The Securities and Exchange Board of India (SEBI) had from the public over proposed amendments to the SEBI (Credit Rating Agencies) Regulations, 1999, to regulate activities of credit rating agencies (CRAs). CRAs usually rate securities listed on recognised stock exchanges, and they also evaluate products, securities and issuers, but no specific guidelines exist for such activities.
The proposed amendments, which aim to address this gap, suggest that CRAs should:
- Conduct ratings only when it is fee-based and non-fund based on an arm’s length basis through the CRA’s separate business unit (SBU);
- Transfer all activities not regulated by the SEBI to the SBU, separated from the CRA through a Chinese wall;
- Ensure the SBU has a grievance redressal mechanism;
- Have separate operations from its SBU with separate and independent records maintained, and distinct staff. Only permitted staff can cross the Chinese wall and not key managerial personnel;
- Share resources such as information technology infrastructure with its SBU as per approved procedures;
- Ensure ring-fencing of the minimum net worth requirement of regulated activities to not be impacted from non-regulated activities;
- Disclose on its website its non-regulated rating activities and state that only those activities are available under its grievance redressal mechanism.
- Disclose to its existing clientele, beneficiaries, counterparties and other stakeholders prior to undertaking a non-regulated rating activity and obtain confirmation of understanding from them; and
- Submit and undertake confirmation of compliance as part of its half-yearly reports.
These changes are expected to lead to efficient and smooth synergy between different operating bodies and address procedural gaps.
