New rules to be implemented latest by June 30

The Securities and Exchange Board of India (SEBI) has issued transparency and disclosure norms for credit rating agencies (CRAs) order to impart higher credibility to the processes and procedures associated with credit rating.

“Recent events in the global financial system have underlined the pivotal role that credit ratings play. Effective use of credit ratings by the users is crucially dependent upon quality and quantity of disclosures made by the credit rating agencies (CRAs),” SEBI stated in a circular to all credit rating agencies on Monday.

The CRAs were asked to take necessary steps to implement this circular immediately and ensure its full compliance at the latest by June 30.

The half-yearly disclosures, stipulated by the regulator, would be made by the CRAs within days from the end of the half-year (March/September). The yearly disclosures stipulated would be made by the CRAs within 30 days from the end of the financial year. However for 2009-10 only, the half yearly and yearly disclosures stipulated would be made by the CRAs by June 30.

SEBI stated that a CRA can make additional disclosures other than those stipulated with the prior approval of its board. The CRAs were asked to communicate to SEBI the status of the implementation of the provisions of this circular by July 15. “They shall also place the compliance status of this circular before their boards. The CRA shall disclose its shareholding pattern as prescribed by stock exchanges for a listed company under clause 35 of the Listing Agreement.”

A CRA would be formulating policies and internal codes for dealing with the conflict of interests: 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; that the employees' involved in the credit rating process and their dependants do not have ownership of the shares of the issuer; prompt review of the credit ratings of the securities as and when any of its employees joins the respective issuer.

The CRAs were asked to keep all records in support of each credit rating and review/surveillance thereof: The important factors underlying the credit rating and sensitivity of such credit rating to changes in these factors; summary of discussions with the issuer, its management, auditors and bankers which have a bearing on the credit rating; decisions of the rating committee(s), 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 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,” it stated.

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