The recent purchase of a minority stake in rating agency Care by one of its close competitors, Crisil, has raised a few eyebrows and throws open a larger debate on the apparent inadequacy of Indian regulations governing the rating industry. At the heart of the matter is the purchase of a 8.9 percent stake in Care by Crisil, the Indian subsidiary of US rating agency, Standard and Poor’s, on 29 June. Crisil bought this stake through a bulk deal from one of the existing stakeholders in Care i.e Canara Bank. To be sure, there is nothing illegal in Crisil’s stake purchase. But, Care officials who didn’t want to be named said the agency isn’t happy with Crisil’s ‘predatory’ approach and fears that a hostile takeover is on cards sooner or later.
“There was no discussions, no talks on this,” one of the officials spoke to Firstpost, said. Crisil has indicated that this is a financial investment but the explanation has not gone down well with Care. The agency fears that though ‘Crisil has stated officially that it is a financial investment with no strings attached, it would be naïve to conclude that this is the end of it as the amount involved is high at over Rs 400 crore. A creeping acquisition or a hostile takeover is very much on cards though the timing is a matter of conjecture,” the official quoted above said, adding Care might consider options including moving to the competition commission of India citing an unfair practice. An email sent to Crisil on Saturday, seeking its intent on the Care stake buy remained unanswered till the time of writing this story.
Crisil is probably not the only one looking at Care rating. According to a report in The Economic Times, Fitch, through its 100 percent subsidiary, India Ratings, too has approached some of the large shareholders of Care, including LIC and Franklin Templeton, which together hold around 15 percent stake in the rating agency.
To understand the picture let’s look at the rating industry in India. Presently, there are four big rating agencies that dominates the space—Crisil (subsidiary of S&P), Care (till recently fully owned by Indian institutions, mostly Life Insurance Corporation of India and state-run banks), Icra (the Indian unit of global rating agency, Moody’s) and India Ratings and Research (the Indian Unit of global rating agency Fitch). Of this, Care is the second largest rating agency in the country in terms of domestic rating income. At the end of March, 2017, Crisil has share of 31 percent, Care has 29 percent, Icra has 21 percent while India ratings has 11 per cent - totalling 92 percent. The rest is with smaller rating agencies.
Rating agencies acquiring other raters and controlling most of the market is not a good signal for any economy. Unlike banking sector, regulations pertaining to rating agencies aren’t clear as far as stake purchases by one rating agency in another is concerned. In the case of banks, which are regulated by Reserve Bank of India, stake purchases by one bank in another beyond 5 percent needs to ratified by the central bank. This is because banking institutions are crucial to the economy and their ownership and control needs to be closely monitored to prevent wrongdoings.
Going by the same principle, rating agencies too play a significant role in a country’s economy. They are supposed to play the part of an observer, who can issue advance warning signals in the economy well in advance and flag risks in industries to guide the investors and the government. It is another matter to what extent these agencies have succeeded in doing this job. But, the point here is that unless adequate competition is ensured through a right mix of ownership structure, the country is running the risk of fully falling in to the hands of a few monopolies, based out in other countries. Unless rating assessments come from various rating agencies operating in a competitive environment, it is difficult to get a closer look at the developments on the ground.
This is one reason in the past, Indian government has raised concerns about the approach of foreign raters while looking at India. It is a different question whether a revisit is called for in their methodologies, but sustaining competition is absolutely essential. Presently, there are no regulations that bar a rating agency in India from acquiring a significant stake in its competitor, although rating agencies come under the purview of market regulator Sebi. The government and regulators would do well looking at the lack of regulations governing rating agencies and set rules in the interest of the economy.
Published Date: Jul 10, 2017 12:08 PM | Updated Date: Jul 10, 2017 15:12 PM