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Internal audit now must for rating
January, 08th 2010

The Securities and Exchange Board of India (Sebi) on Thursday made it compulsory for credit rating agencies (CRAs) to have internal audits. 

The internal audit to be conducted on a half-yearly basis by chartered accountants, company secretaries or cost accountants, and will cover all aspects of CRA operations and procedures, including investor grievance redressal mechanism, the regulator said in its circular.

The report will have to state the methodology adopted, deficiencies observed and consideration of response of the management on the deficiencies. Besides a summary of operations and of the audit, covering the size of operations, number of transactions audited and the number of instances where violations were observed will also have to be stated.

Sebi also said the report would also have to comment on the adequacy of systems adopted by the CRA for compliance with the requirements of regulations. The CRA will receive the report of the internal audit within two months from the end of the half-year.

The board of directors of the CRA will consider the report and take steps to rectify the deficiencies, if any, and the CRA will send an action taken report to Sebi within the next two months, the Sebi circular said.

For the half-year (October 09 to March 10), the CRA will receive the report of the internal audit by May 31, 10. Its board will have to consider the report and take appropriate measures to rectify the deficiencies and the rating agency will have to send the action taken report to Sebi by July 31, 2010.

Recently, the High-Level Coordination Committee on Financial Markets (HLCCFM) had discussed the functioning of credit rating agencies.

The history of credit ratings in India can be traced to 1987, with the setting up of Crisil. At present, there are five-registered credit rating agencies in India, including CARE, ICRA, Fitch, Crisil and Brickwork Ratings India.

In its recent annual report, Sebi had said the role of credit rating has grown, because of expansion in issuance volume and increasing faith of investors as well as regulators in ratings. Ratings have far-reaching consequences for issuers as well as investors.

CRAs contribute to the achievement of the regulatory objectives of investor protection, fair and transparent markets and reduction of systemic risk.

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