Isolate credit rating analysts from issuers, says ministry panel

Isolate credit rating analysts from issuers, says ministry panel
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First Published: Fri, Feb 19 2010. 10 24 PM IST
Updated: Fri, Feb 19 2010. 10 24 PM IST
Mumbai: A high-level finance ministry committee said in a report released on Friday that the Securities and Exchange Board of India (Sebi) should be the lead regulator for credit rating agencies (CRAs) that assess the creditworthiness of various firms and financial instruments, and that have come under fire for allegedly grading firms by fees received.
The six-member committee on comprehensive regulation for credit rating agencies (CCRCRA), headed by joint secretary (financial markets) K.P. Krishnan, recommended in its report that CRAs restrict analysts from participating in fee discussions with issuers, should disclose fees received for rating, and should not be allowed to undertake consultancy and advisory services for clients seeking ratings.
CCRCRA is under the jurisdiction of the high-level coordination committee on financial markets (HLCCFM).
The report primarily responds to allegations that credit rating agencies issue ratings in return for the fees paid by debt-issuing entities, potentially compromising the quality of analysis and ratings assigned.
Currently, there are five rating agencies registered with Sebi: Crisil Ltd, Fitch Ratings India Pvt. Ltd, Icra Ltd, Credit Analysis and Research Ltd (CARE), and Brickwork Ratings India Pvt. Ltd.
There are also a number of rating agencies that are not registered with Sebi, but are governed by other regulators such as the Reserve Bank of India (RBI).
CCRCRA said since credit ratings are primarily used by investors in the securities market, which is regulated by Sebi, it should be named the lead regulator and all CRAs be registered with it before using the words “credit rating” with their company names.
Amit Tandon, managing director, Fitch Ratings, said the lead regulator concept would “ensure that different regulators do not pull in different directions”.
To address the concerns of other regulators, the committee suggested existing Sebi regulations be amended before positioning itself as the lead regulator for CRAs.
CCRCRA, which was formed in January 2008, said there should be established policies to separate those individuals who negotiate fees from those employees who rate an issue in order to reduce the possibility or perception that ratings might be linked to fees.
The committee observed that in practice, CRAs often float subsidiary companies for undertaking non-rating activities such as consulting, software development, knowledge process outsourcing and research, which could potentially lead to a conflict of interest, a practice CCRCRA said should be avoided.
“Internal Chinese walls are porous mechanisms to prevent such conflict of interest as such other businesses such as consultancy and advisory services should not be undertaken by CRAs,” it added.
The committee also proposed increased disclosures for every rating, and that CRA should reveal sources of conflicts of interest including details of fees. It said details of fees over the past three years for activities other than rating be disclosed.
“Disclosures always help. I am sure that these increased disclosures will help improve confidence in the ratings,” said Naresh Thakkar, managing director at credit rating firm Icra, of the committee’s recommendations.
The committee also proposed a bi-annual internal audit of processes of CRAs.
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First Published: Fri, Feb 19 2010. 10 24 PM IST