Prajna Capital - An Investment Guide

THIS could be the first instance of policy makers in India learning lessons from the Wall Street collapse. The finance ministry and regulators are looking at the possibility of banning credit rating agencies (CRAs) from providing allied services to clients whose debt instruments they rate. The government feels that when ancillary services such as consultancy and financial advisory are offered by the rating agency to the client which it rates, the former may be constrained to please the latter — a favour that would help in developing the market for their allied services. This would lead to the rating agency compromising on rating and make investors misjudge the worth of the securities they buy. This is in addition to the larger conflict of interest involved in accepting fee from the same entity whose instruments they rate. The proposed regulatory framework for credit rating agencies would explicitly address the conflict of interests grappling these entities, which is highlighted b...