By doing this, SEBI expects to put an end to rating shopping, which allows a company to not disclose an adverse rating and instead seek a favourable rating from another agency.

A company will also not be allowed to get a rating from an agency which is its associate firm. The minimum net worth prescribed for a company to float a rating agency has been fixed at Rs 100 crore.

The committee finalised its guidelines in its meeting held on Wednesday. Committee head and SEBI executive director Vijay Ranjan will now draft the report and submit it to SEBI chairman, who will in turn take it to the board for consent.

Most of the recommendations had been finalised at the previous meeting held on July 30. The only issue that was left to be finalised was on how to prevent rating shopping by companies.

"Even though companieswill find getting two sets of ratings somewhat expensive, this is the only way by which rating shopping could have been prevented, as now the investor will get a fair picture of the company's health as perceived by a credit rating agency," a committee member said.

Dual rating has been prescribed also with an eye on the government's decision to allow provident funds to invest in private sector securities which have been rated by at least two credit rating agencies.

"By doing this, most of the companies will be able to attract investments from these funds," the member said.

The committee is also recommending that the meaning of the rating should be provided alongside the rating symbol. In addition to this, the rating agency must also disclose the rationale for awarding such a rating as this could vary from one agency to another.

"The symbol by itself does not convey anything to an investor. Therefore, the meaning of the symbol as well the rationale adopted in giving that rating should be givenalongside. A classic example of this was the recent ratings of plantation companies, where rating symbols were displayed but not one of them conveyed the true picture: that none of these rating agencies were worthy of investment," another member said.

The committee has also recommended that agencies should continuously monitor ratings assigned by them. "There should be a periodic review of all the ratings published," the member said.

INSIGHT
Move does not address the fundamental malaise

The committee has assumed that the dual ratings obtained by a company will be identical. The reason why a company goes to another agency is that it finds the rating unsuitable for its purpose. Pushing the company to obtain a second rating will not stop it from getting a different rating; in that case, which one will the investor take as the appropriate rating? A better solution would be to make the rating obtained by the company in the first place mandatory. That is, the company should not have anychoice in the matter of carrying the symbol. The move will only come to the aid of the smaller and less reputed agenices. It will also lead to a proliferation of dubious rating houses. Apart from all this, the move will jack up the cost of floating an issue.