“It is important for the members of the public to know that the relationship of the CRA is at arm’s length with that of the rated entity, in letter and spirit. Hence, shareholding ownership patterns of all CRAs need to be made public,” says National Institute of Securities Markets (NISM).

NISM is a public trust, set up by Sebi. It assessed the rating agencies on the request of a high-level committee, founded by financial sector regulators.

It also said rating agencies should completely separate their advisory and rating services. “Some other agencies continue to offer services other than ratings. It is to be ensured that the registered CRA, as a corporate entity, must not engage in any services other than ratings,” NISM said. NISM says there is a need for a framework to be agreed upon by all CRAs and regulators to have a standardised and operational definition of default in case of delay in making payment.

“There is no standard definition of default. Practices vary from CRA to CRA. Some consider even a single day’s delay as a default. Others consider the grace period in case the debt covenants provide for it,”it says.

It further says that rating outlooks, both positive and negative, and ‘rating watch’ have a limited life and must be replaced by a firm rating within a month.
In 2008, ratings of 128 firms were downgraded while that of 37 companies upgraded by these CRAs.