Panel wants more mandatory checks for more transparency.
Credit rating agencies’ consulting business in India has come under a regulatory scanner. Sources said the regulator is examining the issue and rating agencies might be asked to disclose more details on their advisory businesses.
Currently, Icra and Crisil are the two rating agencies which also provide advisory and risk management services to companies and banks. Crisil had transferred its advisory services into a subsidiary, Crisil Risk and Infrastructure Solutions Ltd and Icra had spun off its advisory business to its subsidiary, Icra Management Consulting Services. In 2008, CARE transferred its corporate advisory business to IDBI Capital.
According to the quarter ended September 2009 results of Crisil, the advisory business was Rs 14.45 crore of revenues out of total revenues of Rs 133 crore. Naresh Thakkar, Managing Director, Icra, said: “As far as disclosures are concerned, it always helps and more disclosures will lead to transparency. Disclosures on management of conflict of interest between the two entities will be an appropriate thing to do. We have already hived off the consulting business. It has its own governing structure and independent management, which has nothing to do with the rating business.”
A committee which comprised representatives from various regulators like Sebi, Irda and PFRDA recently gave a report on comprehensive regulations for credit rating agencies (CRAs). The report explicitly states that CRAs should not be allowed to enter any business that may directly or indirectly have a conflict of interest with the job of rating. “Internal Chinese Walls are porous mechanisms to prevent such conflict of interest, as such other businesses such as consultancy and advisory services should not be undertaken by CRAs,” said the report.
The view among regulators is that the issuer may use the incentive of providing CRAs with more ancillary business to obtain higher ratings. Hence, there is a clear conflict of interest in offering advisory services to entities rated by the CRA.
However, rating agencies maintain that while non-rating services do pose conflict of interest challenges on one hand, revenues from other services reduce dependence on rating service revenues, thereby enabling them to maintain objectivity and independence.
Among other recommendations to improve accountability and transparency among CRAs, the panel has recommended a lead regulator model. Under this, Sebi would be the lead regulator and CRAs so registered with Sebi required to further get accreditation from other regulators such as RBI, Irda and PFRDA for rating products that come in the regulatory domain of the latter.
The report has suggested a half-yearly internal audit be mandatory for all CRAs and a standing committee of representatives from various regulators be constituted for matters relating to CRAs.
It has been proposed that any change in control should be done only with prior approval of Sebi. The report has also asked market participants to exercise greater caution while relying on ratings. “Over-reliance on ratings by market participants have to be avoided. Firms using the ratings should use stress testing to assess the impact of a significant reduction of credit rating in their portfolio,” said the report.
