Sebi tightens governing norms for rating agencies; CEOs can't be on panel

The latest steps are to reduce conflict of interest situations at Credit rating agencies

The Securities and Exchange Board of India (Sebi) on Monday tightened the governance and accountability norms for credit rating agencies (CRAs).

Under the new norms, the managing director and chief executive officer (MD & CEO) of a CRA will be barred from being a member of the rating committee. Further, Sebi has said the rating committees of a CRA will report to the chief ratings officer (CRO) and not the MD & CEO.

The latest steps are to reduce conflict of interest situations at CRAs. Experts said the new norms will help create a Chinese wall between individuals who are responsible to generate business and the members of rating committees who are tasked with finalising the rating.

The issue assumes significance after the IL&FS crisis, which had put a question mark on the practices followed by rating agencies.

Sebi has said independent directors will comprise a third of the board of a CRA if the board is chaired by a non-executive director. In case the board of the CRA is chaired by an executive director, independent directors will comprise half the board.

The regulator has also directed CRAs to set up ratings sub-committees and also nomination and remuneration committees. The CRO will directly report to the ratings sub-committee of the board of the CRA.

During the rating process, CRAs have been directed to record minutes of the meeting with issuer management and incorporate it into the rating committee note.