Sebi has notified the clarification in credit-rating agency guidelines which will be sent to the gazzette on Tuesday.

Duff & Phelps Credit Rating (DCR), a subsidiary of the US-based credit rating agency Duff & Phelps, will heave a sigh of relief following Sebi's decision as it is the only rating firm in the country which is not owned by a financial institution. Had Sebi gone ahead with its original stand, Duff & Phelps would have been forced to ask its board directors -- nominees of the parent -- to step down. The agency had urged Sebi chairman DR Mehta for a reprieve.

Among the domestic credit-rating agencies,Crisil has been promoted by term-lending institution ICICI while Industrial Finance Corporation of India (IFCI) promoted Icra and Industrial Development Bank of India (IDBI) promoted CARE. Both ICICI and UTI have stakes in excess of 10 per cent (12 per cent and 13 per cent, respectively) in Crisil while IFCI and State Bank of India have stakes in excess of 10 per cent in Icra and IDBI has a large stake in Care.

"After taking the views of the players and discussing the issue, Sebi has concluded that it is clear that an arm's length distance must be ensured between the promoters and the CRA itself," a Sebi source said.

Two significant decisions were taken in this regard earlier. One was to ensure that the rating agency should not rate the instruments of the promoter institution and, two, if they are rating the instruments of a borrower, subsidiary or group company of the promoter institution, then there should not be any common director or chairman between the promoter and the credit-rating agency (CRA)outfit.

"Only a lending institution would have borrowers and hence only if the promoter is a lending institution would the clause of not having common top officials be attracted. Of course, in the event of a subsidiary or group company being rated, the promoters and CRA would have to ensure that they have no common top brass," the Sebi source added.

The regulations announced by Sebi after a recent board meeting had attracted widespread reactions. Sebi's guidelines implied that promoter institutions of CRAs would be forced to prune their stakes in the outfits and a number of them may see large-scale board reshuffles.

The new Sebi norms will also lead to a shakeout in the industry with Crisil, Icra and CARE losing a substantial portion of their business to DCR, a relatively new entrant in the business in India. Sebi norms have forbidden the agencies from rating the debt issues of their promoters or any entity which is either a borrower or a subsidiary or an associate of the promoter.

Even though DCR hasa paltry net worth of Rs 1.5 crore against the Sebi-stipulated Rs 5 crore, the regulator has given the agency a five-year moratorium to raise its net worth.