In the last few years there have been instances where the credit rating agencies had suddenly downgraded the ratings of the bonds issued by a company leading to panic selling in the bond markets. This happened in the case of Amtek Auto some time back and later in the case of IL&FS and recently in the case of Dewan Housing Finance. As a result SEBI after its last board meeting has decided to make some changes in the way credit ratings are done. The final announcement was made available this week and the following are some of the changes that SEBI is proposing to credit rating agencies functioning.

· Now Credit rating agencies will have to assign default rating probabilities to each bond based on an accepted and transparent methodology. This will reduce the number of company debt that is currently at the “AAA” mark.

· The idea is that cases like IL&FS and DHFL, where the ratings were suddenly dropped to default grade does not happen. Such a sharp drop leads to huge losses that funds and investors are required to write off and make provisions for.

· The probability of default will be calculated and disseminated separately for short term debt and separately for long term debt.

· Rating agencies have been asked to treat bond spread deviations as material events. That means if the yield on bonds suddenly shoots up or falls then the rating agency must explain the same and its implications to investors.

· A very important aspect that rating agencies will now have to include is rating sensitivity. These are like the risk factors in investments where the rating agency will have to clearly highlight factors like technology shifts, oil prices and the likely impact on ratings.

The above measures are expected to make bond investing more transparent.