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Sebi orders operational audit
January, 08th 2010

The Securities and Exchange Board of India (Sebi) has said all credit rating agencies (CRAs) have to get an internal audit done every six months.

The market regulator, in a note, said: It (internal audit) shall cover all aspects of CRA operations and procedures, including the investor grievance redressal mechanism.

The audit will be conducted by chartered accountants, company secretaries or cost and management accountants who are in practice and do not have any conflict of interest with the CRAs.

The report shall state the methodology adopted, deficiencies observed and consideration of response of the management on the deficiencies, the note added.

Sebi said the report should comment on the adequacy of systems adopted by the CRA for compliance with the regulations issued by it and for investor grievance redressal.

Roopa Kudva, managing director & CEO, Crisil, and Region Head, South Asia, Standard & Poors, said: Crisil welcomes the move by Sebi to strengthen the control function at credit rating agencies.

We are fully compliant with the Sebi (Credit Rating Agencies) Regulations, 1999. These internal audits are conducted by an independent chartered accountant firm, and cover compliance with Sebi guidelines.

The way our business is growing, we had appointed a firm to undertake internal audit. But the role was limited to doing a financial check. This year onwards, our board has already asked us to undertake operational audit. We have appointed an internal auditor to do the same, said Cares Managing Director, D R Dogra.

Agencies must get the internal audit report within two months from the end of the half-year. Then, their board will have to consider the report and take steps to rectify any deficiencies, and send an action taken report to Sebi within two months.

The move follows a review of the regulatory architecture initiated by the financial sector regulators in 2008. The exercise, initiated by the high-level committee on capital markets, which is headed by the Reserve Bank of India Governor, was spurred by international developments and the debate over the role played by rating agencies before the global financial crisis.

The committee had reviewed the functioning of the agencies last month, based on a paper prepared by Sebi and feedback from the agencies themselves.

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