The Securities and Exchange Board of India (SEBI) has asked creditrating agencies (CRAs) to document the rating process in detail, release default studies from time to time and disclose other relationship with/income from their rating clients.

"The CRAs shall take necessary steps to implement this circular immediately and ensure its full compliance at the latest by June 30, 2010," Sebi said in its notification.

Besides, two mandatory halfyearly disclosures have to be made - one each at the end of March and September of every fiscal.

The new norms address several concerns related to the operations and processes of CRAs that came under attack after the sub- prime crisis in the US. These include the rating process where dissent was not being recorded, conflict of interest of the analysts who were expected to bring in business, seeking advisory and consultancy business from the same client who had been rated by them and charging different clients different amounts for the same work, among others.

Rajesh Mokashi, deputy managing director, Credit Analysis and Research Ltd (CARE), said, "These new guidelines are basically seeking some additional disclosures. They are aimed at increasing the transparency in the operations of CRAs. This will augur well for investors."

Through the new guidelines issued on Monday, Sebi has sought to improve the transparency and enhance the comfort level of investors, in the wake of doubts on the effectiveness of CRAs arising from the financial meltdown over the last two years.

Many experts blamed the CRAs for these two crises, for the assets (sliced and diced) they rated as high failed to perform, which led to the sub- prime and global credit crisis.

Amit Tandon, managing director of Fitch Ratings India, said, "I break up the new norms into two parts. On the structure of agencies, we have no advisory or consultancy businesses. On the information part, we have already been publishing the information Sebi has suggested now. But the formats suggested by Sebi will make it more digestible to the investors. For example, we used to give the summary of upgrades/downgrades earlier. Now, we have to specify them in terms of how many notches they have changed."

Default studies are central to evaluating the performance of a credit rating agency and whether its ratings can predict default over a period of time, Sebi observed and asked CRAs to disclose default rates in two different set formats.

"On an annual basis, the list of defaults separately for each rating category (e. g. AAA, AA, A, BBB, BB, B, C)," said Sebi, specifying a format for the same. Default studies are a quantitative measure of the CRAs' performance, and act as objective report cards of their track records.

CRAs have to make disclosures to the stock exchanges on the rating procedure, rating history and defaults, compensation arrangements with issuers (clients), receipts from rating and non- rating services, conflict of interest, including relationships - commercial or otherwise, structured product ratings and information on unsolicited ratings, among others.

Even for unsolicited ratings, CRAs have to monitor and disclose the ratings as is done in the case of solicited ratings. And the ratings symbols for the former should be accompanied by the word 'unsolicited'. Roopa Kudva, managing director and CEO of Crisil Limited, said, "We view the guidelines issued by Sebi today as furthering these objectives through a uniform level of disclosures across CRAs." Sebi has mandated the CRAs to maintain details on the rating process and other data for at least five years.