desire that a thorough systemic review should be conducted by RBI so that each episodes involving 'systematically important entities' are pre-empted," the report says.