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SEBI panel moots new norms for credit rating agencies

The Securities and Exchange Board of India's committee on draft regulations for credit rating agencies has recommended that the ratings should cover securities only, and that regulations should not cover the ratings of fixed deposits, LPG dealers, corporates and foreign exchange agencies.

The committee chaired by Vijay Ranjan, executive director of the SEBI looked into draft regulations for CRAs.

The committee consists of representatives of the Reserve Bank of India, the Institute of Chartered Accountants of India, CRAs, issuers and the SEBI.

The committee said that only those ratings of securities may be regulated by the SEBI which are used or proposed to be used by the issuers to comply with or fulfil a requirement prescribed by the SEBI in any of its regulation, guidelines, instructions and circulars.

According to the recommendations, the promoters of CRAs should belong to one of the following categories: public financial institution, a scheduled bank, a foreign bank operating in India, a foreign credit rating agency recognised in the country of its incorporation, having at least five years experience in rating and any other company or a body corporate having continuous net worth of minimum Rs 1 billion as per the audited annual accounts for the previous five years prior to filing of the application with the board.

Further, the promoters should collectively hold at least 26 per cent of the paid-up capital of a CRA for a minimum period of five years.

The panel said no minimum net worth or infrastructure requirements should be specified in the regulations, that compulsory disclosure of unaccepted ratings to investors should be prescribed.

If a company's securities are rated by an associate, then another rating by another CRA should be compulsorily obtained. Disclosure of both ratings should be prescribed.

Uniform rating symbols across CRAs should not be insisted upon. CRAs should carry out periodic reviews at regular intervals and, if necessary, carry out appropriate changes of all ratings as long as obligations on rated security are outstanding in the market during the entire term of the rated security.

The committee further recommended that the SEBI's inspections of the CRAs should not normally judge the appropriateness of CRA analysis before arriving at a rating decision.

Inspections for judging appropriateness of CRA analysis should be very sparingly undertaken in cases of serious complaints and such inspections should be conducted only by a panel constituted by the SEBI consisting of majority of independent experts with relevant experience. It said standardisation of methodology across CRAs should not be insisted upon.

The committee also recommended that the CRAs should not be disallowed to invest in the securities issued by their clients. They should be required to frame their own norms for investments in such securities which inter alia should have mechanisms in place to prevent misuse of insider information.

A clause should be incorporated in the listing agreement of the stock exchanges requiring the companies to co-operate with the rating agencies in giving correct and adequate information.

Issuers coming out with a public or right issue of debt securities should be required to incorporate an undertaking in the offer documents promising necessary co-operation with the rating agency in providing true and adequate information.

Deterioration of financial condition of a CRA should not be a reason for suspension or cancellation of certificate of registration of a CRA.

For all public and right issues of debt securities of issue size greater than or equal to Rs 1 billion, two credit ratings from different rating agencies including rating assigned by an associate, if any, should be made mandatory through amendment in the SEBI's disclosure and investor protection guidelines.

UNI