Tighter controls over raters

Business Standard (BS) reports a new Securities and Exchange Board of India (SEBI) circular issuing guidelines for  credit rating agencies (CRA). Rating agencies would have to make mandatory disclosures at least every six months. Importantly, the raters will be bound to disclose the fees they charge as well as their shareholding pattern. Also, raters have to disclose the default rates on their previous ratings.

SEBI has also asked raters to maintain and make available for scrutiny by regulators for at least five years, details of the process by which ratings were finalised. It also specifies the terms for carrying out ‘default studies’.

One of these guidelines that’s going to be relatively difficult to enforce is ensuring a clear separation of the actual rating staff and the business development staff and steps necessary to avoid any conflict of interest.

A CRA shall ensure:
  • 3.2.1  that   its   analysts   do   not   participate   in   any   kind   of   marketing   and business development including negotiations of fees with the issuer whose securities are being rated,

  • 3.2.2  that   the   employees’   involved   in   the   credit   rating   process   and   their dependants do not have ownership of the shares of the issuer.
  • 3.2.3  prompt review of the credit ratings of the securities as and when any of its employees joins the respective issuer.

The full circular is here

From the BS report, it sounds like the rating agencies are happy to comply with the new rules.

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