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.