|Tuesday, 23 August 2011 00:00|
The issue of credibility of rating agencies has once again come to fore with the head of Icra, one of India’s four rating agencies, saying the industry was making compromises to win business. Despite all the debate over how credit-rating is abused, the law in India still allows firms to shop for ratings. If a company does not like the rating it is getting, after paying the fee, it can go to another rating firm—since the rating is only orally communicated and not put down on paper till the client accepts it, it never gets reported.
The issue of credibility got raked up over perpetual bonds issued by some companies, a new hybrid instrument which was earlier used by banks. While Crisil gave a top investment grade to Tata Power’s R1,500-crore perpetual bond, its rival Fitch, without naming the issuer, said that the new instruments were riskier than other debt obligations and should be treated with considerable caution by investors. The larger issue is that since these ratings agencies work as oligopolies, the market regulator must step in to use its investors’ protection fund or make a pool where companies pay and an independent rating is done rather than the companies shopping for the rating themselves. This will give investors’ confidence to invest in long-term debt paper and standardised ratings will remove a lot of confusion which the current system fuels. The regulation should promote transparency and governance, and quality and fairness of rating, rather than the company managing the rating itself.