SEBI which is responsible for supervising the capital markets has come out with a consultative paper wherein it has proposed some stringent rules for credit Rating agencies.  The idea behind these proposed rules is to make the ratings of financial institutions and instruments more reliable.  The major proposals are:

Sebi  has proposed 10 per cent cross-shareholding cap in credit Rating Agencies, to minimize scope for conflict of interest. The regulator has also enhanced the disclosure requirements by credit rating agencies as well as the companies which seek their rating.

It is also proposed that a CRA will have to seek SEBI’s prior approval for acquisition of shares or voting rights in another CRA that results in change in control.

Another very important proposal is that a person cannot hold 10% or more in CRA (credit rating agency). This would not be applicable for holdings by holdings by broad-based domestic financial institutions.

SEBI has also suggested that other activities other than rating of financial instruments and economic or financial research should be separated from rating business and established as a separate entity.  This rule would not be applicable to public financial institutions, scheduled commercial banks, foreign banks or foreign credit rating agencies.

The capital requirements of CRAs has also been raised from Rs.5 crores to 50 crores so that these companies may be able to invest in intellectual capital and capacity building.

This topic was discussed at the Mangalmay Institute of Management and Technology in the Finance Specialisation class of MBA second year.

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