Regulating Credit Rating Agencies — Lessons from India

SEBI’s Feb-11 bulletin has a terrific lecture (page 5-11)   on Credit Rating Agencies (CRA) by Mr. M. S. Sahoo, Wholetime member of  SEBI.

He says India regulated CRAs despite stiff calls:

The issue is: should the CRAs be regulated? Till recently the CRAs generally argued that their reputation was at stake and the users would approach them for rating only if their opinions carry credibility with the investors. This thought process postponed the regulation of the CRAs in the West. The US and the European markets have seen CRA regulations coming up only in the latter half of this decade. Since the source of the conventional wisdom was the West, the CRAs in Asia also clamoured for no regulation.

There was tremendous pressure on the regulators in India not to bring the CRAs within the ambit of regulation because they were not regulated in the West. India was among the first countries in the world to have formally adopted a regulatory framework for CRAs way back in 1999. India also proactively brings about amendments to these regulations in line with the evolving market dynamics, the most recent one being in May, 2010. The Regulations cover all aspects of a CRA’s functioning with respect to ownership, code of conduct, operations, conflicts of interests, etc. and have served the market well over the last decade.

The financial crisis has settled the issue that the CRAs need to be regulated. What is not yet settled is the extent of regulation. Should regulations standardize rating methodology or ratings? Should regulations standardise the  methodology or make the CRAs disclose their rating methodologies? I think, regulation should promote transparency and governance, and quality and fairness of rating, rather than managing the rating itself. Regulations should not  stifle innovation and competition while  protecting the interests of investors.

Hmm. Somehow India always had the regulators who understood their job is to regulate. Apart from RBI. SEBI too deserves to be praised for many innovations in capital market regulations.

Apart from this, he discusses the entire gamut of issues on CRAs. Must read…

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5 Responses to “Regulating Credit Rating Agencies — Lessons from India”

  1. SRINIVASAN Says:

    to the author…

    How do u get this issue.. i just need Jan month bulletin…Could you send me pls….

  2. wikirating Says:

    Great post! thanks a lot

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  5. Yasmine Says:

    Credit rating agencies area sham.Dont you remember 2008?The aghencies werte paid exobirtant money for issuing higher ratings.
    Unless the “rating value”,ie money paid by issuer to rating agency is not standarised or regulayted the “CREDIT RATINGS” will also be a variable of the compensation paid to gbet them.

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