Raters can't offer fee-based services beyond ratings, research
Mumbai: Market watchdog Sebi has said that a credit rating agency cannot offer any fee-based services other than credit ratings and research to its rated clients, while its regulations would apply to ratings of all kinds of securities, bank facilities and services.
Capital markets regulator Sebi (Securities and Exchange Board of India), which also regulates credit rating agencies in the country, has expressed its views in this regard in an 'interpretative letter' sought by SME Rating Agency of India Ltd (SMERA) under the regulator's informal guidance scheme.
In its guidance note, Sebi said its CRA (Credit Rating Agency) guidelines, including those pertaining to rating process and methodology and its records, transparency and disclosures, avoidance of conflict of interest and code of conduct, would apply to ratings of all securities, instruments, loans and other bank facilities.
The Sebi guidelines would apply to ratings of all these services even if they are not regulated by Sebi, but are used by other regulators or their regulated entities, it added.
Besides, a CRA would can not offer any "fee based services to the rated entities, beyond credit ratings and research", Sebi said while explaining its regulations in this regard.
SMERA is a Sebi-registered CRA promoted by Small Industries Development Bank of India (SIDBI) and Dun & Bradstreet Information Services India Pvt Ltd (D&B) in association with leading private, public and foreign banks.
Seeking Sebi's guidance with regard to CRA regulations and their applicability, SMERA had said it provides entity ratings to SMEs, greenfield and brownfield projects, Maritime Training Institutions and Micro Finance Institutions.
SMERA said these ratings are private in nature and were not governed by any regulators in the country including Sebi.
It had further asserted that SMERA also provides services like risk rating of industrial clusters, validation of rating models, code of conduct assessment for various institutions and due diligence exercise, which are consultancy and advisory services and not credit rating of any security issued by them.
SMERA had also sought to know whether its services would be subjected to Sebi regulations that restrains CRAs from rating a security issued by an entity which is a borrower, a subsidiary or an associate of its promoter, or which has common Chairman, Directors or Employees with the rating firm.
It had further sought to know whether the Sebi guidelines for CRAs would apply to services being offered by SIDBI such as resources support through re-financing, bill discounting and re-discounting facilities to banks.
SMERA has got RBI's accreditation to carry out rating of various facilities provided by commercial banks to their borrowers such as loans, guarantees and cash credit limits.
SMERA said that some of its SME clients have approached it for rating of these services provided to them by their respective banks.