Move follows tight norms for raters in US, EU after global financial turmoil.
With the role of rating agencies under the lens across the global, Indian financial sector regulators too have decided to review their functioning and explore the possibility of strengthening regulation.
Sources said the issue has been discussed threadbare by the high-level coordination committee (HLCC) on financial markets at the last two meetings and the Securities and Exchange Board of India (Sebi) has been asked to come out with a paper on it.
“While there is neither anything wrong with our rating agencies nor any suspicion of wrongdoing, the review is due to the global developments. The paper will be more like a discussion paper,” said a source close to the development.
Another source said the regulators were merely discussing the possible issues that they may need to deal with. At present, rating agencies in India do not fall within the purview of any regulator.
In recent weeks, the United States and the European Union have proposed tightening of norms for rating agencies in the wake of their role in the financial turmoil. The moves follow a recent investigation by the Securities & Exchange Commission, which revealed poor standards that were adopted in rating structured products.
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In India, an issue under discussion is the possible conflict of interest between an agency’s rating role and the consulting activity undertaken by it. Even in the US and Europe, regulators are grappling with the issue and are trying to deal with norms for registration, quality standards, reporting and supervision.
In India, rating agency CARE recently decided against undertaking any fresh consulting jobs, though it still has some assignments from its clients.
Fresh cases are being passed on to its affiliated agencies, an executive said. Executives at the rating agency could not be contacted for comment.
Global rating majors like Moody’s and Standard & Poor’s are shareholders in Indian firms such as Crisil and Icra.
Earlier this year, the Reserve Bank of India (RBI) had asked the domestic agencies to follow revised international codes to avoid potential conflict of interest and improve standards.
In recent months, the role of rating agencies has increased in India, following the Basel-II regulations and now any loan over Rs 50 crore needs an agency’s rating. As a result, the link between banks and agencies has increased.
In a statement issued on Friday, RBI said Governor Y V Reddy chaired an HLCC meeting, which was also attended by Finance Secretary D Subba Rao, Sebi Chairman C B Bhave, Irda Chairman J Harinarayan and pension regulator D Swarup. It, however, did not disclose any details. The committee is a forum for interface among financial sector regulators.