After the mutual fund sector,it could be the turn of credit rating agencies to become more transparent now. The current thinking in the Finance Ministry as well as the regulators the Securities and Exchange Board of India and the Reserve Bank of India is that there should be more transparency in fees,fee-based services and rating methodology of rating agencies in India,especially at a time when the dubious role of global rating agencies in the financial crisis has come under a close regulatory scanner in the US. Currently,rating agencies dont disclose the fee that they charge from companies that they rate. This has led to rampant undercutting of fee charged by various rating agencies,raising worries that such practices could create systemic problems at a later stage. For example,now the situation is that a well-known company with Rs 50,000 crore turnover pays only Rs one lakh as fee for rating whereas an unknown Rs 100 crore company ends up paying Rs 10 lakh for getting its instrument rated. Rating agencies undercut each other to get bigger and high-profile clients, said a source involved in the exercise. The Sebi which is in the process of finalizing the guidelines for rating agencies is expected to take a view on disclosure of fees in the revised guidelines for credit rating agencies,which are expected shortly,a market source said. A Finance Ministry committee headed by KP Krishnan has already recommended the disclosure of details of fees collected by rating agency from the issuer/its subsidiary due to the current rating assignment/previous rating assignment during the last 3 years. This panel has also proposed disclosure of details of fees collected by the rating or its subsidiary from the same issuer/its subsidiary due to activities other than rating during the last 3 years. The panel has also proposed disclosure of the amount of money received by the promoters of the rating agency due to any financial transaction with the issuer in the last 3 years including a brief description of the said financial transaction. The RBI has already called for strengthening of the guidelines governing the rating agencies. As of now,the regulations mandate that a rating agency should not offer fee-based services to the rated entities,beyond credit ratings and research. The regulations also mandate that a credit rating agency should maintain an arms length relationship between its credit rating activity or any other activity. However,in practice,rating agencies float subsidiary companies for undertaking other activities such as consulting,software development,knowledge process outsourcing,research etc. The new Sebi norms are expected to include the nature of compensation from the entities they rate,disclosure about the assumptions underlying their rating methodologies,the frequency of reviews in ratings and the different criteria and models used for the initial rating. Sebi will be the lead regulator governing the rating agencies. Therea also a debate on whether unsolicited rating without inputs from the company should be allowed or not. The panels view is that if unsolicited rating is to be allowed such ratings may be issued with appropriate disclosure indicating whether issuer has participated in the rating process or only public information disclosed by the issuer,including its audited financial statements,strategic objective and investor presentation have been used in the assessment. The Wall Street experience is a signal for Indian agencies. Mortgage investments which initially appeared good thanks to good ratings from rating agencies later turned out to be bad. Interestingly,in the US,under the proposed Financial Regulation Bill,rating agencies would have to disclose their methodologies,how they used third parties to conduct due diligence on their assessments,as well as their own ratings track record by providing information on any changes to their initial ratings. The US bill would require the SEC to issue rules that would either prohibit or require a ratings agency to disclose any conflicts of interest related to its assessments of investments. As per the US bill,conflicts would include how the agency is paid and whether it has business relationships with the issuer of an investment.
