 "Sebi tightens norms for credit rating agencies")
The Securities and Exchange Board of India (Sebi) on Tuesday tightened rules for credit rating agencies, prescribing more disclosures on suspension and withdrawal of ratings.
The capital markets regulator also directed agencies to disclose the nature of their compensation arrangements with rated entities, including exchange of gifts.
CRISIL, ICRA and CARE are the major agencies that assign credit ratings to issuers of debt instruments. The Sebi move follows an increase in the number of defaults due to a deteriorating corporate debt profile.
“Each rating agency shall frame detailed rating criteria, include the same in its operations manual or internal governing document, and disclose the same on its website,” Sebi said in a circular on Tuesday.
Rating agencies have to frame criteria on default recognition and the post-default curing period. “Each criteria shall be reviewed periodically by the agency and the periodicity for such review shall be disclosed on the agency’s website,” Sebi noted.
Sebi wants to specify the rating process, including the nature of compensation arrangements with rated entities, the policy for appeal by issuers, the confidentiality policy and the policy on outsourcing of activities and on managing conflict of interest.
Any conflict of interest owing to the composition of members in the ratings committee must be reported during an internal audit of the agencies.
Besides, agencies have also been asked to lay out the role and responsibilities of analysts. “Analysts shall be responsible for undertaking the rating process and adhering to the timelines as specified in the operations manual or internal governing document,” Sebi said.
At present, CRAs make limited disclosures as prescribed under Sebi's credit ratings regulations. Sebi said, each CRA shall disclose on its website details of all ratings assigned by them, irrespective of whether the rating is accepted by the issuer or not, even in case of non-public issues. Details disclosed shall include the name of the issuer, name/ type of instrument, size of the issue, rating and outlook assigned, etc, it said.
For the ratings assigned and their periodic reviews, CRAs have to issue press releases, and should be put on their websites. With a view to harmonising the format of the press release, it has been decided that all CRAs shall follow a standardised template, regulator noted. Accordingly, CRAs have to now highlight the minimum information and that must be covered in the press release.
For instance, press release for the initial rating of bonds, debentures, etc. shall disclose information about the rated amount of the instrument; the subsequent press releases shall also disclose additional details of the rated instrument, viz coupon, maturity date, etc. Besides, each CRA shall assign a rating outlook and disclose the same in the release.
The guidelines also mandated publishing of norms on what constitutes non-cooperation from the issuer and policies with regard to suspension or withdrawal of ratings. In case an issuer approaches another CRA after suspension of its rating, the new CRA has to disclose details on suspension of ratings by the previous CRA.
Sebi also list steps to strengthen internal audit for CRAs, including mandating a rotation of auditors every five years or earlier. Internal audit reports have to be sent to Sebi within two months.
