New CRA norms to improve transparency, help investors: Crisil

Sebi guidelines to enhance standards of the credit rating industry will lead to improvement in transparency of the entire evaluation process and benefit investors, rating agency Crisil said today.
The markets watchdog had yesterday issued guidelines to improve credit rating standards, including mandating more disclosures by credit rating agencies (CRAs).
The move will help ensure greater discipline in the processes, making rating outlooks compulsory, recommend performance evaluation of rating committees, and underline the process to be adopted in the event of non-cooperation by issuers, apart from underscoring steps to strengthen internal audit process, Crisil said.
Welcoming the guidelines, Crisil Managing Director and Chief Executive Ashu Suyash said, "These guidelines will lead to a material improvement in both transparency of the credit rating process as well as enhance industry standards. Investors will benefit immensely as the rigour and disclosures will contribute to better pricing decisions."

She claimed that many aspects of these rules are already a part of Crisil's existing processes, especially offering rating outlook, which it has been doing on long-term instruments since 2003.
Under the new norms, Sebi wants CRAs to publish a standard set of detailed criteria documents. Further, policies pertaining to the general nature of compensation and monitoring of ratings will also have to be disclosed on the websites of CRAs with a view to ensure investors have access to crucial information on rating criteria and its application.

To increase accountability of CRAs, they are required to make disclosure about ratings that have not been reviewed in a timely manner.

Pawan Agrawal, Chief Analytical Officer at Crisil, said investors will also benefit immensely as rating outlooks have been made mandatory, which reduces the possibility of sudden rating changes. Outlooks helps investors anticipate the direction of rating changes over the near-to-medium term.
The guidelines also seek to enhance transparency of the evaluation process by making it mandatory to disclose the composition of rating committees and sub-committees, and the eligibility for membership.
This will mean many CRAs will have to now build talent pools. The market watchdog has recommended guidelines for evaluation of decisions taken by the rating committee, which will be reviewed by the CRAs' board. Crisil warned that the insistence on CRAs reviewing their ratings on an ongoing basis over the life of an instrument, in spite of issuer non-cooperation, may lead to suspension of ratings. Getting information from unlisted companies in a timely manner could also prove to be difficult, it said.

Overall, Crisil said, it believes the guidelines are timely and will go a long way in developing a vibrant and deep corporate bond market in the country.