Independent Research and Policy Advocacy

Improving Outcomes for the Financial System through Credit Rating Agencies – Part 2

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This is part 2 of a two-part series on the topic. In part 1, the authors discuss the role of credit rating agencies as fiduciaries, and on how improving public disclosures by corporates can help improve the performance of CRAs in their role as fiduciaries.

Reflecting on own practices

Even if we improve outcomes for CRAs in their abilities to access better quality corporate disclosures, there are at least five significant global best practices that Indian CRAs don’t emulate. First, Indian CRAs, while assigning ratings to conglomerates, fail to report the organisation structure, the holding company’s stake in key operating and financing entities, and the distribution of revenues, profits, cash flows, cash and investment holdings, debt and intra-group guarantees. Second, domestic rating agencies do not disclose their assessment of a borrower’s standalone credit rating and the final credit rating that takes into account the borrower’s parentage and systemic importance (as in the case of the IL&FS group). Third, an evaluation of a borrower’s debt profile including secured and unsecured debt, senior and subordinated debt, domestic and FX-denominated debt, year-wise maturity of debt and the consequent refinancing risk, and off-balance sheet liabilities are conspicuous by their absence. Fourth, Indian CRAs do not report their projections of the adequacy of a rated entity’s profits and liquidity in meeting its debt servicing obligations and other contractual commitments. Fifth, rating triggers i.e. specific circumstances that may lead to an upgrade or downgrade in ratings and/ a change in outlook are not published.

SEBI’s periodic circulars since[1] November 1, 2016, require domestic rating agencies to partially address the second, third and fourth items listed above, besides laying down standards to enhance the quality and timeliness of rating reports and the robustness of rating criteria, among others.

Market infrastructure as a disciplining mechanism

India, like several Asian economies like Singapore, Malaysia and Indonesia, continues to be a predominantly bank loan dependent market. Bonds account for less than 5% of outstanding corporate and financial sector debt according to data published by the Bank for International Settlements[2] and Asian Development Bank’s Asia Bond Monitor[3]. The secondary market for trading these bonds is nascent, making the role of CRAs all the more crucial to get right for the orderly growth and stability of the corporate credit markets.

Price providers like the FIMMDA, market infrastructure providers such as stock exchanges (BSE, NSE) and voluntary industry associations that perform the role of information aggregators have an important role to act as catalysts in growing India’s bond market and rendering it more liquid. FIMMDA may develop a portal on its website, that tracks issuer-wise real-time bond information including credit ratings, price, yield, and volume traded. Though financial service providers like Bloomberg and Reuters provide this information, it is expensive for an average investor. CRAs can be required to update this portal directly every time an opinion is put out. A key design issue for this to work is to mandate CRAs to review and take action (upgrade, downgrade and affirmation of ratings and/ outlook), at a minimum, every time one or more events from a list of significant events occur, such as that described by SEBI in its Circular dated June 30, 2017[4]. Such an idea has already been operationalised in the EU by ESMA which created a Central Rating Repository or CEREP that provides credit ratings information of CRAs registered or certified in the EU. The CEREP database allows investors access ‘on a single platform, the performance and reliability of credit ratings on different types of ratings, asset classes and geographical regions over the time period of choice’[5].

Similarly, stock exchanges may publish issuer wise ratings along with share price information. Any sustained disconnect between a company’s share price performance and credit rating may serve as an early warning signal indicative of potentially optimistic ratings especially in an economy with an under-developed bond market. While CRAs are expected to track such disconnect for issuances they have rated, making this divergence available easily to other participants will have the intended effect of making CRAs responsible for timely updates to their opinions that make it useful for investors.

Incentive Design that does not leave room for deviations from the fiduciary responsibility

The February 2019 report[6] submitted by the Standing Committee on Finance, chaired by Dr. M. Veerappa Moily, on “Strengthening the Credit Rating Framework in the country” correctly identifies the conflict of interest inherent in the “issuer pay” model. The committee recommends that the Ministry of Finance explore the “investors pay” and “regulators pay” models.

Rating agencies are bodies corporate engaged in delivering sustainable shareholder returns while simultaneously discharging their fiduciary duty to lenders, investors, regulators and borrowers. Credit ratings are not just opinions of borrowers’ ability to service debt in a timely manner, they support a nation’s regulatory and corporate governance initiatives.

A “stakeholder pay” model is the need of the hour considering

  • The importance of credit ratings in assessing the quality of and in pricing debt securities,
  • The far-reaching implications of ratings,
  • The skilled personnel required to assign credit ratings, and
  • The multiple stakeholders involved in the process.

In other words, regulators, lenders, investors and stock exchanges ought to form a corpus to compensate CRAs, thereby eliminating the conflicts of interest inherent in the “issuer pay” model. The mode of mandating CRAs to assign ratings to specific debt issuances so as to minimise, if not eliminate, ratings shopping needs to be explored.

[1] Master Circular for Credit Rating Agencies, SEBI, May 2, 2019. Accessible at:

[2] Statistics by Bank for International Settlements. Accessible at:

[3] Asia Bond Monitor Series, Asian Development Bank. Accesible at:

[4] SEBI Circular SEBI// HO/ MIRSD/ MIRSD4/CIR/P/2017/71, June 30, 2017. Accessible at: This covers a list of events to include annual and interim results release; mergers, acquisitions and other restructurings; corporate debt restructuring, reference to BIFR, winding-up; share and/ bond price volatility uncorrelated to broad market movements; significant increase in indebtedness and/ cost of debt; deterioration in financial performance that was not projected by the CRA in its earlier review; positive and negative changes in key licenses and regulation; favourable and adverse changes in operations; attachment and / prohibitory order against issuer; actions taken by international CRAs

[5] ESMA makes available data on credit ratings’ past performances – central repository launched. Press Release dated 2nd February 2012, ESMA, accessible at

[6] Summary by PRS Legislative Research, of the Report of the Standing Committee on ‘Strengthening of the Credit Rating Framework in the Country’ released on February 13, 2019. Accessible at

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