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MF News After MFs, SEBI to introduce Risk-o-meter in NCDs too

After MFs, SEBI to introduce Risk-o-meter in NCDs too

SEBI feels that Risk-o-meter would provide an easy understanding of the risk involved in an issue.
Nishant Patnaik Jan 12, 2017

SEBI has issued a consultation paper on credit ratings of non-convertible debentures (NCDs) in which it has proposed to introduce Risk-o-meter which will depict the level of credit risk through a meter just like it did in mutual funds.

The regulator feels that Riskometer would provide investors an easy understanding of the kind of risk associated with different corporate bonds  and their suitability to them.

SEBI has said that the advertisements of NCDs focus mainly on the coupon to lure the retail investors. In fact, the market regulator has found that a few companies issued both secured and unsecured NCD through same offer document with different credit ratings. It is difficult for the retail investors to differentiate between secured and unsecured issues within the same offer document, said SEBI.

“It is felt that there needs to be an additional layer of protection for the retail investors, who get attracted towards such NCDs which though on one side pay higher coupon but on the other side have a below investment grade credit rating,” said SEBI.

Currently, an issuer indicates the credit rating on the front page of the offer document. SEBI feels that an investor may miss this disclosure on the credit rating and a better alternative would be to introduce the rating in a pictograph format.

Issuers are expected to put risk-o-meter in all their advertisement materials, front page of initial offering application forms, scheme information documents (SIDs) and common application forms.

The rating to be displayed on the ‘Risk-o-meter’ would be the latest rating provided by the credit rating agency. Modifiers such as ‘+’ (plus) or ’-‘(minus) may be included, if applicable, in the meter.

SEBI has said, “The concept of the ‘Risk-o-meter’ would be to draw attention of the investors towards the credit rating of the issue. This form of meter may be more relevant than the text on rating in  the  prospectus for investors,  particularly  retail, as  it  will  make  things  easy  to understand  for  them.  The  idea  is  not  only  to  caution  the  investors  but  to  enlighten them about the risk factor involved with the debt issue.”

SEBI data shows that companies have raised close to Rs.24,000 crore in the first six month of current financial year i.e. HFY 2016-17.

jaideep · 1 year ago
The Riskometer may be an easier alternative to understand than the credit rating system. What needs to be reiterated is that as the financial status of companies change, their ratings may not remain the same. I have seen cases of companies with even decent ratings default on their obligations totally, hence rating updates are more important. There is the crucial factor of liquidity that needs to be addressed in our retail bond markets, because most investors cannot sell lots upto the so called retail limit of Rs 10 lakhs, without wide fluctuations in prices, as buy sell spreads and buying interest is very low.
jaideep · 1 year ago
Just a correction to the last line in my earlier comment, "buy sell spreads are very high and hence buying interest is low"
GAJANAN YADAV · 1 year ago
It is good news from SEBI side, people will alert before investing in NCD,s . In past so many companies given poor performance and deprived poor investors, like TECIL bonds etc. Like SEBI Reserve Bank of India and National Housing Bank too make bold decision for Corporate Fixed Deposits accepting companies for non repayment of deposits .
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