Rating is a mechanism of ascertaining the credit worthiness of a company, stock or a nation in global financial world. Their vital role is brought out by the fact that they help in making informed decision on investment.
• WHY DO RATING AGENCIES FAIL TO INSPIRE CONFIDENCE:
○ Scams, corruptions and scandals like the recent sex scandal in Oxfam rating agency.
○ Conflict of interest as rating agency try to expand the shareholders while at the same time rating the share markets.
○ Much of the revenue of rating agencies comes from non-rating activities like advising the corporates through which they influence the market.
○ There is growing lack of confidence on rating procedure adopted by the companies. Example in 2008 crisis Moody gave AAA to stocks which plunged.
○ Lack of uniformity and discrepancy in data between various rating agencies like Moody , Crisil, Goldman Schacht etc.
• SHOULD RATING AGENCY BE REGULATED:
○ YES BECAUSE , they can destabilize the market; shift the flow of investment from one country to another; cause currency fluctuation; shutdown and give rise to unemployment, skewed investment in non-viable sectors; they also influence fiscal and monetary policies of an economy.
○ NO BECAUSE , regulation will impact the independence of the rating agency and will hamper the unbiasedness nature of their working.
• STEPS TO BE TAKEN:
○ Market regulators like SEBI can put a curb on their non-rating activities.
○ Establishing a framework to supervise the ratings provided by the agencies
○ Periodic change in rating agencies employed by corporates .
○ Devising of standard fee charged by the agencies in order to avoid conflict of interest.
