Mumbai: Credit rating agencies (CRAs) will have to disclose more to investors, with market regulator Securities and Exchange Board of India (Sebi) on Monday acting on the recommendations of a six-member high-level committee set up by the Union finance ministry in February.
The regulator said that a CRA will have to explain the factors underlying its ratings, provide a summary of discussions with an issuer’s management, auditors and bankers, and reveal voting details of rating committee meetings and notes of dissent.
Rating agencies have been in the spotlight after the global financial crisis raised questions about the quality of the information they provided investors as well as conflicts of interest.
According to Sandeep Parekh, visiting faculty at the Indian Institute of Management, Ahmedabad, the tighter norms will make life difficult for the credit rating firms. “If the firms are required to disclose the rating committee’s decisions or voting details, not many members will be comfortable in sharing their views about a given rating assignment, which in turn may deteriorate the quality of discussions. But the move will certainly help improve transparency and prevent conflict of interest.”
A CRA should also publish information about the historical default rates of rating categories, said the regulator.
In its recommendations to Sebi, the high-level committee noted criticisms that issuers often get ratings based on the fees paid to the CRA.
Sebi has directed rating agencies to devise policies and internal codes for dealing with such conflicts of interest.
A CRA has to ensure that its analysts do not participate in marketing and business development, including negotiations of fees with the issuer. Employees involved in the credit rating process cannot own shares of the issuer.
“We support the objectives of increasing transparency and accountability of CRAs. ...Crisil is already compliant with all the suggested guidelines for managing conflicts of interest, and most of the increased disclosure requirements,” said Roopa Kudva, managing director and chief executive officer of Crisil Ltd, the biggest of the four CRAs in India. “Crisil will comply with additional disclosure requirements regarding rating histories and more detailed revenue break-ups within the timelines stipulated by Sebi.”
In case of unsolicited credit ratings, the rating symbol shall be accompanied by the word “unsolicited” and the CRA has to monitor and disclose ratings during the life of the rated securities, as if it were a solicited rating.
The new guidelines require CRAs to disclose shareholding patterns, compensation arrangements with issuers, fees from rating services and non-rating services, issuer-wise share of non-rating income of the CRA, and names of issuers who contribute 10% or more of total revenue of the CRA.
The half-yearly and annual disclosures for the fiscal year ended March have to be made by 30 June.