Sebi tightens accountability norms for rating agencies

Move aimed to address conflict-of-interest issues

MUMBAI: At a time when rating downgrades, especially that of non-banking financial companies (NBFCs), are grabbing headlines, the Securities and Exchange Board of India (Sebi) has tightened the governance and accountability norms for credit rating agencies (CRAs).

Seemingly to address the much debated question of conflict of interest, Sebi has instructed that the managing director and chief executive officer (MD & CEO) of a CRA can’t be a member of the rating committee.

Further, the markets regulator said the rating committees of a CRA will report to the chief ratings officer (CRO) and not to the MD & CEO.

Experts said the new norms will help establish a strong ‘ethical wall’ between individuals who are responsible to generate business and the members of rating committees who are tasked with carrying out the rating exercise.

The Sebi’s tightening of norms for rating agencies has to be viewed in the new context when the once highly rated companies – mostly NBFCs, have started defaulting on their financial obligations giving perennial headaches to banks.

Sebi has also said independent directors will comprise a third of the board of a CRA if the board is chaired by a non-executive director. In case the board of the CRA is chaired by an executive director, independent directors will comprise half the board.

The regulator has also directed CRAs to set up ratings sub-committees and also nomination and remuneration committees. The CRO will directly report to the ratings sub-committee of the board of the CRA.

During the rating process, CRAs have been directed to record minutes of the meeting with issuer management and incorporate it into the rating committee note.


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