A sub-committee appointed by the Securities and Exchange Board of India (Sebi) to review

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eligibility norms for specific market intermediaries on Thursday recommended a phased increase in minimum net worth requirements for asset management companies (AMCs) to Rs 50 crore from Rs 10 crore. It also suggested minimum promoter net worth of Rs 100 crore in debenture trustee (DT) business.

The Committee on Review of Eligibility Norms (Core), which looked at the eligibility norms for credit rating agencies (CRAs), debenture trustees and AMCs, also recommended that all registered rating agencies should be disclosed on websites, along with information on shareholding pattern and the names of the owners.

In addition, the committee said, “The question of promoters and their continuing involvement in CRAs that they promote should be re-examined”. Under the regulations as they stand today, it is possible to ‘borrow’ an established company’s balance sheet simply to meet the continuous net worth criterion for gaining registration, the committee pointed out.

As far as AMCs are concerned, the sub-committee felt that funds invested/lent back to group companies other than AMC subsidiaries should be reduced from net worth computations. “Despite the pass-through nature of AMC operations, it is important for AMCs to have strong and serious sponsors. A strong sponsor would find it easier to attract – or provide – quality fund management personnel to an AMC. Also, the knowledge that a strong sponsor was backing a fund has been seen to provide comfort to investors even in times of turbulence,” the sub-committee headed by Roopa Kudva, managing director and chief executive officer of Crisil, said.

The committee said a gradual increase in minimum net worth could be stipulated. It could for instance, start at Rs 20 crore at the end of one year and move up to Rs 50 crore by the end of three years. Distinctions could be made by product types offered by AMCs if it is practical. For instance, an AMC focusing only on exchange-traded funds need not have a large distribution network and the infrastructure requirements associated with it. Hence, an exemption from the net worth requirements can be explored, it suggested.

Coming to rating business, the committee recommended every CRA publish, every six months, a list of its publicly outstanding ratings that have moved by more than one notch over the preceding six months (along with the number of notches moved).

The entire period should be considered. Therefore, if a rating has been downgraded twice by one notch each, it should also feature on the list as a movement of two notches The committee also recommended that every CRA publish one-year and three-year default rates, category-wise ( for ‘AAA’, ‘AA’, ‘A’, separately) covering the entire history of its ratings.

In addition, ratings outlook should be disclosed for all long-term ratings on plain vanilla instruments and facilities.

The committee also recommended mandatory publication of unaccepted ratings if the rated security is listed within — say one year of the rating being assigned. However, any regulations on unaccepted ratings can easily be circumvented. The issue of 'rating shopping' should ideally be left to the market to decide, it said.

The Reserve Bank of India has allowed banks to use only accepted ratings, and Sebi regulations could be aligned to the same.

On debenture trustees, the committee said there should be no conflicts of interest for a debenture trustee.

The committee also recommended an investor protection fund (IPF)-like corpus for debenture trustees to access for meeting expenses such as calling investors for meetings and for carrying out legal proceedings. The corpus can be funded out of a small cess of a few basis points on debt issues. The fund can be replenished once recoveries occur.