Given how badly CARE Ratings and Crisil failed to monitor the quality of Amtek Auto’s bonds and the quality of JP Morgan’s bond fund’s holdings, respectively—and brought on a redemption crisis in August 2015 when Amtek Auto was on the verge of defaulting on Rs 800 crore of bond repayments—market watchdog Sebi has rightly hauled them up. While CARE failed to warn the market sufficiently ahead of time about Amtek’s position, and suspended its rating abruptly—before suspension, it had given Amtek a AA- rating, which hid its inability to service financial obligations on time—Crisil didn’t give adequate consideration to information in the public domain about the Amtek bonds that the JP Morgan MF held.
So, when it assessed the JP Morgan schemes investing in low-credit-rated paper, it gave the schemes the highest portfolio credit quality rating. Between September 1 and 29, Crisil brought down its rating by eight notches before announcing withdrawal of ratings on October 15. It was as if Amtek paper became junk overnight, and this would have seriously hurt buyers and investors in the JP Morgan fund. Similar laxity on the part of reviewers in the US helped precipitate the 2008 financial crisis.
The role of the Big Three—Standard & Poor’s, Fitch and Moody’s—has come under legal scrutiny in both the US and Europe. Indeed, Moody’s , earlier this year agreed to pay $864 million as penalty for its shoddy rating of mortgage securities in the US, while S&P had to pay $1.375 billion after the US launched a $5-billion suit against it. Though the US government has moved to repeal the 2010 Dodd-Frank legislation that gave more teeth to ratings’ regulation, faulty assessment of risk associated with debt securities needs to be taken seriously.