SEBI ON WEDNESDAY proposed allowing credit ratings agencies (CRAs)to rate financial instruments regulated by other financial sector regulators, signalling them to consider products including unlisted securities. The move, based on feedback received from the industry regarding the rating of such products, was announced by the regulator in a consultation paper.
According to current CRA Regulations, they will not carry out any activity other than rating of securities listed or proposed to be listed on a stock exchange recognized by the board.
Since rating of said products is adjacent to current business of CRAs, permitting the same may lead to significant synergies, while also addressing a gap in the industry, Sebi said. The stated FSR include the Reserve Bank of India (RBI), Insurance and Regulatory Development Authority (IRDA), Pension Funds Regulatory and Development Authority (PFRDA), I nter-national Financial Services Centres Authority(IFSCA), Ministry of Corporate Affairs (MCA) and Insolvency and Bankruptcy Board of India (IBBI).
Agencies may undertake rating of financial instruments, which fall under the purview of any other FSR, provided they comply with respective regulatory framework. This includes matters related to policy, eligibility criteria, risk management,investorgrievanceordis-pute handling mechanism, inspection, enforcement and claims.
CRAs may undertake fee-based and non-fund-based activity that are not regulated by Sebi only at an arm’s length basis through one or more separate business unit (SBU).There should be a ‘Chinese Wall’ and such activity has to be ring-fenced from ratings of Sebi-reg-ulated activities.
Further, staff engaged in such activities should be distinct from staff handling activities regulated by Sebi. These staff can crossthe’ Cliinese Wall’, subject to due procedures approved by the board of directors of the CRA. Resources, including the information technology infrastructure, may be shared between these two arms-length businesses.
Before undertaking activities not regulated by Sebi, there shall be an upfront written disclosure by the CRA to stakeholders including clients, beneficiaries and counterparties. They have to submit a compliance report to Sebi within six months from notification of such proposal, it said.