Sebi's big ask baffles credit rating agencies

Synopsis

SEBI is pushing credit rating agencies to increase their oversight of companies seeking equity funding, aiming to prevent misuse of funds and deter dubious firms. The regulator wants CRAs to assess the justification for equity offerings and scrutinize fund utilization beyond standard audits.

The capital market regulator wants credit rating agencies (CRAs) to play a larger role to restrain dodgy companies from raising money in the equity market.

While the rating agencies are open to sharing their skills acquired in the debt market to protect equity investors and hold back fly-by-night operators, the initial proposals have not gone down well in the industry, two persons familiar with the discussions told ET. The regulatory ideas were spelt out by senior officials of the Securities and Exchange Board of India (Sebi) at a recent meeting with CRA officials.

Not only would the regulator like the rating firms to undertake a closer scrutiny of how business spent the funds mobilised, it has even proposed that rating agencies comment on whether a company is justified in tapping the equity market - if it is at all required to raise funds, or the quantum of money raised is commensurate with its business and track record.

No Clarity on SOP Review
The idea has flummoxed most CRA officials who feel that neither do they have access to information to dig deeper into the activities of the company nor is it their business to examine the relevance and appropriateness of a company's stock issue plan which is approved by its board and cleared by Sebi.

At present, CRAs carry out monitoring of utilisation of issue proceeds of more than ₹100 crore equity offerings of different kinds - maiden issue, preferential allotment, placement to qualified institutions, or rights issue. A company raising funds signs a contract with a CRA after the issue is over. For issuances below this size, a monitoring by CRA is voluntary.

"CRAs look at certification from audit firms, invoices from the company, bank statements and other documents from the management besides doing independent checks. However, Sebi expects more. It clearly wants CRAs to go beyond the auditor's certificate and other standard documents. Now this is a challenge, particularly, if the CRA has not given a rating to any outstanding debt of the company. In such cases, the information available to CRA is even less," said an industry official.

The monitoring by a CRA continues till the entire issue proceeds are utilised.

Rating firms in consultation with Sebi had developed a standard operating procedure (SOP) on how to go about monitoring issue proceeds. "We don't know yet whether the SOP would have to be reviewed in the wake of these new expectations from the regulator. If so, it would also require companies to part with more data. Also, CRAs would have to think of the cost of putting in the extra effort. Though so far there is nothing in writing on the subject from the regulator, the intent was made clear in at least one of the meetings," said another person.

It's unclear what triggered the idea. "May be, one or two recent instances of shell companies with little or no operation tapping the equity market raised some heckles within Sebi," said a banker aware of the discussions.

A Sebi spokesperson did not respond to ET's queries on the matter.

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