In order to safeguard small investors' interest, regulator Sebi is planning to put in place a mechanism to ensure prompt and proper disclosure of changes in credit ratings of listed firms, especially those with bad debt.
It is also looking to revamp norms for credit rating agencies, including the possibility of asking them to disclose their rating actions directly through the stock exchange platform for the benefit of investors, sources said.
Sebi is already looking into possible lapses on the part of rating agencies in the wake of investors, including those investing through mutual funds, facing the brunt of huge debts turning sour for some listed companies.
Those under the scanner also include the promoters and the top management of the concerned companies, as also some banks who appeared to have sold distressed debt securities to mutual funds at cheaper prices to hedge their own positions without making proper disclosure about adverse rating actions on such corporate bonds.
Some mutual funds have complained to Sebi that rating agencies were being following a casual approach in their rating actions, including for the distressed debt securities.
Any change in the regulatory framework would take place only after thorough consultations with all the stakeholders, a senior official said, while adding that Sebi is of the view that there is also an urgent need to enforce the existing regulations for credit rating agencies including the requirements to thwart any conflict of interest on their part.
The official said Sebi is looking to bring in a greater level of transparency in the way credit rating agencies work, including in their adherence to 'Chinese Walls' like structures between their sales and research teams.
The proposed measures include checks against any possible manoeuvring by the rating agencies in favour of their major or preferred clients while assigning ratings to them.
At the same time, fears have also been raised in the past that bad ratings may be assigned to the entities that have either fallen out of favour with the rating agencies.
Sebi is looking to instil a greater level of confidence among investors although the regulations already require credit rating agencies to keep their sales and research functions completely separated by 'Chinese Walls' like structures, so that income received from their clients do not affect the ratings being assigned to them.
Credit ratings are indicative of the creditworthiness and potential credit risks associated with the entity being rated.
The rating agencies are regulated by Sebi, while ratings assigned by them are depended upon by both the borrowers and the lenders, when it comes to raising of funds from the capital markets.
The new listing regulations, which were notified by Sebi earlier this month, also make it mandatory for listed firms to disclose all rating actions involving them, including on their website and through stock exchange platform.
Listed companies also need to "co-operate with and submit correct and adequate information" to rating agencies.
The rating agencies also need to review the each rating assigned to a listed company with respect to non-convertible debt securities at least once a year.
The functioning of rating agencies has always been a matter of debate for possible regulatory violations, as the business model of such entities involves income realisation from the companies being rated by them.
The role of rating agencies becomes much more important during times of slowdown in macro-economic scenario, corporate earnings and the capital markets.
Industry experts say that Sebi already has a very strong set of regulations for such entities and the regulator has been very futuristic while framing these norms. However, changing business dynamics and the trends being witnessed in global markets require a fresh look at these norms.
In the developed markets of the US and Europe, a lot of regulatory thinking has gone into the potential safeguards against any possible manipulations by the rating agencies since the financial crisis of 2007-2008.
These entities had faced the brunt in a big way when many banks rated highly by them went bust during the crisis, resulting into the regulators across the world tightening their norms for such entities.
