MUMBAI, Aug 5: The Sebi-appointed committee set up to frame regulations for credit-rating agencies has made it mandatory for companies to seek dual credit rating for issues of size above Rs 50 crore. By doing this, Sebi expects to resolve the issue of rating shopping, which allowed a company to not disclose an adverse rating and instead seek a favourable rating from another rating agency.A company will also not be allowed to get a rating from an agency which is an associate firm of the company concerned. The minimum net worth prescribed for a company to float a credit rating agency has been fixed at Rs 100 crore.
The committee has finalised its guidelines in its meeting held on Wednesday and. 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 last meeting held on July 30. The only issue that was to be finalised was about how to preventrating shopping by companies.
"Even though companies are going to find getting two sets of ratings somewhat expensive, this is the only way in 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," said a committee member.
The 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 would be able to attract investments from these funds," said the member. 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 rating agency to another. "The symbol by itself does not convey anything to an investor. Therefore, the meaning of the symbol aswell the rationale adopted in giving that rating should be given alongside. A classical 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," said a committee member.
The committee has also recommended that credit rating agencies should continuously monitor the ratings assigned by them. "There should be a periodic review of all the ratings published," said the member.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
