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Q. To keep eye on credit rating agencies: Discuss the need of tightened rules to keep eye on credit rating agencies.
Nov 09, 2016 Related to : GS Paper-3

Ans :

Introduction-

Recently equity market regulator Security Exchange Board of India has tightened rules for credit rating agencies in an attempt to arrest rating malpractices by companies. The SEBI has asked rating agencies to disclose how they rate a company, rating history and responsibility of analysts and also ask the rating committee to explain if there is a sudden downgrade among other things.

Credit rating agencies-

It is an independent company that evaluates the financial condition of issuers of debt instruments and then assigns a rating that reflects its assessment of the issuer's ability to make the debt payments. Potential investors, customers, employees and business partners rely upon the data of credit rating agencies in determining the overall strength and stability of a company.

Analysis-

  • Ratings are primarily used by investors to assess the risk associated with each debt offering and assess whether the reward offered is commensurate with the risk involved.
  • Recently we have witnessed many accusations against the malpractices by rating companies. There is an immediate need of greater transparency and accountability will help curb rating shopping by companies.
  • Going by current trends as well as past experience like 2008 financial crisis, in which inflated ratings for complex mortgage-backed securities played a major role suggests for strengthening oversight over internal processes.
  • Rating agencies need to publicly provide more details of the criteria used for rating and rating changes, and the process adopted. 
  • Like audit committee, the rating committee, just as the audit committee needs to maintain integrity and independence in the rating process. 

Conclusion-

As seen in the past and recent experience showed that there is need of greater transparencies in the operation and process of credit rating agencies. In this background recent guidelines of SEBI are effective in establishing the transparency and accountability. Hence to keep eye on the credit rating agencies SEBI has taken right step.

 


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