The Securities and Exchange Board of India (Sebi) needs to be complimented for its recent move to standardise the rating symbols and definitions across all rating agencies in the country. The market regulator's circular issued on June 15, 2011 requires all credit rating agencies (CRAs) registered with it to use the standardised rating symbols and definitions as specified by it. The initiative deserves even more praise as Sebi is the first market regulator in the world to come up with this investor-friendly regulation. This stipulation makes for uniform meaning and interpretation of a particular rating, easier identification of symbols with the agencies and better comparability of ratings across rating agencies.
Non-uniformity
Currently, there are six CRAs registered with Sebi — Crisil, Icra, Care, Fitch, Smera and Brickworks. While the number of notches in the rating scale is the same across ratings agencies, the rating symbols and definitions vary across agencies. For example the symbols and definitions for an 'A' level rating across agencies (obtained from respective websites) are given below:
lCrisil — 'A' — Instruments rated 'A' are judged to offer an adequate degree of safety, with regard to timely payment of financial obligations. However, changes in circumstances can adversely affect such issues more than those in the higher rating categories.
lIcra — 'LA' — This is the adequate credit quality rating assigned by Icra. The rated instrument carries average credit risk.
lCare — 'Care A' — Instruments with this rating are considered to offer adequate safety for timely servicing of debt obligations. Such instruments carry low credit risk.
lFitch —'A(ind)'— 'A' national ratings denote a strong credit risk relative to other issuers or issues in the country. However, changes in circumstances may affect the capacity for timely repayment of these financial commitments to a greater degree than for financial commitments denoted by a higher rated category.
lBrickworks — 'BWR A' — Instruments with 'A' rating are considered to offer adequate credit quality.
lSmera — Website says 'page under construction'
As can be seen, all rating symbols do not carry the name of the agency making it difficult to identify which agency has assigned a rating. Market participants may know the agency by experience, but this is sub-optimal. The interpretation of the rating varies — some of them have 'timeliness' and others do not, some speak of financial obligations and others do not, some speak of 'credit quality' or 'credit risk' while others do not. Obviously this is not a desirable situation.
Sebi standardisation
Sebi has stipulated the following symbol and definition for the rating level discussed above ('A' rating).
l'A' (prefixed by agency name) — Instruments with this rating are considered to have adequate degree of safety regarding timely servicing of financial obligations. Such instruments carry low credit risk.
From the symbol itself, the rating agency which has assigned a particular rating can be instantly identified, and it is clear that the rating addresses 'timely' servicing of financial obligations. Thus, it removes ambiguity and brings about uniformity and thus clarity and comparability. Similarly, Sebi has also standardised the rating symbology and rating definitions for short-term (original maturity of less than one year) and securitisation instruments. The regulator has given four months time for full implementation of the new system by the rating agencies.
International scenario
Even though, the credit rating concept is more than 100 years old in the US, there is no such standardisation there. For example, the symbols and definitions for a 'BBB -' level rating across international agencies are given below:
lS&P — 'BBB -' — Considered lowest investment grade by market participants.
lMoody's — 'Baa3' — Obligations rated 'Baa' are subject to moderate credit risk. They are considered medium grade and as such may possess certain speculative characteristics.
lFitch — 'BBB' — It denotes good credit quality. 'BBB' ratings indicate that expectations of credit risk are currently low. The capacity for payment of financial commitments is considered adequate but adverse business or economic conditions are likely to impair this capacity.
The symbols as well as the definitions are widely varying, putting the investor community to inconvenience. In this background, the fact that Sebi has been able to push through such a reform is indeed commendable.
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