SEBI to bar rating of CRA promoters

NEW DELHI, MAY 13: The Securities and Exchange Board of India (SEBI) will soon come out with a new set of regulations barring credit rati...

NEW DELHI, MAY 13: The Securities and Exchange Board of India (SEBI) will soon come out with a new set of regulations barring credit rating firms from rating financial instruments floated by its promoters with over 10 per cent stake.

"We will issue the guidelines preventing credit rating agencies from assessing the bonds, debentures and other financial instruments floated by promoters who hold more than 10 per cent equity in the agencies," SEBI chairman DR Mehta said.

The stock market regulator will also frame guidelines preventing promoters to have representations on the board of the rating agencies, Mehta said.

He said the guidelines incorporating the changes would be issued through a circular soon as the next board meeting of SEBI is scheduled for June. "We will insist for an arm’s length relationship between the promoters and the rating agency and we do not want the firms to be influenced by the promoters," he said.

Mehta said the proposed regulations were less stringent than the earlier proposalwhich barred rating firms to assess financial instruments of promoters who held over five per cent stake in the rating company. The new rules would be applicable to only fresh issues floated by the promoters and the rating firms would be allowed to continue the ratings of existing financial instruments of promoters, he said.

The new guidelines were drafted after a meeting with the rating agencies and its promoters recently, SEBI executive director Dharmishta Rawal said.

The new guidelines on credit rating agencies will have serious implications on the three major players in the business such as ICRA, Crisil and CARE. Major financial institutions such as Industrial Finance Corporation of India (IFCI), ICICI and Industrial Development Bank of India (IDBI) hold over 10 per cent stake in ICRA, Crisil and CARE respectively.

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“There were allegations in the past that rating agencies had given favourable rating to their promoters. While rating agencies have downgraded the rating of other companies, they havenot done that in the case of their promoters. This is despite the deteriorating performance of some of the promoters,” said a banker.

Further, the three financial institutions have to pull out their representatives from the board of directors of these rating agencies as a result of the guidelines, industry sources said. Industry sources pointed out that the withdrawal of ICICI chairman N Vaghul from the board of directors of Crisil was a move anticipating the SEBI guideline.