Sebi to keep an eye on rating agencies

Amid a global market mayhem triggered by a rating action in the US, Sebi has decided to keep an "intent watch" on the role of credit rating agencies and risks they might pose to the market -- with an aim to make necessary changes in regulations for these entities.

The regulator will revisit the regulations for credit rating agencies (CRAs) after monitoring the domestic and global developments in this regard, a senior official said.

The issue was discussed by Sebi board in its last meeting and the regulator would propose required changes, if required.

A credit rating is indicative of the creditworthiness and potential risks associated with an entity being rated. CRAs, which give such ratings, are regulated by Sebi in India.

Global rating agency major Standard and Poor's last Friday downgraded the long-term sovereign credit rating of the US, triggering a mayhem in the markets across the world. This is the first time the US has lost its top-notch 'AAA' rating.

Strongly objecting to the downgrade, the US had said that the rating agency's analysis was flawed and also questioned the credibility and integrity of S&P over its action.

In the past also, questions were raised over the role of credit rating agencies, especially at the time of the global financial crisis of 2008 when many institutions and instruments, which were top-rated by CRAs, had collapsed.

The regulators, including in India, have been particularly concerned about the conflict of interest issue with regard to the actions of CRAs, as they are generally paid by the companies that actually get rated.

Also, it has been feared that the companies not agreeable to the terms of CRAs might get bad ratings.

In a memorandum to its board, Sebi said that it has laid down comprehensive framework for regulation of CRAs and also to address conflicts which may arise in the their activities.

"However, as the area of CRA regulations is undergoing changes in the developed countries too, Sebi may keep an intent watch on both international and domestic developments and revisit CRA regulations from time to time to address any emerging issues in connection with role of CRAs and the risks they may pose to the market," it noted.

In its new guidelines, the International Organisation of Securities Commissions (IOSCO), a global body of regulators, has called for CRAs being subjected to adequate oversight and a regulatory system for their registration and supervision.

While Sebi regulations are already compliant with this guideline, the Indian regulator has decided to keep a close watch on the developments surrounding CRAs with an aim to make necessary changes, whenever required.