SEBI Tightens The Noose For Credit Rating Agencies (CRAS)

 

Relevancy:

  • GS Prelims, GS Mains paper 3
  • Indian economy, credit rating agencies

Recently:

  • SEBI has proposed a 10 per cent cross-shareholding cap in credit rating agencies along with a slew of measures for tightening the financial and operational eligibility of their promoters.

What are the suggestions of SEBI (details)?

  • The regulator has proposed that no CRA should directly or indirectly, hold more than 10 per cent of shareholding and/or voting rights in another CRA and shall not have representation on the board of the other CRA.
  • Besides, the regulator has suggested greater disclosure requirements by credit rating agencies (CRAs) as well as by companies getting their services.
  • The proposed norms are likely to have an impact on global rating agencies such as S&P, Moody’s and Fitch which have significant holdings in domestic agencies besides their direct presence.
  • Further, SEBI’s prior approval would be needed for acquisition of shares or voting rights in a CRA that results in change in control.
  • The requirement would not be applicable for holdings by broad-based domestic financial institutions.

What is the objective behind this move?

  • This initiative has been taken by the SEBI in order to improve the market efficiency and transparency, accountability and governance of the rating agencies.
  • This has also the motive to improve investor awareness about the operations of rating agencies.
  • Another reason behind the move is to prevent rating agencies from resorting to collusion in reaching decisions.
  • But how the rules will solve the problem of “rating shopping” that plagues the business of credit rating in the country is unknown.

 

 

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