Rating changes cannot be immune to the general economic scenario

Written by Sajan C Kumar | Updated: Feb 25 2010, 02:55am hrs
CARE Ratings, with over a decade of experience and track record in rating various types of debt instruments across varied sectors, constantly tracks international developments in rating analytics & research and incorporates the latest tools and techniques of analysis. In an interview with FEs Sajan C Kumar, DR Dogra, MD & CEO, CARE Ratings shares his views on the industry. Excerpts:

The methods used by CARE Ratings are in line with the best international practices. What are your views on the synchronisation of global practices vis-a-vis Indian firm ratings

Over the years, a greater linkage between domestic and global markets has emerged. This required modifications in the methodologies. However, the basic approach is not radically altered unless circumstances change drastically. Also, some products offered by global credit rating agencies (CRAs) found their way to countries like India. Globally, factors like the overall financial market scenario and liquidity in the market are also seen over and above the industry and company-specific factors for credit rating. Domestic CRAs have also attached significance to such characteristics since a company cannot remain impervious to market developments.

CARE has been assigning ratings for bank facilities and various debt instruments. But, percentage-wise, has there been more downgrading than upgrading

Rating changes cannot be immune to the general economic scenario. While some sectors were impacted more due to the slowdown, to a large extent the impact was visible on most entities. Thus, downgrades outnumbered upgrades by a significant margin. At the same time, preceding years of a low interest rate regime and ample liquidity enabled corporates to improve their financial profile.

Of late, there have been controversies over IPO ratings. What are your views

Investment decisions tend to be governed by the risk-return relationship and the risk tolerance of an investor. Valuation also plays an important role in determining the attractiveness of an investment proposition. IPO grading has to be necessarily seen as an opinion to juxtaposed against factors like the risk-return principle and risk tolerance of an investor. In the longer run, investors are expected to get better returns through capital appreciation, bonus shares, rights issue and better dividend by investing in IPOs graded higher.

Conflicts of interests can not be ruled out even in highly-transparent events and transactions. How do you ensure that a well-defined code of conduct is being adhered to

At CARE, we have our code of conduct for directors & senior management personnel, as well as for other employees. CARE also complies with the best practices of ACRAA and has also aligned its code of conduct with the IOSCO recommendations. CARE is the only rating agency which has an independent, external rating committee comprising reputed professionals.

The independence of a rating decision-making body goes a long way in imparting transparency and avoiding conflicts of interests. CARE had also discontinued its advisory services division long back as a step towards avoiding any perceived conflict of interest.

Corporate governance has been in the news after the Satyam scam. What, according to you, is the formula to enhance corporate governance practices

Though the Satyam scam had a significant impact on corporate India, it presented a case study about what a well-meaning board can do to the fortunes of a company. While there is no magic formula for improving corporate governance practices, one can just have a look at the developments that have taken place over the last decade or so.

Rating agencies often say their ratings are opinions and not recommendations to buy, sell or hold the security. Dont you think these statements tend to complicate the stockholders vision

Structured products, by their very nature, tend to be complex instruments. When structured differently, the same underlying pool of receivables can get different ratings. Investors should know this aspect clearly. An AAA rated fixed deposit or debenture need not be equated with an AAA structured product when it comes to complexity related to the instrument. Investor decisions tend to be governed by a risk-return relationship and ratings only aid in decision making.

Globally, credit rating agencies have often been criticised for lack of prompt action in downgrading companies. Also, large rating agencies open themselves to undue influences. What are your views

Generally, rating changes do not happen every quarter or even annually because for long-term ratings, a view is taken on the basis of long-term fundamentals of the company. For cyclical industries, a through the cycle rating approach is taken. A major reason for very few instruments getting into high rating categories is that high rating categories usually reflect greater rating stability, compared to lower rating categories.