SEBI May Revamp Rating Firms’ Governance Structures By Making Getting More Independent Directors On Their Boards

The Securities & Exchange Board of India (SEBI) plans to overhaul governance structures of credit rating firms by requiring them to have a majority of independent directors on their boards as well as include a SEBI nominee.

The capital market regulator also plans to nominate a person on the board of each credit rating company for a period not exceeding three years.

It may ask credit rating firms to have independent directors in a majority at all times on their boards. In such cases, the maximum tenure for independent directors should not exceed three years and they may serve for not more than two terms, although not consecutively.

SEBI has observed that presently none of the credit rating agencies has a majority of independent directors on their boards and in some cases there are no independent directors at all.

Hence, SEBI may not only revamp boards of credit rating firms but also enhance their disclosure norms in order to address issues related to any conflicts of interest.

SEBI is also considering other proposals. These could include barring shareholder-directors from being part of compensation as well as audit committees of credit rating companies.

A proposal to get credit rating firms to store client data as well as rating related notes as well as documents locally to enable easier retrieval by probe authorities is also under consideration.

It has been proposed that rating companies would put in place a remuneration and compensation committee, where most of the members are independent. Such a committee would frame broad policies on remuneration of employees designated as analysts who are directly involved in recommending or deciding the rating of an issuer. This could also include the chief rating officer.

Besides, the remuneration policy framework may have to be published on the company’s website.

Credit rating firms may have to disclose their whistleblower policy and create a transparent and anonymous system available to their boards and the SEBI. Boards would have to form a committee to deal with any whistleblower complaints received as per approved policy as well as file reports with the SEBI, after investigations, as per the proposed norms.

Incidentally, these plans came up for consideration after recent investigations into the Infrastructure Leasing & Financial Services (IL&FS) default revealed significant conflicts of interest in the conduct of credit rating firms in India.

The IL&FS investigations revealed that such risks are often related to the corporate and compensation structure of credit rating agencies which are important market intermediaries which help investors with better risk discovery in the debt market.

However, nothing has been decided yet and SEBI is still engaged in the process of gathering feedback from rating companies before finalizing its proposals.