Sebi to streamline guidelines for credit rating agencies

Capital market regulator Securities and Exchange Board of India (Sebi) plans to issue revised disclosure guidelines for issuance and review of ratings carried out by credit rating agencies, amidst a recent spike in the number of corporate downgrades.

Sebi feels the recent increase in the number of drastic downgrades has had a spill-over effect on the market and the regulator wants rating agencies to streamline their review procedures and be more accountable.

Accordingly, the regulator is planning to strengthen disclosure guidelines for issuance and review of the ratings by CRAs.

Sebi is also expected to ask Credit Rating Agencies (CRAs) to separate the functions of rating of instruments other than securities, as they do not fall under Sebi's jurisdiction, reports quoted a senior Sebi official as saying.

CRAs also give ratings for various financing facilities, projects and fixed deposits, while some of them also undertake works like grading of NGOs and Real Estate properties.

"Hiving off such activities will also ensure that there is no dual reporting or action by two or more regulators for the same violation," the official added.

Sebi had set up a committee, comprising members from all credit rating agencies to review the functioning of CRAs in order to enhance the standards and procedures related to assignment of ratings and review of ratings.

The committee submitted its report after incorporating recommendations and suggestions of all CRAs.

The report also incorporated issues related to functioning of CRAs as deliberated upon by the International Advisory Board of Sebi.

Sebi will also take into account suggestions made by the expert committee as well as by its International Advisory Board before finalising its policy actions with regard to CRAs.

Among the proposed measures, CRAs would have to adopt a policy regarding suspension and subsequent withdrawal of rating and disclose the same publicly.

It has also been suggested that Sebi would provide a format of the press release regarding suspension to remove any ambiguity and ensure uniformity across various CRAs.

Sebi also wants disclosure of all ratings assigned by the CRA, whether accepted or not by the issuer, even in case of non-public issues.

Other proposed measures include strengthening the agreement between the Issuer and CRA to improve client co-operation, public disclosure of the CRAs' procedures for ongoing monitoring of credit ratings and disclosure of rating transition of the issuer.

The CRAs would also need to publicly disclose various 'criteria' used for rating, which would need to be referenced in their press releases.

There would be a periodic review of the criteria used for rating and public disclosure of the periodicity of review.

The internal document governing rating process would need to be made available on the website of CRAs.

Sebi also plans to put in place a mechanism for evaluating and enhancing the performance of CRAs, along with terms of reference for internal audits of CRAs.

Accountability of the CRAs, rating committee, analysts, including provisions for checks and balances, would need to be clearly defined in the internal governing document and rating manual of the CRA.

There would be restrictions on participation of business development team and other employees with revenue targets in analytical processes.

Besides, a defined process would be required for evaluating performance of rating committee members.