Roopa Kudva took over as Region Head, Standard and Poor’s (South Asia) last August, and continues to be MD and CEO of Crisil, India’s first credit rating agency. After last year’s financial crisis, rating agencies have been under fire from regulators in the developed world. India started regulating credit agencies in 1999 but the regulator, the Securities and Exchange Board of India (Sebi), is tightening these regulations further. Rajesh Bhayani spoke to Kudva on these issues as well as on the new areas that Crisil would be looking at. Kudva appears most excited about climate change; another area is the grading of listed equities which, according to her, is an extension of IPO-grading. Excerpts:
Crisil is shifting to a new green building. Does this mean you are looking at climate change as a business opportunity?
Yes, apart from shifting to our new green office building, we are internally deliberating possibilities in the climate change area to see if we can play any role. Whatever happens at Copenhagen, the direction is clear — the world has to move towards reduction in greenhouse gases. Today 11 per cent of investments of US asset management companies and 17 per cent of investments of European funds are in ESG (environment, social and governance)-compliant companies. Pressure from investors, buyers as well as legislation will make companies change and focus on becoming environment-friendly.
How big is the business opportunity?
Carbon emissions in India are expected to reach 6 billion tonnes by 2030. To reduce it by half will require investments of $1 trillion. This implies annual investments over the next 20 years of an amount that is double the investments planned annually in the road and power sectors. We are examining what role a company like ours can play in this landscape. We feel that the Clean Development Mechanism agenda will need a new institutional architecture to bring in greater transparency and risk assessment. Examples of some risks associated with carbon reduction projects include whether a project will be completed on time, whether it will generate the specified credits and will the project be eligible for certification. Independent assessments would play an important role in bringing transparency to a complex market and ensuring the market develops on a robust and confidence-inspiring basis.
Have you worked in this area before?
Crisil’s Infrastructure Solutions business is currently working with the Forum of Indian Regulators, comprising central and state electricity regulatory commissions, to fix renewable energy targets for each state. This means a certain percentage of power produced by each state should be renewable energy-based. Once this is done, a renewable energy trading system can be developed. We had worked on rolling out a similar mechanism in South Africa for trading renewable energy certificates.
Let’s move to another hot topic! If you see the post-listing performance of IPOs, it would appear the IPO-grading hasn’t helped assess the returns on such investments.
Grading of IPOs helps in understanding a company's fundamentals and governance issues. We have received market feedback that there is a dire need for such research. Based on this, we have extended our equity research to listed companies also. This is just an extension of IPO-grading. An additional feature here is that we also provide an assessment of fair value through a unique two-dimensional matrix. We carried out a study that revealed that only 170 companies have research coverage by more than 10 analysts and, in many cases, companies that investors are looking at are not covered, or there is no follow-up coverage. Researchers are not covering companies that have no liquidity, and since there is no research available, there is no liquidity in the stock. This is a vicious circle.
But that doesn’t explain why grading of IPOs is important?
We have just launched grading of listed stocks, and we would like that companies coming out with IPOs eventually continue to get their shares graded post-listing. Investors see value in this. In fact, we are also talking to investors and even stock exchanges for commissioning bulk researches for companies in which they feel liquidity and volumes can be increased. We have data that shows that after we announced grading of listed stocks, volumes in those stocks increased. Globally, several stock exchanges, including Singapore, AIM London and Bursa Malaysia, are sponsoring independent equity research to improve liquidity in such companies. We are able to provide unique insights as our research business covers 52 sectors in depth. Most importantly, we are independent and the market sees value in independent equity research. That is why even well-researched companies like DLF and NTPC have approached us to get their stock graded; these are most liquid counters even otherwise.
There is talk of making credit-rating non-mandatory.
Crisil has never been in favour of mandatory ratings. The healthiest way for the market to develop is for investors to demand ratings. That is how the credibility of rating agencies can be judged. Credit rating was not mandatory, in the 1990s, for private placement of debt, but over 90 per cent of the issues were rated. The ratings business should be driven by investors seeing value in ratings and not because ratings are mandatory.
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But the idea of making rating non-mandatory has been derived from developments overseas where regulators felt that rating agencies had not done their job properly. Do you think that Sebi needs to strengthen regulations here also?
Rating agencies in India have not faced the anger that rating agencies faced abroad. Indian credit rating agencies have been regulated by SEBI since 1999. In the US, regulations came in a couple of years ago and the European initiatives are being rolled out now. Rating agencies are subject to the Sebi code of conduct and are inspected by Sebi. India has used separate symbols for structured obligations since the very beginning while this is now being discussed elsewhere. Although regulations have served the Indian market well, there is always scope for further strengthening in areas which include transparency in ownership of rating agencies, default recognition etc. Our report card is our default and transition statistics. There should be a uniform recognition of default -- in Crisil, we consider even a single day or a single rupee's delay as a default.
What lesson have you learned from the global financial crisis?
We have learnt lessons even as we have not faced problems that rating agencies in the developed world have faced — but we are not complacent and have been improving our services. Globally, one of the issues was that products were very complex and investors had not understood them. In India, we have categorised all products as simple, complex, or highly complex. This will help retail investors avoid investing in highly complex products that they have not understood, and companies can simplify their highly complex products if they want retail investors to participate. We have also started releasing credit alerts that identify the trends in specific industries,and indicate that ratings of the companies in those industries may change.
What are the new initiatives that you are looking at?
SME ratings are an area that has huge potential, considering the large number of SMEs and the very real difference that ratings can make in helping SMEs access funds. We estimate that our SME ratings have led to a total saving of Rs 100 crore so far in interest costs alone! Considering the huge impact that this product has in a critical sector of the economy, we are ramping up the volumes as fast as we can. Among the innovative sourcing and delivery methods that we came up with was the concept of tying up with banks to get their SME borrowers rated; taking this one step further, we are now entering into agreements with large companies to get their suppliers, distributors, and buyers rated, so that both the large companies and the cluster of SMEs surrounding them can benefit from a transparent flow of information.
Have you outsourced SME ratings?
We have outsourced getting mandates for which we have appointed agents. Rating and analysis have not been outsourced. Some of the verification work regarding SMEs and taking photographs of the place from where they are operating have been outsourced, but the actual analysis and rating is very much done within Crisil.
The education sector offers big opportunities given how it is growing and how a lot of education-entities will enter the market to raise money.
The education sector is indeed seeing significant investments and a proliferation of institutions in higher education. Crisil is currently having an exploratory dialogue with various stakeholders in the education sector to assess whether there is a role that companies like ours can play in providing independent assessments.