Capital market regulator SEBI has issued new guidelines for credit rating agencies that seek to make the rating process more transparent. The guidelines flow from the report of a government-appointed high-level committee. As in the case of practically all aspects of the capital market impinging on investor protection, SEBI has relied heavily on the disclosure mechanism in formulating these guidelines. Henceforth, credit rating agencies have to make mandatory, comprehensive disclosures twice a year. They will have to place in public domain the factors behind their ratings and provide a synopsis of the discussions they had with the merchant bankers, bankers, and auditors concerned. They will have to disclose details of voting at the rating committee meetings and also of any dissent note. Credit rating agencies will have to look for and report defaults on the basis of certain well-established criteria, such as non-payment of interest on the due date, and also publish information about the historical default rates in various rating categories. It should not be difficult for the leading agencies to follow these guidelines. However, two questions are relevant here. One, will the additional information available really help the majority of investors? Second, will compliance with the guidelines help the agencies improve their image that has been tarnished recently?

Credit rating agencies provide valuable inputs to investors to make an informed decision when they want to place their money in debt instruments. More recently in India, new equity share offerings were also rated. In developed markets, they attracted a lot of negative publicity for their conduct during the recent financial crisis. Many complex financial instruments with high investment grade ratings fell by the wayside, dragging down the financial institutions and several other investors. The charge against them is that they misled investors by awarding satisfactory ratings to instruments whose risks they did not comprehend. In the late 1990s, during the Asian currency crisis too, they were seen in poor light. In India, the rating agencies are rapidly expanding their activities, even if the lack of depth in some segments of the debt markets might be restricting their scope. They will do well to adhere to these guidelines, if they are keen to improve their credibility in the eyes of investors. Notably, in every credit rating agency, there must be a Chinese wall between the analysts involved in the rating exercise and those responsible for the marketing and other business-related functions.

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