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S. Murlidharan

Who will judge the judges? Who will audit the auditors? Such questions, rhetorical as they might sound, have reared their heads time and again defying a satisfactory answer each time. The latest on the dock and on which the searchlight is focused on are Credit Rating Agencies (CRAs).

The financial crisis rocking the world having its epicentre in the US perhaps could have been averted, aver the cognoscenti, had the CRA been true to its salt. An organisation, especially the one rendering service, is only as honest or as efficient as its personnel.

The raters in CRAs are alleged to have awarded exaggerated ratings to debt instruments and their derivatives that had poor quality written all over them.

To be sure, a rater should not be hauled over coals if things go awry subsequently with regard to the instrument rated by it, especially if it had forthwith come out with a revised rating. But to knowingly award exaggerated ratings is unpardonable to put it mildly. Quite a few employees belonging to CRAs have taken exception to the carping criticism of the entire tribe. To be sure, all employees of CRAs should not be tarred with the same brush.

Insider trading in shares is frowned upon though the market regulator SEBI has nothing to show by way of tangible results in punishing the guilty. SEBI incidentally has been mulling a proposal for more than six months now, to ask the 10 per cent stakeholders to cough up short-swing profits, that is, profit made on sale of shares if the sale thereof took place within six months of their acquisition.

The regulator should address the incipient problem of insider trading in debt instruments as well. How about asking the employees of CRAs to stay away from trading in securities their organisation has rated at the pain of heavy penalty, including disgorgement of profits?

That a CRA’s fee is paid by the company whose instruments are rated has been diagnosed as the root cause of all the trouble. Implicit in this view is the truism that one doesn’t bite the hand that feeds him.

The alternative is to ask the market regulator to pay. SEBI has the distinction of being perhaps the only governmental agency that can survive sans the budgetary support of the Central Government, thanks to the copious flow of fee collected by it along with applications for an assortment of purposes from corporates and market intermediaries. Surely, it can pay the CRA’s fee from its coffers with a quid pro quo — any disgorgement made by the avaricious employees of a CRA would flow back to the same coffers. In the alternative, it can dip into the investors’ protection fund for paying the CRA.

Asking the investor to pay would be cruel on him not the least because when the instrument changes hands he would have no means of asking for reimbursement of what he has paid towards fee of the CRA from the buyer.

It is not as if the employees of CRAs have all along been the villains of the piece. The companies whose instruments are rated have been complicit.

Therefore, before casting aspersions on a CRA it must be made sure whether the company concerned had bared its chest and placed all the cards before the CRA. Hefty penalty must be collected from delinquent corporates too which would be a poetic justice in retrospect — paying for their sins.

More Stories on : Credit Rating | Accountancy

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