SEBI Tightens The Noose For Credit Rating Agencies (CRAS)
GS Prelims, GS Mains paper 3
Indian economy, credit rating agencies
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.