SEBI debating peer review of ratings by credit agencies: Report

The Securities and Exchange Board of India (SEBI) will consider implementing a peer review system for credit rating agencies (CRAs) along the lines of the Institute of Chartered Accountants of India (ICAI).

As per a report in the Hindu BusinessLine, the move coupled with some other changes such as the removal of Employee stock ownership plan (ESOP) for CRA employees and rotation of CRAs for rating assignments comes after multiple financial fallouts and downgrades.

Moneycontrol could not independently verify the report.

The changes, aimed at restoring investor confidence in the system, will specify technical, quality and ethical standards to improve the reliability of the ratings, the paper added.

The changes gain significance after the recently-submitted Grant Thornton audit report on IL&FS Group which analysed the role of the various credit rating agencies on various debt instruments and how they facilitated excessive borrowings from money markets across group companies that eventually led to defaults.

The report noted that CRAs maintained a high rating for IL&FS despite stress and liquidity indicators and only downgraded it in June-July 2018. Experts feel that a peer review system and rotation on the rating of companies would help fill the holes, it added.

The report stated that canning of ESOPs is also under serious discussion as these may have created a conflict of interest for CRA employees. In addition to having a rotational policy, clients would no longer be able to dangle stocks as incentives for favourable ratings.

Meanwhile, CRAs are also expected to maintain stricter self-regulation. Given the dominoes that have fallen, the agencies are bound to turn conservative, the report added.