The Securities and Exchange Board of India (Sebi) plans to tighten regulations for credit rating agencies by ensuring that rating processes are insulated from business decisions, said two people with direct knowledge of the matter, including a Sebi official.
The capital markets regulator will also likely allow for suspension of ratings, they said, declining to be named.
“Sebi had been consulting with credit rating agencies to ensure that the rating processes have increased accountability and transparency. A discussion paper with proposed amendments to credit rating agency regulations would be released by the end of this year,” said the official cited above.
The revamped regulations would focus on minimizing conflict of interest and ensuring that sales or business development teams have no say in the ratings process.
“Rating committees should also follow process of rating by ensuring fair voting,” the second person cited earlier said. That means the voting policy should give priority to junior and independent officials as they are less involved in the managerial and business decisions of the rating agency.
“This can minimize conflict of interest,” the person said.
The relook at the strength of the ratings system in India has been sparked off by a sharp cut in the ratings of Amtek Auto Ltd in September 2015, which forced JP Morgan Asset Management Co. to restrict redemptions for two of its funds in September. Other instances of sharp, sudden downgrades and ratings withdrawals have also come to light, forcing a wider relook at credit rating agency oversight.
While Sebi has been in constant consultation with stakeholders, it was facing hurdles in addressing the issue of conflict of interest.
“By and large, most of the rating agencies in India follow the policy of not involving business development teams in the analytical side of the business,” said the head of a rating agency on condition of anonymity. “However, the only grey area is if a board member, who looks at the financials of a credit rating agency, is also a part of the rating committee.”
The move to erect a Chinese wall between revenue and ratings has been welcomed by experts.
“The inherent conflict of interest in rating process is the competition between various rating agencies and the shopping of ratings that companies do as companies have the discretion to accept or reject the ratings,” said Shriram Subramanian, Founder and Managing Director of InGovern Research Services Pvt. Ltd, a proxy advisory firm. “This shopping of ratings could be avoided if rating agencies are forced to publish the ratings even if companies don’t accept the ratings.”
Sebi also plans to increase the frequency of internal audits of rating agencies and keep a tab on corrective action post such audits. The new regulations would also allow for suspension of ratings, but with full disclosure.
“The revamped regulations would allow for suspension of ratings if an issuer doesn’t give relevant information, but full disclosure would need to be made, giving reasons for suspension or withdrawal, and still assign a rating based on publicly available information and also disclose if another agency has suspended rating of the particular paper,” said the Sebi official.
Current norms do not allow credit raters to suspend ratings if the underlying debt security is still outstanding. A rating can be suspended only if the security is clubbed with another security or in the case of a company merging with another one.
“In India, credit rating agencies have devised their own business practice for suspension of ratings, even when suspension is not provided in the law. Under Sebi regulations, only withdrawal is permitted in limited circumstances,” said Vaneesa Agrawal, regulatory lawyer, Suvan Law Advisors.
“The Sebi international advisory board had also recommended that suspension of rating may be considered as a first step when information is not forthcoming. If the regulator comes up with criteria for suspension, it will clear the ambiguity.”
Source: livemint
