SEBI is also planning to bring a framework on compensation for rating agencies to ensure that there is a disincentive for them to assign aggressive ratings
The Securities and Exchange Board of India (SEBI) may ask rating agencies to separate their rating entity and their non-rating businesses in order to avoid conflicts of interest, The Economic Times reported.
The market regulator is considering a proposal to overhaul the role of credit rating agencies (CRAs) in the wake of the IL&FS crisis.
The proposal states that there should not be anything linking the two other than shareholding and that there should be no repatriation of dividend or profit from the non-rating businesses to the company that owns the rating business.
SEBI is also planning to bring a framework on compensation for rating agencies to ensure that there is a disincentive for them to assign aggressive ratings, the newspaper reported.
The regulator believes the move may pave way for rating agencies to deal with conflicts and assign a non-biased rating. These ratings are fundamental to any debt instrument and a vital piece of information in the investment process of fixed income instruments.
"Currently, there is no transparency in the way credit rating agencies are getting compensated. This will bring transparency and accountability," a fund manager with a domestic asset management company was quoted as saying.
SEBI is also reportedly considering a rotation of rating agencies, wherein no rating agency would be appointed to a company for two consecutive terms.
The regulator may also tweak its rules to have at least two ratings in a case where the issuance amount is over Rs 100 crore, and three rating agencies in the case the amount exceeds Rs 500 crore.
"The proposal of requiring multiple ratings depending upon the size of an issue, while carrying a decent logic, would be yet one more regulatory prescription which only bolster their business further, that too in the immediate aftermath of the IL&FS rating fiasco," S Raman, former whole time member of SEBI, was quoted as saying.
Apart from these measures, SEBI is planning a range of measures to strengthen the standards for ratings and disclosures, the news daily reported.
It has proposed that if a subsidiary company gets support from its parent company, or if a company gets support from the government, the rating agency will be obligated to disclose the name of the said parent company or government that will help fulfill debt obligations if necessary.
SEBI is also planning to introduce a specific section on liquidity among key rating drivers that will highlight liquid investments or cash surpluses for servicing debt obligation over next one year, so that investors are aware of the liquidity situation of an issuer.
The regulator will discuss all these proposals at a meeting with credit rating agencies this week.
The credit rating industry has come under scrutiny after rating agencies that assessed IL&FS failed to pick up signals of financial trouble brewing at the lender.
SEBI is considering a probe to see whether proper due diligence was carried out by the rating agency at the time of assigning credit ratings to the company.There are seven rating agencies registered with SEBI, including CRISIL, Care Ratings, Ind-Ra, and ICRA.