SEBI restricts rating agency monopoly

SEBI took a slew of measures at its last board meeting of 2017 held on Thursday, the most prominent being restricting credit rating agencies (CRAs) from consolidating their shareholding among each other. SEBI imposed a 10 per cent cap on cross-shareholding of credit rating agencies, raised their net worth criteria to ₹25 crore from the current ₹5 crore and disallowed any seat on the rival’s board. S&P, Moody’s and Fitch are the three of world’s largest CRAs that dominate the business and were doing so in India too.

With annual bond issuance of over $100 billion, India has a mouthwatering debt market for ratings and concentration of business had given rise to lobbies. Experts say, SEBI’s move on CRAs will save the sector from monopolistic practices. SEBI also said that CRAs will only be able to withdraw their rating on a certain instrument in a specified manner. CRAs will also have to segregate their rating and other financial and economic activities.

CRISIL, a subsidiary of S&P, said the new regulations will raise industry standards and deepen the corporate bond market in India.

“The proposed guidelines raise the bar on the eligibility to set up a CRA and stipulate greater disclosure for issuers on their financial performance. It will ensure that only serious and credible players with long-term perspective enter the field.” The much-anticipated reform of making companies to give an immediate disclosure with regard to default on debt was yet again scuttled by SEBI. Ajay Tyagi, SEBI Chairman, said they will hold further discussions on it. Experts say, there is a fear within the government and SEBI fears it could impact the market sentiment negatively.

SEBI allowed listing and trading of security receipts (SRs) issued by asset reconstruction companies (ARCs) to enhance capital flows and help deal with bad loans in the banking industry. Security receipts can be traded on exchanges.

In the mutual fund space, SEBI has put a 10 per cent cross-shareholding cap on them to avoid any potential conflict of interest. No MF can hold more than 10 per cent stake in another MF. The new measure may have an impact on the shareholding pattern of UTI Asset Management Company, requiring its promoters to lower their stake to 10 per cent or below in the next one year. State Bank of India, Punjab National Bank, Bank of Baroda and Life Insurance Corporation all have their own MFs and also hold 18.24 per cent stake each in UTI AMC. They also are barred from having board representation among each other.

To prevent conflict between ‘advising’ of investment products and ‘selling’ by the same entity/person, SEBI said there should be clear segregation between these two activities. Existing registered investment advisors who are offering distribution services through a separate division would be given an option to choose either before March 31, 2019. SEBI said it will provide an additional method — qualified institutional placement route for listed entities to achieve the minimum public shareholding requirements.

It allowed convergence of stock and commodity trading on a single platform. “It is a forward-looking move and will bring lot of depth in the markets,” said Raghvendra Nath, Managing Partner, Ladderup Wealth Management.

SEBI relaxed the norms for Real Estate Investment Trusts (REITs) and allowed them to “invest at least 50 per cent in Holdcos/ SPVs and similarly allowing Holdco (holding company) to invest at least 50 per cent stake in SPVs (special purpose vehicle)”. But this is subject to certain safeguards and includes the existing requirement of REITs to have ultimate holding interest of at least 26 per cent in the underlying SPV would remain unchanged.

Among other criteria, REIT manager in consultation with the trustee, needs to appoint at least such number of directors on the board of Holdco or SPV, in proportion to the shareholding or interest in such entity. Further, in case of any inconsistencies between the shareholder or the partnership agreement and the obligations cast upon the REIT in the norms, the provisions of the REIT regulations would prevail. Besides, SEBI rationalised the definition of sponsor group in case of REITs.

It has proposed to enable investments by REITs in unlisted shares under the 20 per cent investment category.