The Securities & Exchange Board of India (Sebi) may soon release guidelines for credit rating agencies. In its recent communication with these agencies, the markets regulator has sent its suggestions to improve their operations and sought their observations on the same, according to two people with the direct knowledge of the development.
“The communication included key issues like uniform industry policy for suspension of credit ratings, and compulsory disclosure of ratings that are unaccepted by companies which are graded, among other propositions,” said one of the two persons.
This is a second round of communication between Sebi and rating agencies. In October-November, rating agencies had submitted a set of collective suggestions after discussions among themselves under Sebi’s guidance.
While Sebi did not communicate a time line for the impending road map to agencies, given that the regulator has listed “raising standards for credit rating agencies (CRAs)” as part of its action plan for fiscal 2016-17, the guidelines could be expected soon.
Among the key discussion points was the argument whether credit rating of a listed company should be suspended as its financials are available in the public domain. And that this information should help rating agencies form a fairly healthy assessment of the credit profile of the company.
However, some executives are believed to have pointed out that such publicly available information is not always enough, and agencies generally seek more information on details such as bankers’ report, production and realisation numbers to form a better assessment. “The time line of availability of the information and the quality of information were debated,” said a person familiar with the discussions.
Publication of unaccepted ratings by companies in cases where they do not agree with the assessment of the rating agencies was also part of discussions. It was mulled whether agencies should let this information be available on their website for any investor to make use of it.
After the Amtek Auto debacle which impacted two of the fixed income schemes of J P Morgan Mutual Fund, Sebi has on several occasions expressed its ire on sudden suspension or withdrawal of the ratings of a company.
Sandeep Parekh of Fin Sec Law Advisors says in absence of a black swan event multiple notch, downgrades highlight the need of improvement in the rating mechanism.
“Usually, the financials of companies deteriorate in a gradual manner, quarter over quarter. In that sense three to four notch downgrades are unusual and could be because a company is hiding information or rating agency could not spot the anomalies,” added Parekh, a former executive director of Sebi.
Parekh believes that Sebi guideline may look at the roles of both rating agencies and companies that are being rated. “If a company gives wrong information to rating agencies, the efficiency of ratings is bound to be effected.”
In the last five months, Sebi on several occasions laid emphasis on addressing conflict of interest between rating operations and business development units of rating agencies.
It is believed that the markets regulator also asked for suggestions to improve the external audit of rating operations of agencies to check if rationale and mandate of the system are efficient.