SEBI reverses stand on rating agencies

SEBI has proposed two alternatives for the consideration of the board. One is to allow full operating freedom to the agencies and the other is to adopt the draft note on comprehensive regulation which was prepared earlier by the regulatory body. In the last board meeting,no consensus was reached.

The finance ministry has been taken by surprise by SEBI’s sudden decision to move for complete deregulation on the credit rating front. It has not yet been able to make up its mind on the issue but has said there is no immediate need to drop the clauses in the SEBI Act which empowers it to regulate rating agencies.

Sources said that the sudden change in SEBI’s viewpoint was dictated by its reported unwillingness to take the additional and onerous responsibility of regulating rating agencies. Apparently, regulatory agencies the world over did not put rating companies to scrutiny and India would be an exception if it did so.

It has been further argued that regulation might not be the best way to keep rating agencies under check. Even in the draft note on regulating these agencies, SEBI had made it abundantly clear that it would not be possible to oversee the actual process of rating. Rating of a company’s debt or equity issue was essentially a deal between the company and the agency.The earlier draft note on regulating the sector had mooted a minimum capital adequacy norm. The idea seemed to be to ensure that these agencies had the basic infrastructure to rate market instruments. The draft also stated that express permission should be required from SEBI for setting up rating agencies. Reacting to the draft, the finance ministry had said that it was necessary to ensure strict entry norms for rating agencies. A proliferation of agencies as it would lead to confusion in the market. Internationally, it was pointed out, there were only a handful of agencies in each country.SEBI was under pressure to implement a regulatory framework for rating agencies after the CRB Cap’s fiasco and instances where two agencies had given contradictory ratings to a debt floatation by the same company.Fresh thinking by SEBI may well mean that credit rating will not be subject to government control after all.