SEBI Norms for Credit Rating Agencies

What is the issue?

  • Securities and Exchange Board of India (SEBI) has released a new framework for financial disclosure by credit rating agencies (CRAs).

BACKGROUND

  • Credit Rating Agencies (CRAs) are companies that evaluate the financial condition of issuers of debt instruments.
  • CRAs assign a rating that reflects its assessment of the issuer’s ability to make the debt payments.
  • Rating is denoted by a simple alphanumeric symbol. E.g. AA+, A-, etc.
  • In India, CRAs are regulated by SEBI (Credit Rating Agencies) Regulations, 1999 of the Securities and Exchange Board of India Act, 1992.
  • The entities that are rated by credit rating agencies comprise companies, state governments, non-profit organisations, countries, securities, special purpose entities, and local governmental bodies.
  • Some of the key CRAs in India include –
  • Credit Rating Information Services of India Limited (CRISIL)
  • ICRA Limited
  • Credit Analysis and Research limited (CARE)

DISCUSSION

Issues related to Credit rating agencies

  • Ideological biases: CRAs might favour certain political ideologies to limit negative policy and market surprises as they strive to keep ratings stable over the medium term.
  • A panel analysis of Standard & Poor’s, Moody’s, and Fitch’s rating actions for 23 OECD countries from 1995 to 2014 shows that left executives and the electoral victory of non-incumbent left executives are associated with significantly higher probabilities of negative rating changes.
  • Conflict of interests: CRAs are funded by the very companies they rate.
  • Lack of ability to predict: CRAs follow the market, so the markets alert the agencies of trouble. This happens post-market and after something has happened. This is the reason for CRAs inability to predict frequent near default, default, and financial disasters.
Location: Thiruvananthapuram, Kerala, India

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