Context:
The Securities and Exchange Board of India (SEBI) has proposed that credit rating agencies (CRAs) take a more active role in scrutinising companies raising money in the equity market. The regulator aims to ensure that questionable companies do not access capital markets, which could lead to investor protection issues.
Key Aspects of the Proposal
- Closer Scrutiny of Fund Utilisation: SEBI has suggested that rating agencies should closely monitor how companies utilize the funds they raise in the equity markets. This would help in preventing misuse of capital raised from public investors.
- Evaluation of Fund Necessity: The regulator has proposed that CRAs assess whether a company’s decision to raise funds through the equity market is justified. This includes evaluating whether the amount being raised is appropriate for the company’s business needs and financial track record.
What are Credit Rating Agencies?
CRAs theoretically provide investors with an independent evaluation and assessment of debt securities’ creditworthiness. However, in recent decades the paying customers of CRAs have primarily not been buyers of securities but their issuers, raising the issue of conflict of interest (see below).
