Sebi plans new rules for rating agencies

The Securities and Exchange Board of India (Sebi) is planning to issue fresh guidelines for credit rating agencies, amid instances of lack of disclosures and conflict of interest between such agencies and issuers. The regulator might also prescribe rules for fund houses to avoid concentration risks in a single debt security. The move is aimed at avoiding a repeat of recent crises such as the Amtek Auto default, which hit investors of JP Morgan Mutual Fund.

“What we have started looking at is why it is that in certain cases, in which papers were being rated investment grade, the rating was suddenly suspended? Maybe, there was genuine reason. I am not questioning it but that has to be explained to investors and the public at large. We felt that was not being done. We had a meeting with rating agencies and explained our concern to them,” Sebi Chairman U K Sinha said on the sidelines of an annual capital market summit organised by the Federation of Indian Chambers of Commerce and Industry.

Sinha said Sebi was also looking at whether there was any conflict of interest in the rating process followed by agencies.

To avoid concentration risks towards a single debt instrument, the regulator is considering tightening investment rules for mutual fund houses. “We have observed that perhaps, the mutual fund sector isn’t being very careful about the investments it is making in debt products and the process it is following,” Sinha said.

Sebi is also planning to ease norms to make online investing easier. It is planning to do away with the requirement of in-person verification, a know-your-customer requirement under current rules. The move would help increase mutual fund penetration and enable the sale of financial products through e-commerce platforms.

Sebi has set up a committee under former UIDAI chief Nandan Nilekani to revamp the process of distributing financial products across the country.

“Millions of potential investors in the country are buying products online and such buying has gone up exponentially. But there is some difficulty for them to buy mutual fund products online,” Sinha said.