Jun 10, 1999|
Rating agencies up against 'Chinese Wall'
In a move towards building a Chinese wall between credit rating agencies (CRA) and their institutional promoters, the Securities and Exchange Board of India (SEBI) has barred all CRAs from rating securities of their institutional promoters.
In addition, CRAs will not be able to rate securities of corporates, which are borrowers of their institutional promoters, unless there is a Chinese wall between the CRA and the promoter. A Chinese wall refers to a situation where there are no common chairmen or directors between the parent and the CRA and restricts transfer of information between parent and CRA. The same rule will also apply to subsidiaries and associates of the promoters. The rating restrictions will also apply if there are common employees between the CRA and the promoter.
In India, the leading credit rating agencies have all been promoted by financial institutions. Crisil, the leading credit rating agency has been promoted by ICICI. Similarly, ICRA has been promoted by IFCI and CARE by IDBI. The new guidelines now mean that Crisil will not be permitted to rate securities offered by ICICI. In addition, Crisil cannot rate ICICI's borrowers, subsidiaries and associates, if there is no Chinese Wall between Crisil and ICICI.
The revised guidelines are to be placed before the SEBI board and approved shortly. The guidelines represent a change over the earlier stance adopted by SEBI where the ratings were restricted on the basis of equity holding of the promoter in the rating company.
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