By:- Vijay Sardana
In recent weeks, many large-scale disasters in the financial market like ILFS, DHFL, and now Zee Group is due to the lack of prudent rating by rating agencies. This is the classic case when private rating agencies are going all out to retain their fee by lending reports to please the promoters. Once again, I am saying this is not the end of bad news.
We must take a proactive stand and force the rating agencies to review the ratings of all their clients in the next 30 days. When there are series of bad news in the market about non-banking companies due to the wrong credit rating given to these companies the whole credit rating agencies eco-system is under a cloud. Authorities must order a major review of all ratings given by all rating agencies.
In post-IL&FS crisis ecosystem, when there are talks that interest rates are likely to go down, the news item of the Rs 2000 crore India Infoline Finance (IIFL) secured and non-secured non-convertible debentures (NCD) issue at a high coupon rate attracted my attention.
When so many companies are under scanner, there are mounting NPAs, interest rates are likely to go down, in such a situation, Rs 2000 crores NCDs at the high-interest rate is something needs proper investigation from all angles.
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The internet search to study the track record and facts about the company and promoters was a handy tool. Unfortunately, it was not very encouraging to know about the company has many litigations and fines due to the violation of various legal provisions and involvement of company and the promoters in serious investigations was displayed on the internet but not mentioned in reports by the rating agencies.
What was shocking that there was no mention of any litigation or penalties against the company or promoters or any mention of ongoing litigation against the company or promoters. Is this a deliberate cover-up by rating agencies or this is incompetency of rating agencies? Why credit rating agencies have not investigated the serious ligations against IIFL while giving AAA ratings. In fact, one the rating agency in the covering note does indicate that promoters can use the stale rating certificate. This should be investigated by concerned authorities.
What is the accountability of Credit rating Agencies?
Even after all these guidelines, there are series of high-profile disasters in stock markets including AAA-rated instruments. It means there is serious credibility issue of credit rating agencies and the questionable methods adopted by them. Such manipulation can happen only under two conditions either rating agencies are not competent, or they have a defective methodology for the rating of the debt instruments.
If rating agencies have credible and time-tested methodology, in that case, there is a deliberate attempt to suppress facts due to some motivation or some understanding between the credit rating agencies and the promoters of the instrument which is to be rated. In both the cases, there must be a proper investigation and suitable action should be taken to send a message to concerned agencies to stop manipulating behaviour.
Is this the way rating agencies want to earn the confidence of regulators and want to protect public trust? That is why EU wants to reduce the dependency on a few Rating Agency and want full disclosure by fundraising entities. The issue is why the status of various litigations are missing from IIFL prospectus? Media and regulators must scrutinize all the rating certificates of all IPOs, new offers. Promoters and rating agencies must be made accountable for hiding the facts which are already in the public domain.
Concerned Authorities must study this case in detail and identify the reasons for hiding the facts from the investors. If required, modify the Guidelines for Credit Rating Agencies Reporting formats to avoid stale and misleading rating certificates for raising money from the market. After NPAs due to bad project evaluations by top bankers, now this is time to ensure tight regulations for credit rating agencies. Please note no one is saint in this business.
Top Management and largest shareholder of Credit Rating agencies must be made accountable for their acts and omissions. Their act is shaking the confidence about governance in India and bringing a bad name to the country. No should be allowed to play with the national interest and interest of minority shareholders.
Vijay Sardana is an independent legal, commercial and investment advisor and arbitrator. He is a member of various boards and expert committees including SEBI’s Commodity Derivatives Advisory Committee. The views expressed are the author’s own and not of Financial Express or SEBI.