To curb ‘rating shopping’

Highlights

Market regulator is looking into complaints that the Credit Rating Agencies and the companies are being rated tend to adopt a \'pick-and-choose\' approach in disclosure of the rating actions

Market regulator is looking into complaints that the Credit Rating Agencies and the companies are being rated tend to adopt a 'pick-and-choose' approach in disclosure of the rating actions

New Delhi: Market regulator Sebi is set to tighten disclosure norms for rating agencies along with the companies being rated, as it seeks to check the menace of 'rating shopping' and a 'pick-and-choose' approach in disclosing rating actions.

Following the Amtek Auto fiasco, the regulator is proposed the move as there are growing number of loan defaults triggering downgrade or suspension of ratings, though the same was not been communicated to investors.

According to the officials, there is a need for tightening of disclosure norms in order to ensure the Credit Rating Agencies (CRAs) avoid any conflict of interest while deciding and disclosing their rating actions.

Sebi is looking into complaints that the CRAs and also the companies are being rated by them tend to adopt a 'pick-and-choose' approach in disclosure of the rating actions, while there are some gaps in disseminating the information in case of ratings being withdrawn or suspended.

Sebi, which has the mandate to regulate credit rating agencies in the country, is finalising a draft set of revised disclosure norms and the same would be soon presented before its Board, the official said.

Once approved by the Board, the draft norms would be put in public domain for comments from all concerned stakeholders and the final regulations would be framed after taking into account their suggestions, the official added. The proposed draft norms also take into account the recommendations made by Sebi's International Advisory Board (IAB) which has also called for a relook the prevalent mechanism of the functioning of CRAs.

The IAB, which advises Sebi on its policy action based on the relevant global experiences and emerging challenges, in its last meeting felt that the rating business involves dissemination of opinion for 'public good' but there are asymmetric processes being followed in this space.

As the 'independence and credibility' of CRAs assume great significance for the benefit of investors, the IAB observed that regulators globally are calling for reducing the reliance on rating agencies.

However, it has suggested against any direct involvement for Sebi or other regulatory authorities in the rating process of the agencies. "What may be required for Sebi is to work towards improving rating processes, enhancing transparency and removing conflict of interest. "The disclosures of ratings of an issuer by CRAs may also include the rating transition of the issuer in the past as a track record of the rated issuer and also to reflect on the consistency of ratings by the CRAs," IAB has told Sebi.

This would help the investors take an informed decision while the 'credibility risk' can keep the CRAs as also the concerned companies on their toes. It has also suggested that in cases where CRAs fail to get the rating-related information from the companies being rated, the first step should be suspension of the rating with proper public disclosure of the reasons. This could be followed up with the rating withdrawal when it becomes necessary, IAB has said.

It also wants the companies to disclose all ratings obtained by them even in case of non-public issues so as to curtail the scope of 'rating shopping'. This would check the practice of the companies keeping under wraps the ratings that are not very favourable to them.

What is rating shopping?
Rating shopping occurs when an issuer chooses the rating agency that will assign the highest rating or that has the most lax criteria for achieving a desired rating. Rating shopping has a strong effect when one rating agency's criteria is much more lax than its competitors' criteria. Unless investors demand multiple ratings on deals, issuers will tend to use only ratings from the agency with the most lenient standards.
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