Securities market regulator the Securities and Exchange Board of India (SEBI) has taken credit rating agencies to task after a spate of fiascos wherein a rating agency downgraded a certain paper from BBB+ to BB+ and finally D all within a span of month. In another case the credit rating agency suspended ratings on a certain stock citing non-availability of sufficient information. Interestingly, in both the cases the companies have been called out for debt servicing issues in the wake of the NPA process at major Indian banks.
The SEBI has taken a strong exception to these incidents and has started efforts to bring in stringent disclosure norms for both companies and credit rating agencies. Interestingly, this is not the first time that the market regulator has set its sights on the rating agencies. However, the credit rating agencies, with business models built on fee based income from clients requesting a credit rating, have not demonstrated any significant improvement in their performance so far. All key players: CRISIL, ICRA, CARE, ONICRA, FITCH (India Ratings & Research) & SMERA have been found wanting in improvement on their disclosure norms in the wake of the 2008 and now the NPA crises in the country.
Credit rating agencies in the country generate significant revenue from non-rating activities through their various subsidiaries. In fact, revenue from such activities is reported to be as high as 40% of their top line. This often compromises their objectiveness when it comes to rating issuers who happen to be clients for other lines of business as well. Besides disclosures, SEBI should take a strong view of such conflicts of interest and seek to eliminate them. Perhaps it is time to unbundle the rating business in the country. However, notional unbundling, as has happened in the case of the Big 4 will not be of any help. The SEBI needs to ensure that the ‘Chinese’ wall remains ‘Chinese’ and not turn ‘Indian’ as is usually the case in the country.