7 Mar 2010

Credit Rating Agencies in India: Time to revamp the law?

We had written a paper a couple of years back that the Credit Rating Agencies in India were operating under a legal regime which strictly speaking attributed no liability on these agencies for the actions performed by them. The international financial crisis and the bubble burst only corroborated the theory. The 'Committee on Comprehensive Regulation for Credit Rating Agencies' appointed by the Department of Economic Affairs, Ministry of Finance under the Chairmanship of Dr. K.P. Krishnan has now given a green signal to the much awaited reform. 

The recently released report of the Committee, which boasts of participation from all regulatory authorities in India, calling for a 'comprehensive review of the registration, regulatory and supervisory regime for Credit Rating Agencies', inter alia proposing greater checks (in terms of supervision and control by various regulatory authorities), directing greater disclosures and observing norms to avoid conflict of interest in the rating process etc. Further, the Report also notes that "the committee has taken note of international action in this regard and inter alia recommend that there may be greater disclosures regarding materially significant revenues received from a particular issuer/ non rating business like advisory services. A lead regulator model for CRAs may also be explored. The committee has also strongly recommended voluntary compliance with existing and emerging regulations like IOSCO Code."

One can only hope that greater regulatory control is exercised over these agencies which carry out the innocuous looking exercise of rating equity and debt instruments but have a tremendous impact over both the entity being rated as well the potential investors. 

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