Thursday, November 20, 2008

"Never even try"

Dr.Jaimini Bhagwati calls for public sector (government controlled) Credit Rating Agencies (CRA) to deliver objective evaluation of security instruments in the interest of investors.

His concern is genuine since there is just the three globally recognized CRA – S&P, Moody’s and Fitch that run the show. (In India we have CRISIL, ICRA and CARE and that’s it.) He explains how the flawed rating processes of S&P helped rate sovereign rating of GOI bonds lower than that of ICICI bank at one time, an year or so ago. His case – CRAs are paid by issuers and hence there are limitations to the level of objectivity an investor can expect out of them. Need of the hour, therefore is establishment of an Indian public sector CRA to increase competition and provide benchmark standards.

I take off from there. Then what happens? Like PSU oil companies, populist interest will upend commercial imperatives. Our politicians will call the shots. Will RIL bonds get a bad rating if Murli Deora is the Minister in charge? Look how he made GOI intervene in the ongoing dispute between RIL and RNRL in the matter of KG gas distribution. Now imagine Amar Singh at helm – ADAG group companies could be awarded ratings equal or better than sovereign ratings of GOI bonds. Reliance Capital will run M/o Finance, SEBI and Company Affairs. Every shift in incumbency will influenze the rating outlook. Are investor interests protected or are they imperiled as the saga of ambivalence plays out?

Today CRAs have authority but no responsibility. I suggest a participative method – make them what I call `backstop underwriters’ by entrusting a portion of underwriting obligations to CRAs, making them own up to their ratings. This is how it works. If the rating awarded is downgraded within say, a year of issuance or if the issuer defaults in its commitment to the retail investors within that period, then CRA will have to step in and bailout the investor. Investors will be glad to pay a small nominal premium for that reassurance. That way, CRAs can augment their income (fee for backstop underwriting besides rating fee) and ensure the objectivity of their processes as well. Investors get a toe in the door and Issuers save on the retail portion underwriting fee as well. Win win?

Bringing a politician have only complicated issues everywhere. Look what’s happening in appointments of PSU / Nationalised Bank Chairmen, Central and State Police Administration and frequent transfers among Income-Tax bigwigs. Think of Shibu Soren at the helm and imagine what would Anil Agarwal of Sterlite get away with? I go “Never even try”.


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