'AAA+' RATING FOR SEBI's GUIDELINES FOR RATING AGENCIES!

By Ruma Dubey

Finally! The rating agencies, who are like God on the Street, holding the power to crash or lift a stock price up, merely by announcing a downgrade or upgrade. And this happens all of a sudden – one fine day, a report will appear that the rating agency has decided to downgrade, citing reasons which until that moment were not even visible on the horizon.

Rating agencies reign their own fiefdoms, waving their wands, moving prices up and down to their whims and fancies. Many blame the entire 2008 financial crisis on rating agencies. All over the world, people had questioned their ­­­­integrity– how could they have granted triple A ratings to mortgage based financial securities even when the housing markets had collapsed. It was crystal clear to all that these rating agencies had misrepresented the true credit risk, keeping their own selfish interests in mind. Otherwise how do these agencies explain the fact that all these “Triple A” rated issues were in default within a year of this rating? At that time itself, it was clear that these rating agencies were actually at the heart of this entire financial collapse. But over a period of time, people got busy trying to save their homes and jobs and this got buried deep. But the hurt and mistrust which these rating agencies had created just refused to go.

Rating agencies are like up there on a pedestal; no one dare touch them. And they have been taking umbrage in the fact that these ratings were “opinions” and it was all about freedom of expression and this defense for so many years could just not be pulled down. But the very logic of these rating agencies work comes into question. How do these rating agencies rate products designed by the very banks from which it gets get paid? Isn’t that a major conflict of interest? Even though the rating agencies vouched for “objectivity” it obviously looks like it lost its very objective.  It was but obviously working for banks which they helped give good ratings for bad products. Competition was so intense, if S&P did not do it, Moody’s would it or Fitch would do it. So the fear of losing business was so high that most agreed to do things which were totally against the very grain of their business.

Thus in this background, it comes as a great succor to know that SEBI has decided to clip their claws and give this rating business more order, making it more transparent. The best ruling is the disclosures which credit rating agencies (CRAs) have to make on their website, which ushers in indeed a new era of transparency as far as CRAs are concerned. On their websites, apart from just giving a one-liner about the change in rating or new rating, CRAs will have to tell us:

• Criteria used for rating various instruments and sectors and for default recognition
• Rating Process and Policies
• Any change in Rating Criteria, process and policies
• All Rating history, Press Releases and Rating Reports assigned by the CRA including ratings withdrawn and those non- accepted by the issuer, even in case of non-public issues.
• Rating transition/ Rating history of the issuer
• Details of all such ratings where the review became due but was not completed by the due date by the CRA

In case a rating is not accepted by the issuer, the CRA shall disclose on its website details of all ratings assigned by them, irrespective of whether the rating is accepted by the issuer or not, even in case of non-public issues. Details disclosed shall include the name of the issuer, name/ type of instrument, size of the issue, rating and outlook assigned, etc. This is a great move as it is usually seen that companies get ratings from multiple agencies – known as ‘rating shopping’ and publish only the one which is most complimentary. This disclosure means that even the worst rating will have to be published.

It is also seen that many a times, when companies have problems or start defaulting, they do not furnish any information to CRAs, who are then forced to not present any review. To nix this bad practice, SEBI has stated that when companies do not co-operate, like do not provide information required for rating, non-payment of fees for conducting surveillance; the CRA shall continue to review the instrument, on an ongoing basis throughout the instrument’s lifetime, on the basis of best available information, in accordance with the rating process and policies set forth in its Operations Manual/ Internal governing document. In such cases, the credit rating symbol shall be accompanied by “Issuer did not co-operate; Based on best available information”.

Also, in case, an issuer, having not co-operated with a CRA in the past, approaches another CRA for rating, the new CRA shall, in its Press Release, disclose the aspect of non-co-operation.

Talking about Press Release, SEBI has issued a standard template which will include rating action and Outlook, details of the instrument, key rating drivers, rating history, reference to applicable criteria, contact details of Rating Analyst etc.

This is a great move in the right direction. CRAs have 60 days to adhere to these new guidelines. Kudos to SEBI – it is at times like these that we see its teeth and claws gnashing out!