In a first, two rating companies form self-regulatory unit

CARE Ratings and Acuite Ratings & Research have set up a unit to evolve a common code of conduct and practices to prevent a recurrence of defaults such as those by IL&FS and DHFL.

This is the first time that such a self-regulatory body has been formed for rating agencies, like the ones for the mutual fund industry, bond and currency dealers.

India Ratings and ICRA, backed by global rating companies, are considering joining the proposed entity, market sources said. Both the rating companies will likely discuss the matter with their overseas parents, Fitch and Moody’s, respectively, before taking a final decision.

India Ratings did not respond to ET’s query till press time Monday.

“It is a welcome development. We will carefully evaluate in due course any invitation for joining the body and will take a call on merit,” ICRA said.

The legal entity – known as Association of Indian Rating Agencies (AIRA) – has been incorporated as a not-for-profit company and will work closely with regulators like the Reserve Bank of India (RBI) and the Securities Exchange Board of India (SEBI).

“Ratings have become central to informed decision-making in the financial world,” said Ajay Mahajan, MD & CEO, CARE Ratings. “Through this association, we aim to engage extensively and constructively with all stakeholders for the orderly development of the debt market with the increased usage of credit rating.”

While Acuite and CARE are its founding members, they have reportedly invited others to be part of the association.

AIRA has written to the other three local rating companies, including Crisil, the local arm of S&P; Brickwork and Infometrics Valuation to join as shareholders-cum-members.

“The association will work with all stakeholders to enhance availability and flow of information needed for ratings,” said Sankar Chakraborti, Group CEO & Executive Director, Acuite Ratings & Research. “It will create awareness of best practices adopted by the industry. AIRA will play the role of a bridge between all stakeholders.”

The trade association is expected to set benchmarks for reviewing routine assessments amid growing criticism of huge rating variations on the same borrower, and repeated failures by agencies to forewarn about potential defaults and insolvencies.

Members have also reached out to Sebi and RBI for suggestions on the same.

Stakeholders of rating industries, including fund houses, believe there are crucial gaps in awareness-building and standardisation that can be effectively addressed by an industry body.

For example, “non-cooperation of the issuer” is a problem faced by many credit rating companies, which struggle to obtain information from borrowers or bond sellers. In the absence of adequate information, rating grades tend to be misleading.

Infrastructure financier IL&FS had defaulted on a series of loans/bonds beginning August 2018, triggering a collapse in India’s non-bank lending space. However, investors were not warned about default risks. Since then, credit rating companies have begun streamlining their processes.