Sebi panel advises on removing 'conflict of interest' while rating

International advisory board suggests suspension of rating by rating agency should be accompanied by reasons

The Securities and Exchange Board of India (Sebi) international advisory board (IAB) has suggested that the market watchdog should work in improving the rating process, increase transparency and reduce conflict of interest.

These suggestions assume importance in the wake of the recent Amtek Auto crisis which had the regulator into examining the role of credit rating agencies.

"IAB felt that rating is a public good and therefore the independence and credibility of credit rating agency in this context assumes special significance," said Sebi in a press note.

IAB suggested that the composition of the rating committee may be left to the credit rating agency. The disclosures of ratings of an issuer by rating agencies may also include the rating transition of the issuer in the past.

"To reflect on the consistency of ratings by the rating agency," said IAB.

On withdrawal vs. suspension, an issue that was frowned upon the regulator in the Amtek episode, IAB suggested that in cases where information required for rating is not forthcoming from the issuer, suspension with reasons thereof may be the first step and then could be withdrawn.

"The issuers should disclose all ratings obtained by them even in case of non-public issues so as to curtail the scope of 'rating shopping'," said IAB.

The think tank also noted that in many economies the reliance on rating agency is marginal.

Sebi post the Amtek crisis had directed the mutual fund houses to do their own home work and reduce reliance on rating agencies.

The international think tank also deliberated on the price polling of commodity prices and the regulator's conduct in context of Libor crisis.

"It was agreed that while this is an extremely complex matter, it is the regulator's responsibility to take active measures for ensuring good behavior and appropriate conduct in the markets," said Sebi in a press note.

Additionally the board noted that in context of the new bankruptcy law that there is a need of adequate infrastructure. Also, a clear segregation of clients' assets may be recognized and they should not from part of debtor's estate.