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Sebi’s prior approval would be needed for acquisition of shares or voting rights in a CRA that results in change in control. Photo: Aniruddha Chowdhury/Mint
Sebi’s prior approval would be needed for acquisition of shares or voting rights in a CRA that results in change in control. Photo: Aniruddha Chowdhury/Mint

Sebi proposes cross-shareholding cap for credit rating agencies

Sebi proposes 10% cross-shareholding cap, greater disclosure requirements by credit rating agencies

Mumbai: The Securities and Exchange Board of India (Sebi) has proposed capping cross-holding among credit rating agencies (CRAs) at 10%, and suggested stringent net worth and ownership criteria. 

No credit assessor shall hold more than 10% of shares or voting rights in another rating firm and it shall not have a board representation in the latter, said a discussion paper released by the capital markets regulator on Friday.

The regulations also state that even an individual shareholder cannot have a 10% (or more) stake in two rating agencies at the same time. Sebi’s prior approval would be needed for acquisition of shares or voting rights in a rating company that results in change of control. 

The requirement would not be applicable for holdings by broad-based domestic financial institutions.

“Having some thresholds on cross-holding in CRAs may mitigate concerns regarding conflict of interest, independence of operations, etc.," the consultation paper said. 

Currently there is no restriction on shareholding in rating agencies. Sebi’s 10% cap draws parallels with such norms in the banking industry. Reserve Bank of India norms say that a bank cannot hold more than a 10% stake in another bank. 

The Sebi proposal assumes importance in the wake of Crisil Ltd picking up an 8.82% stake in CARE Ratings Ltd on 29 June. According to a 14 August report in The Economic Times, Sebi was examining the deal after CARE complained to the capital markets regulator that it was an attempt at a hostile takeover. 

“The move to restrict cross-shareholding will enhance credibility in ratings, enhance transparency in key management decisions and may also ensure that no particular instrument gets a biased rating from two or more rating agencies because of the presence of a common controlling shareholder," said an official from a credit rating agency who didn’t want to be identified as the matter is regulatory and the rules are yet to be finalized. 

“As far as prior Sebi approval regarding acquisition of control in a rating firm is concerned, Sebi wants to ensure that the promoters and the people controlling the rating business have adequate credibility so that they do not act with any vested interest," said the official. 

Sebi has proposed raising the minimum net worth required to start a credit agency to Rs50 crore. Currently, it stands at Rs5 crore, a number stipulated in 1999. Existing credit raters will be given three years to bring their net worth to this level, the paper said.

Sebi said it wants to increase the minimum net worth criterion to ensure that ratings firms have adequate capacity to invest in building intellectual capital and develop efficient systems to ensure the highest standards of analytical rigour. 

“The proposal to increase the net worth requirement from Rs5 crore to Rs50 crore may not be practical since a credit rating agency should not be treated at par with a systemically important entity like a mutual fund asset manager which manages huge sums of public money and has a similar net worth requirement," said Tejesh Chitlangi, partner, IC Legal. “This may kill competition in the market, discourage new entrants and hence a more realistic net worth criteria may be prescribed."

A rating agency will be allowed to suspend a rating only if it had been assessing the instrument for 5 years or 50% of the tenure of an instrument. Ratings firms may need to hive off any activity other than the rating of financial instruments and financial research.

Anirudh Laskar and PTI contributed to this story. 

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