SEBI Tightens Disclosure Norms For Credit Rating Agencies

Markets regulator SEBI on Tuesday came out with stricter disclosure requirements for credit rating agencies to ensure more transparency in their policies amid instances of drastic downgrades impacting investors.

With the tightened norms, the credit rating agencies will have to share more details about the criteria followed in rating instruments, provide information in a user-friendly manner on their websites and also specifically mention in case a particular issuer did not cooperate at the time of rating.

Issuing a detailed circular, the Securities and Exchange Board of India (SEBI) said credit rating agencies (CRAs) have to implement the guidelines in 60 days. In case of non-cooperation by the issuer such as not providing details required for rating and non-payment of fees for conducting surveillance, SEBI said CRAs should continue to review the instrument based on best available information.

For such cases, the "credit rating symbol shall be accompanied by 'issuer did not co-operate; Based on best available information' in the same font size".

Among others, SEBI said press releases related to review of rating should "carry the rating transition/history of all instruments of that issuer, rated by the CRA in the past three years, irrespective of whether the instrument is currently outstanding or not".

Further, the agencies should make available the rating history, press releases and rating reports, including those ratings which have been withdrawn, on their websites.

CRAs will have to frame detailed rating criteria and the same has to be reviewed periodically. Besides, the periodicity for such review should be disclosed on their websites.

"The criteria shall be placed on the CRA's website in a user-friendly manner in order to facilitate easy and ready access of the same by investors," the circular said.

Earlier this year, SEBI Chairman UK Sinha had said the regulator would act tough against rating agencies for their lapses after it came to light that CRAs were offering only limited disclosures when they suspended ratings.

The latest guidelines have been issued after taking into consideration the recommendations made by a panel set up by SEBI on "strengthening the guidelines and raising industry standards for credit rating agencies".

The committee had looked into measures and guidelines to bring about greater transparency in policies of credit rating agencies and enhance the standards followed by the industry. CRAs have to define obligations, responsibilities, and areas of conflict of interest, among other factors of rating committee members in their operations manual/internal governing document.

Apart from disclosing the eligibility for becoming a member of the rating committee, minutes of each case discussed at the committee should be maintained and signed by the chairperson, the circular said.

"The process of discussion of case by circulation must be avoided, unless there is urgency in taking a rating action," it added.

As per the circular, each CRA should disclose on its website details of all ratings assigned by them, irrespective of whether the rating is accepted by the issuer or not, even in the case of non-public issues.

For carrying out internal audit of a CRA, SEBI said the audit firm should have a minimum experience of three years in the financial sector.

Besides, the internal auditor of a CRA should declare that the firm has not been employed by other CRAs in the past two years.

The audit team must at least have a chartered accountant and a certified information systems auditor.