The Securities and Exchange Board of India (SEBI) late on Tuesday issued guidelines to enhance the standards of the credit rating industry, including mandating more disclosures by credit rating agencies (CRAs), ensuring greater discipline in the rating processes, making rating outlooks compulsory, recommending performance evaluation of rating committees, underlining the process to be adopted in the event of non-cooperation by issuers, and underscoring steps to strengthen internal audit process.
CRAs will now have to publish a standard set of detailed criteria documents. Also, policies pertaining to the general nature of compensation and monitoring of ratings will also have to be disclosed on the website. This will ensure investors have access to crucial information on rating criteria and its application. The guidelines also require disclosure of ratings that haven’t been reviewed in a timely manner. This will increase the accountability of CRAs and lead to better discipline in rating reviews.
The guidelines also enhance transparency by making it mandatory to disclose the composition of rating committees and sub-committees, and the eligibility for membership. This will mean many CRAs will have to now build talent pools to facilitate this.
Sebi has, through the guidelines, also reiterated its stance that CRAs need to review their ratings on an ongoing basis over the life of an instrument, despite issuer non-cooperation. This has implications for suspension of ratings. However, for CRAs will be getting information from unlisted companies in a timely manner. Crisil believes ongoing regulatory support will be necessary to ensure this.
Sebi has also enhanced the scope of internal audit to ensure adherence to the policy of default recognition. This will increase the accountability of CRAs and improve the reliability of default statistics, which is the de facto report card of a CRA’s performance. This will require CRAs to recognise defaults in a timely manner.
Another aspect to note is the mandatory disclosure of unaccepted ratings. While this is aimed at improving the transparency in credit ratings, its efficacy within the Indian context will be known only over a period of time.