Sebi cracks disclosure whip on rating agencies

The Securities and Exchange Board of India asked credit rating agencies to disclose the fees they charge companies for assessing their debt profile and the default rate on their previous ratings.

The role of rating agencies had come under the scanner during the global financial crisis, as many companies and their issues collapsed despite high ratings.

Sebi said the agencies would have to comply with the guidelines by June 30 and make mandatory disclosures at least twice in a year.

In a circular issued on Monday, the market regulator also asked the rating agencies to recognise default at the first instance of delay in paying interest or principal on the rated debt instrument.

In addition, the agencies have been asked to ensure their analysts do not participate in any marketing and business development, including negotiations of fees with the issuer whose securities they are rating. Also, employees involved in the rating process and their dependents should not own shares of the issuer, Sebi said.

The new guidelines ask the credit rating agencies to maintain records of the important factors underlying the credit rating and a summary of discussions with all the stakeholders involved, as well as decisions of the rating committee, including voting details and notes of dissent.

"These records should be maintained till five years after maturity of instruments and be made available to auditors and regulatory bodies when sought by them," Sebi said.

Crisil, Fitch, Icra and Care are the four main credit rating agencies operating in India. Based on the creditworthiness of companies, these agencies assign ratings such as AAA, AA, BBB. Investors, banks and other institutions use these ratings while making investment decisions.

The new guidelines require the credit rating agencies to disclose their shareholding patterns as well.

Rating agencies have welcomed the move.

Roopa Kudva, Managing Director and CEO of Crisil, said she supports the objectives of increasing transparency and accountability of credit rating agencies. Crisil, she said, is already complying with the suggested guidelines for managing conflicts of interest.

Kudva said learning from the global financial crisis over the past two years, Crisil made a number of enhancements to its business processes and has increased communication with the market to help investors in their credit decisions. For example, it has introduced CreditAlerts, which highlight changes in any industry that can affect credit profiles of companies in that industry.

"The new regulations of Sebi have taken into consideration all the important issues like transparency and disclosures, conflict management, best practices and documentation. This would reinforce the existing Sebi Regulation for Credit Rating Agencies," said Naresh Thakkar, Managing Director of ICRA.

On ratings of structured finance products, Sebi said rating agencies and their subsidiaries should not provide consultancy or advisory services regarding the design of the product.

"The rating symbols in this case should clearly indicate that the ratings are for structured finance products," said Sebi.

In case of unsolicited credit ratings - ratings not arising out of the agreement between an agency and the issuer - credit rating symbol should be accompanied by the word 'unsolicited', Sebi said.

The rating agencies would now also be required to disclose the general nature of its compensation arrangement with the issuers.

"An agency shall disclose annually its total receipt from rating services and non-rating services. It should also disclose issuer wise percentage share of non-rating income of the agency and its subsidiary to the total revenue and its subsidiary from that issuer," the market regulator said.

For structured finance products, rating agencies now would have to disclose the track record of the originator and details of nature of underlying assets while assigning the credit ratings. Further, rating agencies would have to disclose at least once in every six months, the performance of the rated pool, i.e; collection efficiency and delinquencies.