Watching the Gatekeeper: Credit Rating Agencies and their Regulations

A gatekeeper serves to play a role akin to that of a journalist, which involves assembling information and navigating through communication channels in order to make decisions regarding what shall pass through. In a similar way, a credit rating agency acts as a gatekeeper which is responsible for keeping investors updated and informed about the issues relevant to the securities that they might invest in. CRAs are a critical cog in the wheel of the marketability of securities which also be traded on secondary markets. The ratings are granted after a comprehensive analysis of every relevant objective and subjective factor revolving around the business and the financial management of the company, bringing out the weaknesses or strengths of the latter. In India, CRAs function under various regulations of SEBI and RBI. The biggest concern stemming from the way in which the CRAs function (issuer-pays-model) is that of conflict of interest. This is because CRAs are being paid by those very entities that they undertake to evaluate. This has often resulted in major crisis like situations in the market. The article highlights further concerns that stem from the former. It concludes by providing recommendations that could be utilized for curtailing the impact of the abovementioned deficiencies.