General Studies · Credit Rating and Risk Management
'Techno-Logistics Ltd' is a large-cap company with a 'CRISIL AA' rating. The company announces a massive acquisition of a European competitor funded entirely by debt. Simultaneously, a whistleblower alleges accounting irregularities in its subsidiary. The Credit Rating Agency (CRA) places the company on 'Watch Negative.' However, a week later, the main promoter pledges his entire shareholding to a group of NBFCs to raise personal funds. You are the Credit Manager at a Nationalized Bank with a 500-crore exposure to this company. Based on CRA functions and SEBI guidelines, what is the most likely sequence of regulatory actions the CRA will take, and how should the bank respond?
- 1The CRA will wait for the annual audit before taking action; the bank should increase the loan limit.
- 2The CRA must immediately review the rating in light of the 'Pledge of Shares' (a material event) and likely downgrade the rating to 'A' or 'BBB'; the bank must immediately check the 'Covenant' triggers in the loan agreement.✓
- 3The CRA is not allowed to consider the promoter's personal actions like share pledging; the bank should ignore the rating watch.
- 4The CRA will withdraw the rating because accounting fraud is suspected; the bank should treat the account as a wilful defaulter immediately.
Correct answer
The CRA must immediately review the rating in light of the 'Pledge of Shares' (a material event) and likely downgrade the rating to 'A' or 'BBB'; the bank must immediately check the 'Covenant' triggers in the loan agreement.
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