Norms For Rating Agencies To Be Designed To Regulate Entry
The broad guidelines to regulate credit rating agencies, now being framed by the Securities and Exchange Board of India (Sebi), are expected to emphasise regulating entry of rating agencies and recruitment of high-quality personnel by these agencies. The guidelines are also expected to insist on adequate disclosures and avoidance of conflict of interest between clients and rating agencies, and their promoters.
Sebi officials met representatives of Standard & Poors and the Securities and Exchange Commission of the US in a bid to draw up guidelines for rating agencies. However, both SEC and S&P told Sebi that rating agencies are not regulated anywhere in the world.
Nevertheless, Sebi has decided to proceed with guidelines to regulate credit agencies. Rating agencies which opposed regulation have been told that they have to be regulated under the Sebi Act. Sebi has also been emboldened by the fact that various parliamentary committee have been asking Sebi to regulate rating agencies.
Says an official with a credit rating agency, We are not in favour of regulation, but since the Sebi Act makes it compulsory, we have been talking to the regulatory authority about broad guidelines. However, both Sebi and the rating agencies agree that the rating methodology should not be regulated.
A recent meeting between Sebi and various rating agencies agreed that guidelines should be laid down stipulating who can promote rating agencies. However, a suggestion that the credentials of promoters should be taken into consideration before giving licences to float rating agencies faced opposition from rating agencies.
The agencies pointed out that the credentials of rating agencies can be built up only after they have issued a few ratings. Hence a promoter with no track record should not be prevented from floating a rating company. Says an official with a rating company, It is a chicken-and-egg situation, whether credentials come first or the company floatation.
A proposal to stipulate a minimum equity base for rating agencies was also rejected on the ground that rating is not a fund-based business.
A Sebi official said the guidelines should ensure that there is no conflict of interest in various areas.
For instance, conflict can arise in case a rating agency assesses its promoting company. There are also instances of a promoting financial institution having forced borrowers to go in for a rating by its affiliate.
The general opinion in the financial sector is that the credit rating agencies should be left alone as they have been done the world over.
If the Securities and Exchange Commission has not been able to form regulatory guidelines for rating agencies in the US, it remains to be seen what Sebi does.
It must be remembered that most of the Securities and Exchange Board of Indias guidelines have drawn heavily from international experiences.
But, with the rating agencies, Securities and Exchange Board of India will undertake pioneering work, said an official in a foreign bank.