Sebi to strengthen disclosure guidelines for Credit Rating Agencies

Concerned over the severe spill-over impact of recent drastic downgrades by rating agencies, market regulator Sebi plans to strengthen its disclosure guidelines for issuance and review of the ratings by such entities. 

Besides, the Securities and Exchange Board of India (Sebi) is also considering asking the Credit Rating Agencies (CRAs) to hive off their activities involving rating of instruments other than securities, as they do not fall under Sebi's jurisdiction, a senior official said. 

Besides debt and other securities, the 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 (CRAs), to review the functioning of CRAs in order to enhance the standards and procedures related to an assignment of ratings and review of the same. 

The Committee submitted its report after incorporating recommendations and suggestions of all CRAs. Besides, the issues related to the functioning of CRAs have also been deliberated upon by the International Advisory Board of Sebi.

The markets regulator is now finalising its policy actions with regard to CRAs after taking into account the suggestions made by the expert committee as well as by its International Advisory Board.

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 a 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 and the same 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 a participation of business development team and other employees with revenue targets in analytical processes. Besides, a defined process would be required for evaluating a performance of Rating Committee members.