Parliament Panel Seeks Review Of Credit Rating Rules Following IL&FS Debacle

A parliamentary panel demanded that the government probe the IL&FS group's largest stakeholder, the Life Insurance Corporation of India, as well as agencies that gave high ratings to entities of the insolvent infrastructure group. The panel also called for an overhaul of the rules governing credit ratings in India, suggesting, among other things, a mandatory rotation of rating agencies every three years.

“The governance failures and indecision/indiscretion on the part of the IL&FS Board should also be thoroughly probed,” the Parliamentary Standing Committee on Finance said in a report titled “Strengthening the Credit Rating Framework in the country” that was tabled in Parliament today.

The parliamentary panel's recommendation comes just days after former Reserve Bank of India YV Reddy questioned the risk assessment capabilities of LIC and State Bank of India, given that they were two of the largest shareholders of IL&FS.

The IL&FS group has been defaulting on loan and bond repayments since August last year, sparking risk-aversion in the financial markets, particularly towards non-bank lenders.

Review Rating Processes

The parliamentary panel also sought a wider review of the credit rating processes in India.

The panel suggested that the Securities and Exchange Board of India should explore “mandatory rotation” of rating agencies to avoid long association between companies issuing securities and rating agencies. One suggestion received by the panel was to rotate rating agencies every three years as debt instruments are mostly of long tenures, according to the report.

It also suggested that more than one rating should be compulsory if the debt instrument or bank credit is worth over Rs 100 crore. “This will help the investors to access different viewpoints for an informed decision,” the panel headed by senior Congress leader M Veerappa Moily said in the report.

Another suggestion was to widen the eligibility criterion for rating agencies. All SEBI-registered rating agencies could be made eligible to participate in the bidding process of large debt issuances to provide for a level-playing field and healthy competition. Currently, there is an eligibility criterion for issuances which includes revenue earned by the agency in the past, assignments completed, among others.

The panel was constituted after questions were raised about the inability of rating agencies to alert investors to the risks developing in the IL&FS group.

Other Recommendations:

• SEBI and Reserve Bank of India should review their regulations “comprehensively” and should be proactive in ensuring strict enforcement of regulations.
• Department of Economic Affairs and Department of Financial Services should seek a report from regulators on action taken against agencies that gave “stable” ratings to IL&FS before the default.
• Fresh evaluation of credit rating framework should be undertaken to restore public confidence in rating agencies.
• Exploring models like investors or regulator paying to rate issuances of a company instead of an “issuer pays model”.
• Disclosures made by the rating agencies should include determinants such as extent of promoter support, linkage with subsidiaries and liquidity position for meeting near-term payment obligations, among others.