Sebi cracks whip on credit rating agencies in Amtek Auto case

Regulator has gathered proof against two agencies for sudden suspension of Amtek's rating

Market regulator Securities and Exchange Board of India (Sebi) has initiated adjudication proceedings against credit rating agencies Crisil and CARE ratings over suspension of rating in the case of beleaguered Amtek Auto. This is the first time Sebi is taking up the matter against the credit rating agency.

Crisil, Icra and CARE are among the major agencies that assign credit ratings to issuers of debt instruments.

According to sources, the market regulator has already collected evidence against the two rating agencies on how they suspended Amtek Auto’s credit rating suddenly without following due procedure. The regulator is also investigating the sudden exit of JP Morgan’s credit opportunity fund from Amtek Auto once the downgrade was announced.

“Before you withdraw the rating, you should put the company on the credit watch. One of the arguments the rating agencies are making is that Amtek didn’t provide them enough information to take an informed call on the rating. However, if that is the case, they should have intimated the same while suspending the rating,” said a source.

Suspension of rating has been a contentious issue between Sebi and credit rating agencies. Sebi is of the view that suspension should be avoided. However, if a rating agency does suspend coverage, it should provide a detailed reasoning for doing so. Sebi is also of the view that rating agencies should act on early signs of warning in order to help investors.

The complete Amtek episode forced Sebi to revisit the regulations pertaining to credit rating agencies. According to the new regulations, if an agency decides to drop the credit rating of a company on account of insufficient information or non-payment of fees, the same needs to be disclosed in the public domain while suspending the rating.

In its November 2016 circular, Sebi said, “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 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.