New Delhi, 14 July: The finance ministry has proposed a multi-agency supervisory system for credit-rating agencies. The ministry also wants a ceiling to be imposed on the number of rating agencies that should be licensed to conduct business in India.

Money market-related activities of rating firms like fixed deposits and commercial paper will be monitored and regulated by the Reserve Bank of India while areas concerning the securities market, including equity and debt ratings, will come under the purview of the Securities and Exchange Commission of India.

Activities of rating agencies - like project evaluation and assessment of real estate properties and builders - which fall outside the ambit of the RBI and SEBI will be supervised by those authorities which are concerned with these areas. For example, assessments carried out on real estate and builders can be supervised by the Union ministry of urban development or a similarly authorised body.

The ministry has forwarded its multi-agency supervision proposal for a final decision to the high-level committee on capital markets under the aegis of the RBI governor. The other members of the committee are the Union finance secretary and the SEBI chairman. A decision is expected shortly.

The need for different supervision agencies has been felt following SEBI assertion that it will not be possible for the regulatory body to monitor non-securities market-related activities of rating firms. Apparently, the SEBI Act does not allow it to expand the scope of its supervision. SEBI has appealed to the finance ministry to resolve the issue so that it can go about putting together a regulatory set-up for rating agencies. The idea, clearly, is to delineate between money and securities market activities and, accordingly apportion supervisory responsibilities.

Ministry sources say that multiple-agency supervision of a rating agency need not cause confusion. They give the instance of commercial banks whose merchant banking division comes under the control of SEBI while issues pertaining to portfolio management are under the supervision of the RBI.

In a note to the finance ministry, SEBI has outlined a draft supervisory framework. It includes capital adequacy and a transparent system of assessment which will specify the exact weightage that should be given to managerial, financial and market-related parameters. The draft also says that a rating agency should be manned by competent people and must have adequate infrastructure, technology and database.

The finance ministry has also expressed itself against allowing proliferation of rating firms in the country. "Excess competition will lead to dilution of credibility as firms are likely to vie with each other to lure customers with the promise of a good rating," a ministry officIal said.

The role of rating agencies came into sharp focus following the CRB Caps' fiasco. The finance ministry is keen to ensure that these firms be regulated in order to safeguard against abuse of their rating powers.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.