SEBIReuters File

The Securities and Exchange Board of India (SEBI) is considering moves to review the functioning of credit rating agencies (CRAs) by implementing policy measures that would enhance the standards of ratings and ensure uniformity across various CRAs, according to a PTI report.

The market regulator is reportedly worried that some recent drastic downgrades by rating agencies could have spill-over impact on the Indian economy. Hence, guidelines suggested by the SEBI would seek to establish a mechanism to fix accountability for CRAs and analysts; evaluate and improve the performance of CRAs; put restrictions on participation of business development team and review performance of rating committee members.

The new measures would reportedly need CRAs to publicly disclose the criteria, which would be reviewed periodically, they adopt to rate securities. The internal rating process thus adopted would have to be made available on the website of CRAs, who would also have to disclose their policy regarding suspension and withdrawal of ratings.

In other suggested measures, the regulator may also seek public disclosure of CRAs' procedures for ongoing monitoring of credit ratings and rating transition of the issuer.

The SEBI's move assumes significance in light of two top rating agencies — Standard and Poor's (S&P) and Moody's — coming under intense scrutiny of the U.S. regulators after they were accused of misrepresenting the risks associated with mortgage-related securities in the wake of the global financial crisis in 2008.

The U.S. regulators had back then alleged that the CRAs failed to assess the potential for a decline in housing prices and awarded investment-grade ratings to certain securities to attract business, according to a Reuters report.

For example, at the peak of the housing boom in 2006-07, all of the major rating agencies had issued AAA (the highest and safest) grade to several debt securities. However, the agencies took no time to sharply downgrade the same securities when the housing market collapsed in 2008.

After years of scrutiny and legal tussle, Standard & Poor's settled the dispute in 2015 over the top grades it gave to subprime-mortgage bonds by paying $1.5 billion to the US Justice Department, 19 states and Calpers (California Public Employees Retirement System), said a Bloomberg report.

At the same time, European Union officials argued that the downgrade of the creditworthiness of major eurozone economies, including France, Spain and others, accelerated the debt crisis.

Though the Indian economy has stayed resilient enough to escape any crises, like situation seen either in the U.S. or in Europe in the past decade, the SEBI's move is aimed at strengthening the methodology of rating agencies and making it transparent enough to avoid similar crises.

The SEBI is now reportedly giving final touches to its policy actions as suggested by a committee set up by the regulator with representatives from all CRAs. Among the proposed guidelines, the SEBI may ask CRAs to separate their rating activities of securities, debt and other instruments.

CRAs also rate other financing facilities, projects and fixed deposits, with some grading even NGOs and real-estate properties. Instruments other than securities are not regulated by the SEBI.

"Hiving off such activities will also ensure that there is no dual reporting or action by two or more regulators for the same violation," a senior official told PTI.