Credit rating agencies must disclose details of revenues, especially those that involve conflict of interest such as fees collected by such agencies’ subsidiaries, a government panel report said today.
The panel noted credit rating agencies provide allied services such as consulting and research to the issuers they rate. “CRAs should not be allowed to enter into any business that may directly or indirectly have conflict of interest with the job of rating,” the report said.
The panel said in the wake of the recent financial crisis, which has raised questions on the quality of ratings provided by agencies, regulators and issuers themselves must practise due diligence.
The panel recommended that credit rating agencies should disclose nature of compensation from the entities they rate and must publish information about the assumptions underlying their rating methodologies.
The rating agency must disclose the frequency of reviews in ratings and the different criteria and models used for the initial rating. The panel recommends a lead regulator model, according to which the Securities and Exchange Board of India (Sebi) will be the lead regulator governing the rating agencies.
“In practice, credit rating is much more used by other regulators where rating advisory is often a part of the regulations. Sebi needs to factor in those users and regulators whose use impacts a larger group of investors,” the report said.
Inspection of credit rating agencies must be carried out by a team that has representations from all regulators, the panel said. The panel warned that regulators and market participants must not accept a rating “mechanically”.
“Market participants on their part need to reassess the extent to which their procedures rely on ratings and consider whether this is appropriate. Over-reliance on ratings by market participants have to be avoided,” the report said.
