New Delhi/Mumbai: Companies tapping the debt market regularly may soon have to get their securities rated by a different credit rating agency every three years. The Securities and Exchange Board of India (Sebi) plans to bring in new rules mandating rotation of credit rating agencies after market participants sought an overhaul of governance requirements and levels of accountability for this industry.
“Sebi has received strong suggestions from market participants that rating should be done on a rotational basis. We are going by that and the work has begun,” a regulatory official said on condition of anonymity.
The capital market regulator had put up a draft paper for public consultation on September 8 and sought comments from various stakeholders as part of its review of the regulatory framework governing the ratings business.
The suggestions were made in the backdrop of rising bad loans that have threatened the stability of the financial system and led to increased scrutiny of ratings agencies which have been criticised for not alerting investors in a timely manner about the deteriorating credit risk profile of companies they rated.
Ratings downgrades by agencies for companies such as Reliance CommunicationsBSE -1.73 % and Jindal Steel and PowerBSE -2.28 % took investors by surprise as their credit profile plunged from investment grade to default in a matter of months after delayed ratings.
The planned regulations could resemble audit rotation guidelines that came into effect from April this year and mandated companies to change auditors after two consecutive terms of five years each to prevent potential conflicts of interest and increase transparency.
“Rotation is ideal from the perspective of raising corporate governance standards”, said Rohit Sawhney, MD of India Ratings, the local arm of Fitch group. “It also has practical challenges because rating models used by different agencies vary and companies will need to change agencies periodically thereby impacting long-term assessment models used by analysts”, Sawhney said.
If Sebi implements rotation of rating agencies, it would be first of its kind in the world.
Ratings rotation is also being planned as a means to promote healthy competition in the ratings industry, said people familiar with the regulator’s thinking. The top three firms, CrisilBSE -0.45 %, Care Ratings and ICRABSE 1.18 % collectively account for 85% of revenue market share while other firms such as India Ratings, Brickworks, Smera and Infomeric vie for the remainder.
Sebi is also considering “dual ratings” for loans that currently require a single agency to rate them, a move that could mirror RBI guidelines for rating of commercial paper that came into effect in October this year. The guidelines require companies issuing commercial paper over ?1,000 crore in a single calendar year to get ratings from two agencies. Commercial paper are short-term money market instruments that allow issuers to raise funds with a tenure of between seven days and 12 months.