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Journalism of Courage
The Securities and Exchange Board of India (Sebi) on Friday released a consultation paper on review of regulatory framework of credit rating agencies (CRA) in which it has proposed raising minimum networth required for registering a CRA from Rs 5 crore to Rs 50 crore. The regulator also proposed to cap the cross holding in Sebi-registered CRAs to 10 per cent. This means no CRA can hold over 10 per cent in another CRA.
Through the paper, the regulator has sought comments from public on proposals that are “expected to improve market efficiency by reducing the information asymmetry” in the market and “enhancing the governance, accountability and functioning of CRAs for carrying out the rating activities in an efficient and professional manner, thereby, yielding timely and accurate ratings”.
Sebi also wants the promoter of a rating agency to have at least 5 years of experience in doing business in the financial services sector. According to Sebi, with the enhanced role of rating agencies, an increased networth will ensure that such agencies have adequate financial capabilities to “invest in building intellectual capital, developing efficient systems and infrastructure” for “analytical rigour”.
“Acquisition of shares and/or voting rights in a CRA resulting in change in control may be permitted with the prior approval of Sebi. A shareholder holding 10 per cent or more shares and/or voting rights in a registered CRA shall not hold 10 per cent or more shares and/or voting rights, directly or indirectly, in any other CRA. However, it shall not apply to holdings by broad-based domestic financial institutions,” said the Sebi consultation paper.
The proposed norms are likely to have an impact on global rating agencies like S&P, Moody’s and Fitch, which have significant holdings in domestic agencies besides their direct presence.
As part of enhanced disclosure framework, Sebi has proposed that the agencies should come out with an annual rating summary sheet presenting a snapshot of rating action carried out during the year. The same has to be uploaded on their respective websites annually, separately for securities and financial instruments.
The capital market watchdog has also proposed that the credit rating agencies will have to give off any activity, other than the rating of financial instruments and economic research to a separate entity. This proposed norm is similar to the rules guiding the depositories, said Sebi. In the past, rating agencies came under the scanner of Sebi due to delayed downgrade of firms that have defaulted on loans. Sebi Chairman Ajay Tyagi had earlier said such delays by rating agencies was a “matter of concern” and the regulator will bring a regulatory framework for CRAs to prevent such incidents in future.
