The new administration at the Securities and Exchange Commission (SEC) is finally appearing to flex its muscles in the capital market, threatening to cancel the licence of Lanka Rating Agency (LRA) if it fails to comply with laid-down rules. Official sources said the rating agency has not submitted documentation, as at Friday June 12, which [...]

The Sunday Times Sri Lanka

SEC flexes its muscles, Lanka Rating Agency risks losing licence

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The new administration at the Securities and Exchange Commission (SEC) is finally appearing to flex its muscles in the capital market, threatening to cancel the licence of Lanka Rating Agency (LRA) if it fails to comply with laid-down rules.
Official sources said the rating agency has not submitted documentation, as at Friday June 12, which the SEC has called for since June 4, when it suspended LRA’s business.

“The SEC wanted an agreement on collaboration with an international credit agency or on LRA employing experts on credit rating internationally. What LRA has produced so far is the Memorandum of Understanding (MOU) they have with CRISL (Credit Rating Information Services of India Ltd which is a global analytical company providing ratings) and the SEC isn’t happy with it,” one source told the Business Times.

“LRA’s licence is coming up for renewal by this month end and if they can’t furnish these by then the regulator won’t renew their licence,” the source said. A week after the June 4 suspension, the SEC stepped in again and suspended a debenture issue from EAP Broadcasting which had been rated by LRA, and asked the issuer company to provide a fresh, independent rating. The SEC said there was a conflict of interest with some directors of LRA being part of EAP and raised questions about the rating process.Defending its position, LRA said in an announcement that the rating committee members who rated EAP last year did not have any association whatsoever with the EAP Broadcasting.

It said that since two members of the original (LRA) Rating Committee (Dr. Dayanath Jayasuriya and Russell de Mel) had been appointed to the EAP board in October 2014, they did not directly or indirectly participate in the rating or credit update process of 18 March and this committee consisted of three independent members instead including two overseas Rating Committee members, who had no interest whatsoever in EAP.

The rationale behind insisting on partnering on an international rating agency is that it’s a yardstick for the regulator to evaluate the rating agency on the rating methodology. “If the methodology adopted is based on a third party the company must have a signed trade mark agreement to use it. If it is in-house then the regulator must approve it,” the source clarified.

Industry analysts also raised issues on LRA’s methodology adopted in rating. “If it is based on a third party the company must have a signed trade mark agreement to use it,” an analyst said. In its rules, the SEC says that no credit rating agency can rate a security issued by its associate or subsidiary rating agency or if it’s rating committee has a Chairman, Director or employee who is a Chairman, Director or employee of any such entity. Preethi Jayawardane is LRA Chairman and also a director at EAP.

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