Comprehensive Regulation for Credit Rating Agencies

The Committee on Comprehensive Regulation for Credit Rating Agencies (CRAs), set up by the Department of Economic Affairs, Ministry of Finance under the Chairmanship of Dr. K.P. Krishnan, Joint Secretary (Capital Markets) with representatives from all the financial sector regulators, has felt that prima facie there is no immediate concern about the operations and activities of CRAs in India even in the context of the recent financial crisis. However there is a need to strengthen the existing regulations by learning the appropriate lessons from the current crisis. The committee took note of international action in this regard and inter alia recommended that there may be enhanced disclosures, continuation of the issuer-pays model, strengthened process and compliance audit, reporting of ownership changes, disclosure of default and transition statistics and strengthening the CRA Regulation in tune with these suggestions.



The committee’s report covers issues relating to the usage of credit rating services by different stakeholders in the present multi-regulatory environment. Further, the report has also examined issues relating to the issuer – pays model and potential conflict of interest of CRAs in terms of their business model.



An assessment of the long term performance of the CRAs in India was also undertaken, separately, by the National Institute of Securities Markets (NISM) on the request of the Committee. The Long Term Assessment Report by NISM brought out the strengths and weaknesses in the credit rating model, noted that there is considerable rating migration and emphasized the need for improving the disclosures and governance norms of CRAs.



Both the Reports are hosted on the website of the Ministry of Finance, http://finmin.nic.in and are under examination in the respective agencies.



The High Level Coordination Committee on Financial Markets (HLCCFM), in its meeting held on 11th January 2008, inter alia, decided that “the legal and policy framework for regulating the activities of CRAs should be revisited in order to take a larger view of the entire policy with respect to banking, insurance and securities market.” Accordingly, the committee was set up by the Finance Ministry. The Committee submitted its report on 21st December, 2009 to the HLCCFM .