MCA to look at new framework for credit rating agencies for strong corporate governance

New Delhi


The Ministry of Corporate Affairs is likely to take a relook at a new framework of credit rating agencies as a strong corporate governance structure is essential for a market economy, Corporate Affairs Secretary Injeti Srinivas said on Saturday.

Srinivas while speaking at a national seminar on valuation said a lack of valuation standards and regulations is hurting the system.

Rating agencies which are partly regulated by market regulator Securities and Exchange Board of India (SEBI) and also by the Reserve Bank of India have come under pressure from authorities and investors over their failure to flag financial problems at IL&FS that led the market to burst.

Rating agencies' roles have also come under the scanner due to their lack of alertness in recent cases of Zee and DHFL. They were late in identifying the stress in the IL&FS Group, which defaulted on its loans from banks, mutual funds and provident funds.

Rating agencies have also come under pressure from authorities and investors over their failure to proactively flag financial mess and default probabilities at Infrastructure Leasing and Financial Services Ltd (IL&FS) until after a subsidiary defaulted on some of its debt earlier this year leading to a near collapse of the Non-banking financial companies (NBFC) set up and credit squeeze.

In fact, in case of IL&FS, credit rating agencies made a sudden move after coming under sharp criticism where the rating was cut to junk status from triple-A in a matter of weeks.

Therafter a series of subsequent defaults at IL&FS triggered sharp declines in Indian stock and debt markets, spreading fears of a contagion within the rest of the country's financial sector and prompting the government to step in and take control of IL&FS.

Last year, market regulator SEBI tightened disclosure and review requirements for credit rating agencies (CRAs) after the firms failed to raise timely alerts ahead of debt defaults by one of India's top shadow lenders, or NBFCs.

The big three global rating agencies - Moody's, Standard & Poor's and Fitch - are majority owners of firms in India. Those firms operate separately from their parent companies and have different rating standards.

These credit rating agencies also perform dual role of being advisor-cum-rating agencies for companies which allegedly creates biased assessments by the CRAs about the financial condition of their clients. IANS