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Sunday, Feb 23, 2003

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Rating agencies can rate `associate'

K.R. Srivats

NEW DELHI, Feb. 22

A CREDIT rating agency can now rate a security issued by its `associate' having a common `independent director' with the agency or its rating committee.

Prior to this partial relaxation, a credit rating agency was forbidden from rating a security issued by its associate or subsidiary if the agency or its rating committee had a common Chairman, director or employee with such associate or subsidiary.

This relaxation, made by the Securities and Exchange Board of India (SEBI) in its regulations on credit rating agencies, is expected to provide a new avenue of revenue streams for the credit rating agencies in the country.

SEBI has, however, held that a credit rating agency cannot rate the security of an associate, if the agency has common Chairman, director or employee with that associate and such associate is connected with the promoter of the rating agency as a borrower or subsidiary or an associate.

The rating of the security issued by an associate would be permitted so long as the independent director does not participate in the discussion or rating decisions.

Further, the credit rating agency would have to make a disclosure in the rating announcement of such associate about the existence of common independent director on its board or of its rating committee.

It should also be specified that the common independent director did not participate in the rating process or in the meeting of its board of directors or in the meeting of the rating committee, when the securities rating of such associate was discussed.

SEBI has now inserted an explanation to the expression `independent director' in the sub-regulation (2) of regulation 27 of credit rating regulations.

An independent director means a director who, apart from receiving remuneration as a director does not have any other material pecuniary relationship or transaction with the company, its promoters, its management or its subsidiaries, which in the judgement of the board of the company may affect the independence of the judgement of such directors.

SEBI's existing regulations on credit rating agencies have defined an "associate", in relation to a promoter, to include a body corporate in which the promoter holds 10 per cent or more of the share capital.

A promoter is a person who owns 10 per cent or more of the shares of the credit rating agency.

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