Capital market regulator Securities and Exchange Board of India (Sebi) made it clear on Wednesday that companies should not interfere with the ratings methodologies and due diligence processes of rating agencies and that these methodologies were sacrosanct and need to be recorded in the prescribed manner.
The comment comes a day after the rating agencies met Sebi to discuss the issue of companies suing the agencies. It was not unusual for companies to slap legal notices on rating agencies for downgrading or assigning negative rating which, in turn, led to litigation that ate into the fees of the agencies.
?It is the bounden duty of rating agencies to inform investors about the change in the status of a company or an instrument that they have rated. So our aim will not only be to help the industry but also to ensure investors’ interest is being taken care of. In the context from the feedback we received yesterday from our discussions with the rating agencies, we will be soon taking up the issues,? said Sebi chairman UK Sinha on the sidelines of the third India Securitisation Summit 2012 organised by National Institute of Securities Markets.
Sinha stated that if the companies are raising money from the general public ? whether retail or institutions ? they should be willing to follow the rules of the game rather than being upset if the rating is downgraded.
Sinha said he expected such companies to act maturely and not rush in dragging rating agencies to court. ?I am also sure all the courts in the country are aware that if Sebi is regulating a particular industry or if a particular instrument is being looked at, they will let the due process prevail rather than come in the way,? added Sinha.
Concerning the Nifty flash trade incident on October 5, Sinha said Sebi was investigating the matter and examining the issue from all dimensions: ?Sebi is trying to look at what measures are required to further improve the system and how to prevent further recurrence of such incidences.?
Sinha said the market regulator was working on measures to mitigate algo-based risks. ?We have tried to provide certain checks and balances. We have also provided some disincentives for high trade-to-order ratio. For example, if a particular algorithm goes berserk and goes on pumping orders, the disablement will happen automatically but re-enablement will not happen automatically and will require human intervention to get things right and go ahead,? Sinha said.
Speaking specifically about the securitisation industry, Sinha said the industry needed to ask itself whether it had sound origination standards in place and whether the originator or the issuer should be made to have some stake in the instrument it was selling. ?We have to look at the issue of moral hazard and the general perception about securitisation as an investment class,? said Sinha.
Sinha said the financial markets worldwide had witnessed a distinct shift from ‘exuberance’ to ‘caution’ post 2007. For instance, until 2008 most market players focussed on increasing market volumes and assumed that healthy competition would take care of other issues. However, the global financial crisis had prompted a rethink and made them realise that risk mitigation, the need to avoid conflict of interest and build an element of trust in the capital market were also of paramount importance.
?While innovation is important we need to know whether it will serve a larger social social purpose or not. All market players, including financial firms and regulators, need to go back to the drawing board and bring about some fundamental changes that will help them appear to be trustworthy,? said Sinha. In this context, the need for active surveillance on the part of the regulator, keeping in mind the interest of the investors, had grown. ?Investors have to be assured that their interests are been taken care of,? said Sinha.
