Indian credit rating agencies: The road to regulatory reforms

 

Prateek Sharma, Samit Paul

Indian Institute of Management, Lucknow

*Corresponding Author E-mail: fpm13003@iiml.ac.in; fpm13005@iiml.ac.in.

 

 

ABSTRACT:

Credit rating agencies (CRAs) are considered as the gatekeepers of the financial markets. However, after the global financial crises, the role played by these CRAs came under regulatory scrutiny. CRAs have been accused of faulty ratings for complex asset backed securities and other risky derivative instruments. There are concerns over the inadequacy of existing rating methodologies to rate complex structured products and the inherent conflict of interest in the issuer-pay model. Consequently, there is a renewed impetus on regulating and reforming CRAs worldwide. In this paper, we discuss the Indian Credit rating Industry. We highlight the regulatory concerns and propose the regulatory reforms required for the Indian CRAs. We believe that these proactive measures will be instrumental in protecting Indian capital markets from future shocks.

 

KEY WORDS: Credit rating agencies, CRISIL, ICRA, IOSCO, Credit Rating, credit rating agencies, India, global financial crisis, regulatory reforms.

JEL Classification: G20; G24

 

 

 


INTRODUCTION:

The global financial crisis of 2008 sent shock waves across financial markets throughout the world. The U.S. S and P 500 index declined 56.7% from its high in October 2007 to its low in March 2009. The Dow Jones Industrial Average (DJIA) and NASDAQ Composite declined by 53.7% and 54.7% respectively, and the broader Russell 2000 index fell 59.4% over the same period. One of the most important reasons attributed to the sheer magnitude of the crises was the collective failure of Credit Rating Agencies. The financial crisis enquiry commission (FCIC) termed Credit rating agencies as “key enablers of the financial crisis”. FCIC noted that the reckless ratings in the pre crisis period was the prime reason behind the housing bubble, and the sudden downgrades which followed ultimately led to a worldwide financial disaster (United States Financial Crisis Inquiry Commission,2011).

 

Credit rating agencies (CRAs) have been around since 1860s. CRAs not only play an important role in risk assessment but also determine concentration and distribution of risk within the financial system. Credit ratings facilitate investment decisions and help investors in achieving a desired risk return profile. At the same time, they assist firms in accessing capital at fair costs in accordance to their creditworthiness. The CRAs used to collect fees from the public until 1975. Therefore, they served as information brokers to the capital markets while generating revenue from investors (user-pay). Post 1975, SEC introduced the concept of "Nationally Recognized Statistical Rating Organizations" (NRSRO) and made the access of an issuer to the capital markets impossible without the “approval” of these rating agencies. This changed the business model, customer orientation and revenue generating strategies. CRAs started selling their ratings to the companies whose debt was the subject to be rated (issuer-pay) rather than the earlier user-pay model (Wolfson and Crawford, C. 2010). Presently, the issuer-pay model is the prevalent model for worldwide Credit Rating Industries. While the model has been particularly successful, it naturally leads a conflict of interest that was highlighted by the global financial crisis.

 

The Securities and Exchange Board of India (SEBI) regulates the Indian CRAs. CRAs operating in India need to obtain a “certificate of registration” from Securities and Exchange Board of India (Securities and Exchange Board of India, 1999, regulation 3). The supervision by SEBI is limited to securities issued by public or rights issue. These include Public/ Rights/ Listed issue of bonds, IPO Grading, Capital protection oriented funds and Collective Investment Schemes of plantation companies (Securities and Exchange Board of India, 1999, regulation 2(1) h). Presently, there are six registered credit rating agencies registered with SEBI. There are four primary players in Indian credit rating industry, viz. CRISIL, ICRA, CARE and FITCH. CRISIL has the highest market share (about 55%) followed by ICRA (about 20%), CARE (about 15%), FITCH and Brickworks (about 10%).The major Credit Rating Agencies of the world, viz., Moody’s, Standard and Poor's and Fitch operate through their Indian subsidiaries. ICRA is a subsidiary of Moody’s, CRISIL is a subsidiary of and Standard and Poor's and Fitch Ratings India Private Ltd is a subsidiary of Fitch Ratings.

 

Indian Credit rating industry has witnessed a sharp growth, which is expected to continue in the near future. Steady economic growth, large capital investment projects in infrastructure, power generation and energy sectors and steady decline in interest rates all augurs towards sharp growth in the business of credit rating agencies. Another key driver for the growth of credit rating sector is the SME ratings segment. According to an RBI report on trends and progress in banking 2010, only 13% of the registered SMEs have access to finance from formal sources (Krishnan, Nair, Tiwari, Nagpal, Sahajwala and Jayasimhan, 2008). Soliciting a creditworthiness assessment from a CRA is highly beneficial for a SME as it can bargain for better financing terms, faster turnaround of loan pressing time and better business opportunities afforded by enhanced credibility of unbiased of credit ratings.

 

Financial Products

The rating agencies define the task of their credit rating by their own way, but the variation of this definition is not so high. Specifically, a credit rating indicates the probability of default of a financial instrument, and therefore provides a benchmark for measuring the relative credit risk of the instrument. It helps the investors to find the most suitable option to invest depending upon their risk-return portfolio and the investor’s ability to bear the risk. A credit rating provides huge amount of diverse information by symbolizing it by meaningful symbols. It could be a simple alphabetic or alphanumeric symbol, such as “AAA” or “DA1”, which normally conveys a meaningful credit rating (Vassiliki, 2010). CRAs in India rate the following types of financial products:

1) Bonds/ debentures; 2) Bank loans; 3) Fixed deposits; 4) Mutual fund debt schemes; 5) Initial Public Offers (IPO); 6) Commercial paper; 7) Structured finance products (CDO).

 

The credit rating is an opinion or an assessment on the relative credit risk (or default risk) associated with the rated instrument. Default risk is the event in which companies or individuals will be unable to make the required payments on their debt obligations. A failure to pay even one rupee of the committed debt service payments on the due dates would constitute a default. For most of the instruments, the process involves an estimation of the cash generation capacity of the issuer through operations, investments and financing activities in order to fulfill its requirements for repaying debt obligations over the tenure of the instrument. The analysis, although carried out within the proprietary framework of the rating agency, is purely based on the information obtained from the issuer and on the understanding of the business environment in which the issuer operates (Krishnan et al., 2008).The analytical framework used by credit rating agencies includes the analysis of business risk, market risk, liquidity risk, credit risk, interest rate risk, technology risk, industry risk, financial risk, operational risk and management risk. Business risk analysis, by and large, covers industry analysis; operating efficiency, market position of the company whereas financial risk covers accounting quality, existing financial position, cash flows, financial flexibility and various risks (sensitivity) affecting the performance of the company. Under management risk, analysis an assessment is made of the competence and risk taking capacity of the management (Krishnan et al., 2008).

 

Credit rating agencies usually take two approaches in order to assign credit rating to an instrument. The first method is known as Through The Cycle (TTC) methodology, which only focuses on the permanent component of default risk and rating change policy. It ignores the short-term fluctuations and considers only those developments that are structural and permanent in nature. If there is a substantial change in permanent component of default risk, it definitely leads to rating migrations. The second approach which rating agencies adopt is the Point In Time (PIT) approach. In the PIT approach, the credit rating is changed as and when any new information, affecting the short-term the long-term repayment ability of the entity, becomes available. Therefore, the basic difference between these two methods is that they put different weightage on the permanent and temporary components of credit quality. The relative weights are influenced by different time horizons for which the rating is valid. Specifically, for a one year horizon the temporary component would get more weightage, whereas, for longer time horizon permanent component will get more weightage (Krishnan et al., 2008).

 

Limitations of credit ratings

Following are the major limitations of credit ratings agencies.

1.    It does not recommend the investor to buy, hold or sell any stocks, debentures, bonds, or any other financial instruments issued by an individual entity, or derivatives thereof. It is just an indication to the investors about the potential of a particular instrument so that based on which investor can take the decision.

2.    Apart from the credit default risk, an investor needs to consider several other factors before investing on a debt instrument such as volatility, liquidity risk, pre-payment risk, interest rate risk, sensitivity, yield offered, taxation aspects, exchange loss risk and risk of secondary market loss.

3.    Generally, it does not evaluate the performance of the entity that has issued the instrument in the market unless specified to do so. The rating is usually specific to the instrument and is not the rating of the issuer.

4.    It does not opine on the status or condition of the associates, subsidiaries or group companies of the rated entity. Moreover, it is difficult to quantify naturally qualitative aspects like management quality.

5.    It does not audit the statutory or non-statutory obligation of the entity to be rated.

6.    It does not comment upon the compliance or any legal or statutory requirements.

7.    It does not provide any guarantee against the default risk inherent to a particular instrument. Each instrument carries a certain level of risk with itself and credit ratings do not provide a measure of absolute risk of an instrument. However, it can be assured that higher rated instruments are less risky in comparison to the lower rated ones (Krishnan et al., 2008).

 

Credit ratings are ordinal rather than cardinal in nature. They suggest that a rating of AA has a higher likelihood of default than AAA, but to what extent is not readily obvious. An accurate assessment of credit quality would require a probability to be assigned to each rating indicating its likelihood of default. Further, in the event of default, how much of the debt is recoverable. These two metrics, popularly known as the probability of default (PD) and the loss given default (LGD) are hidden in the aggregate credit rating measure.

 

Rationale for Credit Ratings

Although, the credit ratings are quite useful for the investment decision, it is debatable whether the ratings augment or change the information base as a whole. If the market can estimate the credibility of an instrument on its own, then the role of credit rating agencies are not justified. Empirical evidence indicates that market do the information processing better than the CRAs. Hence, the market price itself acts as an indicator towards its credibility.

 

The rationale for credit rating may be expressed on the following counts. If there is any information gap in the market, regarding a particular instrument, then the market sentiment could be misleading. It affects the cost and reputation of the security traded in the market. In such cases a fair credit rating helps to reduce the information gap and enhance liquidity in the market (Indian Perspective on Banking Regulation, 2010). For instance, in a market with incomplete or inaccurate information dissemination, if firm A is rated above firm B then markets should demand a lower interest from A than B. In the absence of credit ratings, the investors would be wary of the unknown risks and demand higher risk premiums from all firms, making it systemically more expensive to raise capital. Similarly, if the default risk of a newly issued bond/equity is not clearly known to the market, it may cause an under pricing of that particular security. It may again be quite risky to the issuer as long as the information gap prevails. Hence, it is optimal for the issuer to obtain a credit rating so as to place the bonds/equity at a better price. Moreover, international obligations like Basel III require provisioning of capital based on risk weights attached to each of the assets. Capital requirements for a rated asset base is usually less than an unrated assets base, since unrated assets may be classified as highest risk by default.

 

SEBI Code of conduct

The Code of Conduct has been designed by SEBI in order to ensure proper transparency and independent functioning of credit rating agencies. This code of conduct for CRAs addresses some of the basic issues relating to conflicts of interest. Some of the salient provisions of the Code of Conduct are:

§A credit rating agency should put all efforts to protect the interests of investors.

§A credit rating agency should exercise due diligence in order to achieve and maintain transparency and independence in the process of rating. Moreover, it needs to ensure proper care and independent professional judgment in order to gain the investor’s confidence.

§A credit rating agency should follow a rating process that is as par as international rating standards and consistent throughout.

§A credit rating agency should be aware of all current developments and should keep track of all important changes relating to the client companies. Moreover, it should develop efficient and responsive systems to publish timely and accurate ratings. Further it should play a role of a monitor who can keep monitoring closely all relevant factors that might affect the creditworthiness of the issuers.

§A credit rating agency should disclose its rating methodology to clients, users and the public so that there will be no conflict regarding authenticity.

§A credit rating agency should be specific while making a statement. It should not exaggerate about the qualification and capability of its client in rendering services. Whether it is in form of an oral or written communication, it should disclose the actual findings about the client.

 

There are various provisions prescribed by SEBI Code of Conduct in order to ensure credibility of credit rating. Some of the key provisions are:

§If the credit rating agency predicts about any possibility or reasons which may create conflict of interest and in turn affect its ability to predict fair and unbiased ratings, it needs to disclose the same to the clients. It is also the responsibility of the credit rating agency to resolve if there is any conflict of interest exists within the members of rating committee and with client.

§No member of the rating committee and no employee of credit rating agency is allowed to advice about the investment strategy to the outsiders.

§Apart from credit rating and researches, the credit rating agency is not allowed to provide any other services to the clients against any fee.

§For a credit rating agency the credit rating activity should be totally independent of any other activities.

§A credit rating agency should have its own internal code of conduct in place. This will help it to look after its own internal operations and to keep a track of violation of norm, if any. The employees and officers should be aware of the internal code of conduct and encouraged to adhere to it. Such things definitely enhance more of integrity, confidentiality, objectivity, avoidance of conflict of interests, which in turn leads to professional excellence and better services. It gives a clear path way in order to formation of rating committees and the underlying duties of its employees and officers.

§Rating services and investment advisory services are usually provided by separate entities. Nevertheless, concerns are raised regarding the common ownership and overlap in management. Therefore, few credit rating agencies such as CARE decided to discontinue its advisory service business and now it is only providing the credit rating and research activities. However, this poses a challenge in terms of revenue generation by the CRAs.

 

Multiplicity of regulators

The credit rating agencies generally work under the purview of multiple regulators. Products from financial market such as bonds, debentures etc are regulated by SEBI, whereas products like bank loans, fixed deposits, commercial papers etc are regulated by RBI. Earlier, RBI carried out a detailed and rigorous evaluation of Indian CRAs before granting them External Credit Assessment Institution status for rating of bank loans under Basel II. Further, some regulators (such as IRDA and PFRDA) have incorporated ratings into the investment guidelines for the entities they regulate (Darbellay and Partnoy, 2012). It is observed that all SEBI regulated CRAs in India have framed their internal code of conduct, which have provisions, inter alia, of conflict of interest management, avoidance and disclosures of conflict of interest situations etc. and such provisions prescribed are by and large in accordance with the IOSCO Code of Conduct Fundamentals for CRAs. The internal code of conduct formulated by the CRAs is in addition to the Code of Conduct prescribed under the SEBI (CRA) Regulations – 1999.

 

Regulatory Concerns for Indian Credit Rating Agencies

Credit rating agencies (CRAs) play a crucial role in assessing risk and protecting the interest of investors. Credit rating agencies facilitate investment decisions and help investors achieve a desired risk return profile. As the financial sector continues to develop there is a growing reliance on credit ratings due regulatory requirements, maturing capital markets, linkage of capital adequacy norms and creditworthiness appraisal in banking sector. Credit ratings have a potential to govern the capital allocation decisions, direction of investment flows and valuation of assets within the economy. The failure of various CRAs to carry out due diligence is cited as the major cause for late detection and severity of the global financial crisis of 2007-2008. Given the significance of CRAs in the economy, regulatory and supervisory oversight for CRAs is of utmost importance. To this end, we intend to contrast the contrast the features of Indian credit rating environment with the developed markets of US and UK. Specifically we attempt to highlight regulatory concerns and lacunae in the existing regime and try to incorporate lessons from failure of CRAs during the global financial crisis within the Indian context. There are certain features unique to the Indian credit rating environment. Firstly, SEBI requires mandatory ratings for initial public offerings, while in developed markets like US, UK, Australia, France etc. issuers obtain ratings on voluntary basis. This enhances the significance of credit ratings as their scope is extended from debt markets to equity markets. Secondly, we believe that the credit rating environment in Indian capital markets is in a transitory phase. As discussed earlier vigorous growth of credit ratings due to adoption BASEL III norms by the Indian banks (Reserve Bank of India, 2007) and a booming credit appraisal business of hitherto unrated SME sector is marking a inflection point in growth of credit rating industry in India. This sharp growth in number of published ratings and higher transaction values involved enhances the potential for conflict of interests and underlines the importance of strict regulatory regime. Finally Indian CRAs have recently initiated rating relatively nascent structured products in Indian markets, these products are considered potential landmines in wake of the financial crisis and warrant an enhanced regulatory attention (Jain and Sharma, 2008).

 

The fundamental regulatory concern in case of CRAs stems from the inherent dichotomy between their role as ‘gatekeeper’ and a ‘reputational intermediary’ (Oh, 2011). As a gatekeeper, a CRA has a responsibility of monitoring quality of information flowing into the markets, while as a ‘reputational intermediary’ it may indulge in false certification if the gains exceed the loss in reputational capital. In the absence of explicit legal liability, such incentives are magnified. For instance during the global financial crisis CRAs were highly criticized for understating the risk involved with MBS (mortgage backed securities). It is alleged, that the lenient rating standards were a result of rating fees being twice as high for the mortgage-backed bonds as for the corporate bonds. Further, many of the dealers sought active participation of CRAs in creating these issues, which effectively put the rating agencies in a position to influence the size of the market from which they drew lucrative revenues and implicitly bias in the ratings (a notable example being design of CDO tranches).

 

There are several regulatory concerns in the Indian credit rating industry. First, the multiplicity of regulators in the Credit Ratings creates a possibility of CRAs involving in regulatory arbitrage. Another concern is the lack of appropriate methodologies to rate complex structured products with multiple tranches and susceptible to rapid, multiple-notch downgrades. Since CRAs are not liable for accuracy of their ratings, this legal immunity creates perverse incentive for deliberate fraud and malpractices. Finally, CRAs often provide ancillary services like research and advisory services, issuers may lure CRAs into providing favorable ratings by incentivizing them through additional ancillary business. Further, with RBI and SEBI mandating the use of credit ratings for raising any type of capital in the financial markets coupled with the oligopolistic nature of the rating industry, there is an increased reliance on CRAs giving those fewer incentives to compete by developing more sophisticated accurate and precise ratings methodologies.

 

Recommended Reforms

Improvement in Disclosure Norms

The IOSCO code for from rating agencies recommends that the disclosures from rating agencies should include both qualitative parameters like definition of default, time horizons used by the credit rating agency (IOSCO, 2004 , para. 3.5) and quantitative parameters like default rates, transition rates etc (IOSCO, 2004 , para. 3.8). The existing regulations require Indian CRAs to disclose the definition of the ratings, the rationale of the ratings and the rating methodology. However, the disclosure norms do not specified exactly what information should be covered under rating methodology. We believe that more standardized and comprehensive disclosure norms (similar to those followed in developed markets like US), specifying exact requirements within the rating methodology would help users compare the ratings quality across CRAs and provide more transparent credit ratings. To this end, it will be beneficial for Indian Credit Rating Regulations to align itself more closely to the IOSCO disclosure requirements. Further SEBI allows CRAs to develop its own internal code of conduct for governing its internal operations and laying down its standards of appropriate conduct for its employees and officers (“Credit Rating Agencies Regulations”, 1999, principle 19). This is a potential source of accountability gap and non-uniform practices across CRAs. We believe that internal code of Indian CRAs should be aligned with the IOSCO Principles Regarding the Activities of Credit Rating Agencies’ and the ‘IOSCO Code of Conduct Fundamentals for Credit Rating Agencies’. Similar to Australian and European approach , SEBI should adopt a "comply and explain" approach whereby CRAs should be required to demonstrate how their internal code and practices are aligned with recommended IOSCO code and justify any significant deviations in the methods or enforcement of the code. CRAs should also disclose any changes in the method or implementation of their internal codes in accordance to the IOSCO guidelines (IOSCO Code, 2004, para. 4.1).

 

Relaxing Regulatory Mandates for Credit Ratings

Indian regulatory agencies like RBI and SEBI are enforcing the Credit ratings as a mandatory regulatory requirement. This approach is likely to backfire as it develops an over dependence on rating agencies and transforms CRAs into de-facto licensing authorities increasing the potential of abuse of ratings. As regulators make the credit ratings mandatory, the customers (issuers of debt / equity securities or SME availing bank loans) of credit ratings will largely focus on complying with legal requirements than availing the services of CRAs for its implicit utility. This is likely to erode the analytic rigor and reliability of such credit ratings, more likely since there are only a few licensed CRAs in the country operating in a quasi-oligopolistic market. We believe that this will be counter-productive for the development of credit rating industry in general and could have potentially catastrophic effects in case of a financial crisis. In our view such a system is also likely to adversely affect access to small issuers and new entrants in the capital markets. It is noteworthy that the developed markets, like the UK and the US, have a two ratings norm that has developed on its own due to market expectations rather than regulatory compulsion (Duff and Einig, 2007). This is a much healthier approach, encouraging competition among credit rating agencies and providing them incentives to come up with more accurate, precise and rigorous credit rating systems.

 

Provision for increased Liability of CRAs

One of the major concerns cited in the Enron case on the role of CRA is the practical immunity of CRAs to lawsuits (Role and Function of Credit Rating Agencies, 2003). It is noteworthy that making CRAs liable for their ratings may make them susceptible to frivolous lawsuits forcing them to rate only high quality issuers (Pinto, A. R., 2008) or putting a negative bias on ratings due to overly conservative ratings given by CRAs. SEBI defines a rating as merely an "opinion" and allows CRAs to insert disclaimers that investors should only take these ratings as indicative and not the sole criterion for investment decision (“Credit Rating Agencies Regulations”, 1999, regulation 2(q) and 18). However, in cases of deliberate fraud, deceit, negligence; a CRA should be made liable to investors. Such an explicit provision would act as a strong deterrence against professional malpractices and potentially increase the transparency and reliability of credit ratings. It is contradictory policy stance to mandate the credit ratings and increasing investor reliance on credit ratings, at the same time leaving investors unprotected against the possible misuse of rating authority by CRAs.

 

Unambiguous definition of Conflict of Interest

As discussed earlier the various conflict of interests arising due to the nature of credit rating industry are the primary regulatory concern. However, we find that there is a lack of specificity and objectiveness in defining what constitutes a conflict of interest. Regulations merely refer to ‘any conflicts of interest which may undermine fairness and objectivity of ratings’ and fail to define what specific types of conflicts a CRA should manage or avoid. If a regulator wants industrial entities to follow a specified standard, then it must clearly, objectively and unambiguously define the meaning of such a standard. For instance, in the case of conflict of interest arising due to ancillary services provided by CRAs, the regulatory guidelines recommend that there should be an arm's length relationship between the credit rating business and any other activity without clarifying the exact connotation of such requirement. In contrast to this, IOSCO standard clearly defines that there should be ‘operational and legal’ separation of credit rating and ancillary businesses (IOSCO, 2004, para. 2.5).RBI recommends that CRA should disclose details of fees collected by CRA (or its subsidiaries) from an issuer (or its subsidiaries) for both rating and other services for the past three years. Such a disclosure would clearly highlight conflicts of interest arising out of ancillary services provided by the CRAs. Further, the IOSCO approach completely prohibits CRA's employees trading in the securities of its clients including the derivatives of such securities (IOSCO, 2004, para. 2.12-2.14). In Indian context, CRAs are independent to frame their own internal code and there is no regulatory obligation to curb such practices. This is a glaring lacuna in the existing regulations and needs to be addressed on priority.

 

Rating Structured Instruments

Indian CRAs have just forayed in rating structured instruments. Given the important role of such instruments in the recent financial crisis and relative inexperience with such instruments in Indian markets, it is important to formulate special provisions for rating Structured Products. While the general view of the regulator is that existing rating methodologies might be inadequate in rating complex structured products, as of now there are no additional regulatory recommendations for rating structured products. As on date the ratings methodologies remain based on one-dimensional metrics (default probabilities or expected losses) that fail to capture all of the risk dimensions peculiar to tranched products (Krishnan et al., 2008).  Further, there should be clear guidelines prohibiting a CRA from giving recommendations, consultancy or advisory in any form that influences the design of structured products that are also rated by the CRA.  Due to very different nature of risks involved in structured products, there should be a clear distinction between credit ratings of structured products and conventional instruments. CRA should also be expected to perform due diligence to assess the quality of information provided by the originators, arrangers and the issuers of such structured products.

 

Process and Compliance Audit

The existing regulations do not require any process and compliance audit of CRA's operations. However, given the sensitive nature of the CRA's operations, periodic process and compliance audits should be mandated. Such an audit should assess whether all the requirements stipulated in the CRA Regulations and other regulations/guidelines stipulated by other regulators (RBI/IRDA etc) are being followed by the rating agency. CRA should be subject to regulatory penalty in case of material deviations from stipulated regulations as well as have a legal liability in cases of deceit, fraud or deliberate malpractices.

 

Concluding Remarks

Indian Credit Rating landscape is still relatively nascent as compared to the developed nations. SEBI has kept pace with the global trends and reforms in regulating Indian CRAs. However, there are significant improvements required to bring more transparency and clarity to the operations of Indian CRAs. Specifically, there is a need for more standardized and unambiguous disclosure norms. Another major concern is that CRAs enjoy a virtual immunity from any liabilities arising out of failure to carry out their responsibilities properly. For instance, a CRA can’t be held accountable of improper rating due to visibly unsound rating methodologies or mala fide ratings. Finally, Indian market is venturing into complex structured instruments, the products notorious for their role in global financial crises and worldwide failures of CRAs to rate these products properly due to their inherent complex structures. We believe that due to the additional risk factors associated with structured products there is a need for specific regulatory provisions and enhanced rating methodologies for rating these complex products.

REFERENCES:

1.       Darbellay, A., and Partnoy, F. (2012). "Credit Rating Agencies and Regulatory Reform." Research Handbook on the Economics of Corporate Law, 12-082.

2.       Duff, A., and Einig, S. (2007). "Credit rating agencies: Meeting the needs of the market?." Institute of Chartered Accountants of Scotland.

3.       IOSCO (2004). "Code of Conduct Fundamentals for Credit Rating Agencies. Technical Committee of IOSCO."Madrid, Spain.

4.       Jain, T., and Sharma, R. (2008). "Credit Rating Agencies in India: A Case of Authority without Responsibility." Company Law Journal, 3, 89-109.

5.       Oh, P. B. (2004). "Gatekeeping." Journal of Corporation Law, 29, 735.

6.       Krishnan, K.P., Nair, C.K.G., Tiwari, P., Nagpal, P.K., Sahajwala, R. and Jayasimhan, S.N. (2008)."Report of the Committee on Comprehensive Regulation for Credit Rating Agencies." RBI.

7.       Papaikonomou, V. L. (2010). "Credit rating agencies and global financial crisis: Need for a paradigm shift in financial market regulation." Studies in Economics and Finance, 27(2), 161-174.

8.       Pinto, A. R. (2006). "Control and responsibility of credit rating agencies in the United States."The American Journal of Comparative Law, 54, 341-356.

9.       Reserve Bank of India. (2007). "Prudential Guidelines on Capital Adequacy and Market Discipline."

10.     Reserve Bank of India. (2010). "Indian Perspective on Banking Regulation."

11.     Reserve Bank of India. (2011). "Report on trend and progress of banking in India."

12.     Securities and Exchange Board of India. (1999)."Credit Rating Agencies Regulations."

13.     Securities and Exchange Commission. (2003). "Report on the role and function of credit rating agencies in the operation of the securities markets."

14.     United States. Financial Crisis Inquiry Commission. (2011). "Financial crisis inquiry report: final report of the national commission on the causes of the financial and economic crisis in the United States." Government Printing Office.

15.     Wolfson, J., and Crawford, C. (2010). "Lessons from the current financial crisis: should credit rating agencies be re-structured?." Journal of Business and Economics Research (JBER), 8(7).


 

 

 

Received on 20.02.2015               Modified on 15.04.2015

Accepted on 28.04.2015                © A&V Publication all right reserved

Asian J. Management; 6(2): April-June, 2015 page 110-116

DOI: 10.5958/2321-5763.2015.00016.5