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The Securities and Exchange Board of India (SEBI) is pushing credit rating agencies (CRAs) into unfamiliar territory by expecting them to stop dodgy companies from raising money in the equity market. As per an ET report, sources familiar with the discussions said that the market regulator recently outlined proposals in meetings with rating agency officials that would significantly expand their traditional role.

The sources stated that SEBI expects rating agencies to determine whether companies truly need to raise funds through equity markets, and if the amount they're seeking is reasonable given their business model and history.

Currently, CRAs monitor fund utilization for equity offerings exceeding Rs 100 crore — whether through IPOs, preferential allotments, qualified institutional placements, or rights issues. This monitoring begins after the fundraising concludes and continues until all proceeds are utilized.

As per the report, Sebi wants the rating firms to scrutinise the spending of businesses, judge whether the company is justified in raising funds and also how much funds it should raise based on its business and track record.

The report states that the directive has left most credit rating officials confused as they do not have access to the activities of the businesses in question, nor is it their job to whet a company whose stock issue plan has been cleared by its board and SBI.

ET quoted an industry official as saying that credit rating agencies look at bank statements and invoices, certification from audit firms and other documents while doing their due diligence. However, Sebi is asking CRAs to dig deeper beyond documents and auditor's certificates. And this becomes challenging if the agency is not provided with a rating to any outstanding debt of the company.

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