Govt needs to step in when credit rating agencies do a lax job

While the market regulator SEBI has done well to berate the rating agencies CRISIL and CARE for their passivity in the Amtek Auto bond rating, the government needs to step in to permit imposition of stiff penalties on crediting rating agencies doing a lax job.

It all happened in August 2015 when Amtek Auto defaulted on redemption of its Rs 800 crore bonds.  The rating agency CARE had in the first week of August 2015 suspended its AA rating as if it was doing a great service to the investors. And CRISIL which had given JP Morgan fund the highest rating for portfolio allocation suddenly withdrew its rating perhaps taking a cue from its fellow rating agency CARE.

Suspension of rating is a pusillanimous act and frowned upon by the SEBI. Suspension can be resorted to only if the bond merges with another bond or when the issuer company merges with another. Suspension of an ongoing bond, as it were, amounts to abdication of responsibility on the part of a credit rating agency. What instead is expected of a rating agency is to constantly review the rating and downgrade it if warranted.

In Amtek’s case, a junk bond status was warranted a long time before the auto company defaulted in its redemption obligations.  Downgrading forewarns the investors — pull out your chestnut from the fire. Suspension on the contrary leaves investors and traders befuddled, unable to fathom its implications.

Reuters

Credit rating agencies made their advent to aid small investors and others who do not have the wherewithal to carry out their own credit risk assessment. That said, it doesn’t mean well-heeled and savvy investors should not set store by the rating. The rating awarded by an accredited rating agency helps investors and traders make up their minds on invest/hold/sell decisions.

A rating is never meant to be final. Indeed, the very essence of rating is constant revision if warranted on the facts and circumstances of the case so much so an AAA rating can morph into junk bond…

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