SEBI Proposes to Overhaul Disclosure Norms for Rating Agencies

The Securities and Exchange Board of India (Sebi) has proposed a number of measures to strengthen the functioning of credit ratings agencies (CRAs). These measures include stricter disclosure norms, separating out the securities ratings department and periodical review of processes.

The market regulator had set up an independent committee composed of key members from all CRAs to review the existing processes and procedures in agencies and suggest recommendations to improve their functioning. The committee recently submitted its report for review.

Based on suggestions from the committee and inputs from the International Advisory Board of Sebi, the regulator is drawing up new policies to govern the CRAs.

Among the key measures proposed, Sebi is suggesting the severance of all activities not related to securities since they do not come under its purview. The CRAs are currently issuing ratings for a number of other instruments including fixed deposits, varied financing services, projects, real estate properties. Some even issue ratings for NGOs and the new policy would put a stop to all of this.

In a statement, a Sebi official said

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

With regards to disclosure norms, Sebi has proposed that the criteria used for ratings should be disclosed by the agencies and that the internal governing document should be made available on the CRA’s website for easy reference. This document must include details of the accountability of the CRAs, the analysts and rating committee for ratings issued, in addition to rules regarding checks and balances.

It also plans on providing a template for press releases which will reduce ambiguity and ensure standardization amongst the CRAs. Other disclosure requirements will include public release of the CRAs’ processes for ongoing monitoring of credit ratings and disclosure of any rating transition done by the issuer.

Sebi additionally wants CRAs to disclose every rating issued by it regardless of whether it is for a public issue and whether it is accepted by the issuer. It hopes to improve the agreement between the Issuer and CRA to strengthen co-operation by clients. The new guidelines will seek to restrict the involvement of business development team or any one with revenue targets in the analytical processes.

The regulator intends to set up a periodic review of the rating criteria, with the results to be made publicly available. Sebi is also proposing a system to evaluate the functioning of the CRAs and its ratings committee with a view to enhance performance, along with guidelines for internal audits of CRAs.

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