The market regulator Sebi yesterday asked credit rating agencies (CRAs) to disclose their methodologies and fees charged from the companies they rate, a move that will promote greater transparency.
The disclosure guidelines, issued by Sebi against the backdrop of the recent global financial meltdown, require CRAs to frame policies and a code of conduct to deal with the issues related to conflict of interest between their analysts and entities being rated.
Sebi said the CRAs will have to ensure full compliance with the guidelines by June 30 and make mandatory disclosures twice annually.
The role of the rating agencies was questioned during the global financial meltdown as many of the companies and their issues collapsed despite enjoying high ratings.
Credit rating agency representatives lack some times basic knowledge about the industry and its practical aspects.They feel conservative credit rating is safe and adopt this.The representatives are fresh MBA not having analytical background and are not transparent in their methods. Their comparable are irrelevant and reports are stereo type.There is no built in grievance mechanism and the committee also do not justify with reasons the rating methods.RBI should address this otherwise this exercise is sheer waste without any purpose, probably to bail out these agencies from red.
I personally strongly believes that,there exists a close nexus between the company management and CRA’s management,which is primarily resposible for causing distress in the market.So the rating methodologies that is being adopted by CRA’s must be subjected to the vetting of SEBI.