Sebi, Ministry of Corporate Affairs plan to turn up heat on rating firms

Credit rating agencies may be told to follow norms set for bourses; move will change ownership structure

The Securities and Exchange Board of India (Sebi) and the Ministry of Corporate Affairs (MCA) are planning to change ownership and governance structures in credit rating agencies (CRAs), entities that provide an insight into the financial health of a company. The regulatory bodies are considering whether CRAs should be classified as market infrastructure institutions (MIIs), sources in the know of the matter said.
 
Systemically important institutions, such as stock exchanges, clearing corporations, and depositories, are considered as MIIs. If implemented, the move will have wide ramifications for CRAs, as none of them meets the criteria currently applicable for MIIs. What could complicate the matter further is that three big CRAs are listed.
 
Recent episodes of defaults, including that at Infrastructure Leasing & Financial Services (IL&FS) and the lapses at CRAs, have sparked demands for more accountability. According to sources, the MCA has written to Sebi, seeking an overhaul in the composition of their board. The letter, sent last week, also mentions making MII-like shareholding criteria applicable to CRAs. The ministry also proposed that over 50 per cent of the board members of CRAs should be independent directors or public interest directors (PIDs). There should also be a nominee of the regulator, they proposed. “The authorities believe rating firms should be considered systemically important, like other MIIs, and be subjected to higher regulatory requirements,” said a source privy to the development, adding that the move is aimed at filling corporate governance lapses at CRAs.
 
CRAs are not mandated to have a certain number of independent directors or PIDs on their boards. However, a few have independent directors on their board and some have independent members in rating committees. Some have external members and/or internal members not associated with the same case.
 
Seven rating firms are registered with the Sebi, which are also accredited as external credit assessment institutions by the RBI. These firms are promoted by public financial institutions, scheduled commercial banks, and foreign banks having a continuous net worth of Rs 100 crore for previous five years.

In India, CRAs are mainly held by individual shareholders, corporate bodies, foreign investors, and mutual funds, and have significant market shares. Internationally, these are promoted by foreign investment management companies and have independent directors on their boards. Contrary to the new proposal, Sebi’s expert committee, led by former deputy governor R Gandhi, had in its 2018 report on MIIs said: “Though different rating committee structures are prevalent among CRAs, nothing adverse has been noticed. Each CRAs carries credibility and accountability of its ratings with the users and in the market. It would not be desirable to stipulate additional norms on composition of CRAs rating committee.”
 
The report was pertaining to the review of the regulations of MIIs and whether institutions like rating firms, debenture trustees, and registrar and transfer agents (RTAs) can be called MIIs. The issue of IL&FS emerged after the report was submitted. On mandating the presence of PIDs, the panel had felt that the changed regulatory requirement are sufficient since prominent rating firms are listed and have to comply with the appointment of independent directors in terms of Sebi’s Listing Obligations and Disclosure Requirements and Companies Act, respectively.

Plugging  governance lapses at CRAs

• Proposal to change ownership, governance, standards of accountability
• CRAs should have 50% independent directors, public interest directors on board
• Currently, a few CRAs have independent directors on board, rating committees 
• Some appoint internal members who are not associated with same case 
• To have nominee director from the Centre, regulator 
• Shareholding criteria should be same as of MIIs and should be regulated accordingly
• SEs, depositories, clearing corporations are collectively called MIIs