SECP Imposes New Termination Rules for Agreements With Credit Rating Companies

The Securities and Exchange Commission of Pakistan (SECP) has imposed new conditions on the companies that intend to terminate the rating contract/agreement with existing credit rating companies.

The SECP has proposed amendments in the Credit Rating Companies Regulation, 2016 through the issuance of S.R.O.811(I)/2022 on Tuesday.

Under the revised regulations, where a company intends to terminate the rating contract/agreement with an existing credit rating company, it shall obtain a NOC from the existing credit rating company; continue the rating contract/agreement with the existing credit rating company for a period of one year and both the credit rating companies (existing and newly engaged) shall provide credit rating simultaneously for a period of one year.

The SECP has also revised the restrictions, duties, and obligations of the credit rating companies. At least 25 percent shares of a credit rating company shall directly be held for a period of 3 years by a financial institution; an insurance company; a licensed securities exchange; or a company licensed by the Commission to provide depository, clearing, or settlement services in the securities market; a foreign credit rating agency recognized by or under any law for the time being in force in the country of its incorporation; or an institution as may be notified by the Commission from time to time, SECP said.

Any change in a credit rating company’s shareholding that entitles the shareholder to more than ten percent (10 percent) shareholding shall require prior written approval of the Commission. The SECP has also proposed amendments in the monitoring and review of the ratings. A credit rating company shall review all the outstanding ratings periodically, on annual basis, or upon the occurrence of such an event that requires doing so.

Other information to be disseminated on the website of the credit rating company/agency includes detail of transitions/changes in the credit ratings reviewed during the last five years. The detail should contain the ratings upgraded, downgraded and those remaining unchanged. For ease of comparison, both the rating i.e. before and after the review, and the number of notches upgraded or downgraded should be disclosed.

Provided that credit rating companies shall provide explanation/rationale in the case where there are more than two notches downgrade or upgrade within six months, SECP’s draft regulations added.