SEBI’s guidelines to impart higher credibility on credit ratings
The Securities & Exchange Board of India (Sebi) has announced guidelines for credit rating agencies in order to impart higher credibility to the processes and procedures associated with the credit rating. The new guidelines include a number of stringent additional disclosure norms.
Sebi has directed that a credit rating agency (CRA) shall keep record of the important factors underlying the credit rating and sensitivity of such credit rating to changes in these factors. A CRA is also required to keep record of a summary of discussions with the issuer, its management, auditors and bankers which have a bearing on the credit rating. A CRA should also keep record of decisions of the rating committee, including voting details and notes of dissent, if any, by any member of the rating committee.
If a quantitative model is a substantial component of the credit rating process, the CRA should maintain a record of the rationale for any material difference between the credit rating implied by the model and the credit rating actually assigned. These records should be maintained till five years after maturity of instruments and be made available to auditors and regulatory bodies when sought by them.
According to Sebi, default studies are central to evaluating the performance of a CRA and whether its ratings can predict default over a period of time. Sebi has, therefore, asked CRAs to publish information about the historical default rates of CRA rating categories and whether the default rates of these categories have changed over time, so that the public can understand the historical performance of each category and draw quality comparisons among ratings given by different CRAs.
Sebi has said that a CRA shall ensure that its analysts do not participate in any kind of marketing and business development including negotiations of fees with the issuer whose securities are being rated. A CRA shall also ensure that the employees involved in the credit rating process and their dependants do not have ownership of the shares of the issuer. There should be prompt review of the credit ratings of the securities by a CRA as and when any of its employees joins the respective issuer.
Sebi has also said that a CRA shall disclose the general nature of its compensation arrangements with the issuers. CRAs have to comply with these latest Sebi norms latest by 30 June 2010.
Source: Capital Market
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