SEBI guidelines for credit rating agencies

SEBI vide CIR/MIRSD/CRA/6/2010 dated May 3, 2010 has provided for certain transparency and disclosure norms for the Credit Rating Agencies (“CRAs”). The major measures taken in this regard are summarized below:

1. CRAs should maintain records of the rating committee, including voting details and notes of dissent, for a period of five years.
2. It has been made mandatory for CRAs to publish information about the historical default rates of their rating categories and whether the default rates of these categories have changed over time.
3. CRAs should 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. Also, the employees involved in the credit rating process and their dependants cannot own shares of the issuer.
4. CRAs while rating structured finance products, are barred from providing consultancy or advisory services regarding the design of the structured finance instrument. This prohibition would apply to the subsidiaries of CRAs too. While publishing the ratings of structured finance products and their movements, CRAs apart from following all the applicable requirements in case of non-structured ratings should also disclose the track record of the originator and details of nature of underlying assets while assigning the credit rating.
5. In case of unsolicited credit ratings (the credit ratings not arising out of the agreement between the CRAs and the issuer), credit rating symbol should be accompanied by the word “UNSOLICITED” in the same font size.
6. CRAs should also disclose (i) the policies, methodology and procedures in detail followed by them regarding solicited and unsolicited credit ratings, (ii) the history of credit rating of all outstanding securities, (iii) the general nature of its compensation arrangements with the issuers and (iii) the details of any relationship it has with the issuer whose securities are being rated and any of its associate of such issuer and the CRAs or its subsidiaries.

SEBI commented that the recent events in 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 CRAs. Reserve Bank of India had recently published two documents which review the role of CRAs in India.

A copy of the circular is available here.