SEBI has taken stringent measures against credit rating agencies
Recently Securities and Exchange Board of India (SEBI) has drafted new regulations for credit rating agencies in India. This decision has come after SEBI Securities default even after getting good ratings from credit rating agencies. For ex- in 2015 Amtek Auto securities failure.it is to enhance their governance, functioning and accountability.
- Restrict cross shareholding amongst agencies without regulatory approval to 10%
- Increasing minimum net worth required for agencies from 5 crores to 50 crores.
- At least five years experience for promoters of agencies.
- Spin off of on core operations of rating agencies
- Sebi has proposed disclosure norms for rating agencies.
SEBI's prominent concern to introduce a new set of rules is :
- To improve investor awareness about the operations of rating agencies
- Preventing rating agencies from resorting to collisions in taking decisions.
- Prevention of default of highly rated companies
- Spin off of non-core operations of rating agencies will allow SEBI to focus just on the regulation of credit operations of agencies.
However, there are certain ambiguities and issues related to new rules of SEBI :
- There can be some unintended effects on competition in the rating space.
- It is unclear how the rules will affect the rating shopping in the business of credit rating.
- Also, the current model of rating agencies allows issuers to provide securities to shop for favourable rating or to avoid the negative ratings by ending the ties with these agencies. Hence the regulation is needed to tackle this problem. 4. However, even after the corporate default business of these agencies have not hampered because of the lack of alternative service providers who can help investors and SEBI's move to impose further quality requirements will raise the barriers for new players to enter the credit rating space and compete with existing agencies.
Hence while imposing a new set of rules SEBI should keep in mind is that these agencies should actually work to serve the creditors and not the borrowers.