Sebi puts 10% cross-shareholding cap in rating agencies

Markets regulator Sebi has imposed 10 per cent cap on cross-shareholding in credit rating agencies, raised their net worth requirement to Rs 25 crore from Rs 5 crore and disallowed having a seat on the rival's board.

The new norms are likely to have an impact on global rating agencies like S&P, Moody's and Fitch which have significant holdings in domestic agencies besides their direct presence.

Sebi has issued new rules under which a credit rating agency (CRA) will not, directly or indirectly, have more than 10 per cent of shareholding or voting rights in another CRA and would not have representation on the board of the other CRA.

Further, Sebi's prior approval would be needed for acquisition of shares or voting rights in a CRA that results in change in control.

A shareholder with 10 per cent stake or voting rights in a CRA will not hold similar holding or voting rights in any other CRA. However, this restriction will not apply to holdings by Pension Funds, Insurance schemes and Mutual Fund schemes.

The minimum net worth threshold for the rating agencies has been raised to Rs 25 crore from the current level of Rs 5 crore, the Securities and Exchange Board of India (Sebi) said in a notification dated May 30.

The regulator has given three years to existing CRA to comply with networth requirement.

The promoter of a CRA would have to maintain a minimum shareholding of 26 per cent in the firm for a period of three years from the date of registration.

A CRA will not carry out any activity other than the rating of securities offered by way of public or rights issue.

Besides, any activity, other than the rating of financial instruments and economic or financial research, will have to be hived off by the CRA into a separate entity within two years.

"Foreign credit rating agency incorporated in a Financial Action Task Force (FATF) member jurisdiction and recognised under their law, having a minimum of five years' experience in rating securities," it said.

According to Sebi, every credit rating agency will have to carry out periodic reviews of all published ratings during the lifetime of the securities, unless the rating is withdrawn.

If the client does not co-operate with the credit rating agency, the agency will have to carry out the review on the basis of the best available information or in the manner as specified by the board from time to time. In such cases, the agency will have to disclose to the investors the fact that the rating is so based.

"A credit rating agency shall not withdraw a rating so long as the obligations under the security rated by it are outstanding, except where the company whose security is rated is wound up or merged or amalgamated with another company or as may be specified by the board from time to time," Sebi said.