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LATEST NEWS UPDATES | After global meltdown, govt may turn heat on credit ratings

After global meltdown, govt may turn heat on credit ratings

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published Published on Dec 4, 2009   modified Modified on Dec 4, 2009


Indian policymakers are debating doing away with the mandatory rating of financial instruments in the long-term, among a set of measures aimed at strengthening the regulatory and disclosures regime for credit ratings.

The expert group, set up by the High Level Coordination Committee on Financial Markets (HLCCFM), has made specific recommendations on improving and disclosing the way credit rating agencies rate financial instruments, and has sought debate on the very need to have mandatory rating of financial instruments. The expert panel report will be taken up by the HLCCFM at its next meeting, a government official told ET.

Credit ratings agencies have come under fire for their failure in the global financial crisis. They have been blamed for assigning high ratings to toxic instruments, such as subprime mortgages and regulators in many countries, are now adopting rules to make ratings more transparent.

There are strong views against mandatory rating, which have been reinforced by what some critics consider as the dubious role of ratings agencies in the crisis. The conflict of interest inherent in the ratings business — rating is sought by and paid for by the company floating the financial instrument, which compromises the third party, independent nature of ratings.

“The crisis has questioned the integrity, conduct and business model of credit rating agencies. Corrective initiatives under way include stronger regulation of credit rating agencies, measures to address conflicts of interest, differentiation between ratings of structured and other products, and strengthening the integrity of the rating process, RBI governor Duvvuri Subbarao had said in a speech recently.

Regulators are exploring ways to deal with the issue. The US Securities and Exchange Commission has even decided to drop reference to ratings in some of its rules and forms to reduce reliance on ratings. It is also debating if credit rating agencies should be considered as ‘experts’ under the law, making them more responsible for their ratings.

Agencies do not take up the responsibility for their ratings. While large investors have institutional strength to assess financial instruments, small investors tend to look aratings and believe in them strongly. Making ratings purely voluntary would help bring out the conflict of interest more clearly, as investors would know that rating was obtained by and paid for by the issuer.

However, a finance ministry official, who did not wish to be named said the structure of rating agencies is quite robust and very much in line with the principles laid down by the IOSCO (International Organisation of Security Commissions).

This is, however, unlikely to affect the ratings business as market pressure would force issuers to seek a rating. “CRISIL has always maintained that the healthiest way for a market to develop is for investors to demand for ratings. If you go back to when Sebi made ratings mandatory for public or rights issue of debt but not private placements, we still saw over 90% of private placements were rated, “Raman Uberoi, senior director-Ratings, Crisil.

He said investors seek a rating and in an evolved market requirement of rating will always be there. HLCCFM is a forum to deal with inter-regulatory issues arising in the financial and capital markets and functions under the chairmanship of governor RBI, with chairman SEBI and finance secretary, chairman, Insurance Regulatory and Development Authority and chairman, Pension Fund Regulatory and Development Authority as members.

Rating agencies have already responded positively in the changed environment.“ We as an agency have already enhanced disclosures levels in our structured finance rating rationales. We have introduced complexity levels for financial instruments, a global first and begun issuing credit alerts whenever we see a significant changes in any sector which could impact credit profiles,” Mr Uberoi added. Rating of debt instruments except private placement is mandatory while grading of IPOs became mandatory in May, 2007.
 


The Economic Times, 4 December, 2009, http://economictimes.indiatimes.com/News/Economy/Policy/After-global-meltdown-govt-may-turn-heat-on-credit-ratings/articleshow/5298090.cms?curpg=2
 

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