In its sixth meeting held recently, the International Advisory Board (IAB) of SEBI has recommended that the market regulator should ask fund houses to reduce reliance on credit rating agencies (CRAs) and recommended a few measures to improve credibility of such agencies.
SEBI had constituted this committee in September 2011 to respond to the challenges arising out of the global financial crisis. The role of IAB is to guide SEBI by taking into account relevant global experiences, emerging challenges and latest developments in the regulatory space around the world.
The members of IAB include U. K. Sinha, Chairman, SEBI, Prof. Viral Acharya, New York University, Jane Diplock, Independent Director, Singapore Stock Exchange, Russell Loubser, Former CEO, Johannesburg Stock Exchange, Prof. Colin Mayer, Saïd Business School, Blair Pickerell, Chairman Nikko Asset Management, and Dr. Andrew Sheng, Chairman, Securities and Futures Commission, Hong Kong.
In a press release, IAB has said, “It was highlighted that the rating business involving giving of opinions follows asymmetric processes. IAB felt that rating is a public good and therefore the independence and credibility of CRAs in this context assumes special significance. While acknowledging the Code of Conduct for CRAs prescribed by the International Organization of Securities Markets (IOSCO), the IAB also noted the emphasis laid on reducing reliance on CRAs by international standard setters.”
IAB has advised SEBI to work towards improving rating processes, enhancing transparency and removing conflict of interest. IAB has recommended that CRAs should include rating transition of the issuer in the past as a track record of the rated issuer. On withdrawal, CRAs should first suspend its ratings by citing appropriate reasons and this could be followed up with withdrawal of rating. Further, IAB has recommended that the issuers should disclose all ratings obtained by them even in case of non-public issues to curtail the scope of 'rating shopping'.
In a recent public forum, SEBI Chairman U. K. Sinha had cautioned mutual fund houses about credit risks in debt funds and advised them to be careful while investing in debt instruments. Expressing his concern over the recent Amtek Auto episode, he said that fund houses should manage their debt portfolio proactively. He advised fund houses to develop expertise in analyzing credit risk on their own. In fact, SEBI has asked AMFI to issue guidelines for assessing credit risk of debt instruments.
