What Is a Provisional Rating? SEBI's 90 Day Rule

A provisional rating is a rating on a security whose supporting paperwork has not been signed yet. The agency has formed a view on the strength of a structure that exists on paper, and the word Provisional in front of the symbol is the standing admission that part of that structure is still an intention. SEBI standardised the whole practice, so the triggers, the clocks and the disclosures are the same across every Indian credit rating agency.

What makes a rating provisional?

SEBI defines it by an exhaustive list rather than by judgement. A rating is provisional, and not final, when it is contingent on one of these:

1. Execution of a letter of comfort, corporate guarantee, or other form of explicit third party support
2. Execution of documents such as a debenture trust deed, debenture trustee agreement, legal agreements or opinions, representations and warranties, or a final term sheet
3. Assignment of loan pools, or finalisation of cash flow escrow arrangements
4. Setting up of a debt service reserve account
5. Opening of an escrow account
6. For a proposed REIT or InvIT, pending formation of the trust, and only after receipt of SEBI registration

The REIT and InvIT case has its own qualification: the rating process may begin at the stage the sponsor files with SEBI for registration of the trust, but only if the sponsor gives the agency a declaration to that effect.

There is also a hard exclusion. In no case shall a rating, including a provisional rating, be assigned for an issuer or client evaluating strategic decisions such as funding mix for a project, an acquisition, a debt restructuring or scenario analysis in loan refinancing. That rules out the private what-if rating, which is what the standardisation was aimed at.

The 90 day and 180 day clocks

This is the part to remember, because both numbers run from issuance of the security and not from the date the rating was assigned.

A final rating assigned after the end of 90 days must be consistent with the documents actually available or the steps actually completed. In other words the agency cannot keep crediting a guarantee that never got signed.

What the press release has to tell you

Four disclosures are mandatory on top of everything a normal release carries.

• The pending items. Which steps or documents were considered while assigning the provisional rating.
• The risk of the gap. The risks associated with the provisional nature of the rating, including risk factors that are present in the absence of the completed documentation or steps.
• The counterfactual rating. The rating that would have been assigned in the absence of those pending steps. Where the absence would mean no rating could be assigned at all, as with a REIT or InvIT pending formation of the trust, the agency must say exactly that.
• The timeline warning. For a security proposed to be issued, that the provisional rating will have to be converted to final within the prescribed validity period once the security is issued; and for an already issued security, the rating and timeline implications of that same period.

The counterfactual line is the useful one. It is the same instinct as the unsupported rating disclosure that sits behind a CE suffix rating: SEBI keeps forcing the agency to print what the credit looks like once you take the promise away.

For a REIT or InvIT the release must also carry broad details of the assets proposed to be held and the proposed capital structure, and state that the agency has an undertaking from the sponsor that those key assumptions match what was filed with SEBI. If the assumptions change and the provisional rating moves, the release has to say the change is based on a declaration from the issuer that the SEBI filing was changed the same way.

What happens if the issuer does not accept it

It still gets published, with more detail rather than less. Where a provisional rating is not accepted by the issuer or sponsor, the agency's list of non-accepted ratings on its website must additionally carry the details of the steps taken for assigning the provisional rating, and the counterfactual rating that would have applied without those steps. A rejected provisional rating leaves a trail.

How to treat one when you see it

Read the prefix as a date stamp on incomplete information rather than as a weaker grade. Provisional AA is not a notch below AA; it is AA conditional on documents you can check the status of. Three practical habits:

• Note the issuance date of the security, not the rating date, and count 90 days from it.
• Read the counterfactual rating in the release before the headline symbol.
• Watch for the conversion. A provisional rating that has not gone final is a live disclosure event, and rating actions reach the market through exchange announcements, which is where rating revisions are tracked.

Once a rating is final it enters the ordinary surveillance cycle, where outlook and watch markers and the issuer not cooperating flag do the work of signalling direction.

So a provisional rating is a rating with an expiry date attached to somebody else's signature, and SEBI gives you 90 days to find out whether the signature arrived.

Flock reports the filings themselves, each one dated and linked to its source. What a rating means for your money is your call to make. Not investment advice.