High time to gear up credit rating activities

---

Shamsul Huq Zahid
The ministry of finance has decided to ask the major business firms and companies, both listed and unlisted, to do their credit ratings, a job that the Securities and Exchange Commission (SEC) should have got done, at least partially, by long ago.
Credit rating of all business entities and companies is a globally accepted practice since it provides information about the financial strength, profitability and compliance issues. In many developed countries, even individuals are required to get their credit ratings while seeking car or home loans.
The SEC in July 1996 made rules, titled, Credit Rating Companies Rules, 1996. But the Rules have many gaps and holes. Only recently, the Commission has re-drafted the rules and published the same through a gazette notification.
Under the existing rules, credit rating is not mandatory for any company willing to go public. Section 3 of the rating rules, which was inserted in April 2006, rating has been made mandatory for public issues (including issuance of right shares) that offer shares at premium. However, the Commission enjoys the right to exempt such requirement in the 'interest of the capital market'.
Submission of credit rating reports to the Commission has to be made mandatory for any company willing to go public. It should also be mandatory for all listed issues to publish their individual credit rating annually. This would help the investors make right investment choice.
A few listed companies, having strong fundamentals, get voluntarily their individual ratings done by the credit rating agencies. But most companies listed on the bourses and the private firms do not bother about ratings since they are under no obligation to do that. Some companies, both listed and unlisted, seek credit rating only when banks ask them to do so.
The finance ministry has now appreciated the need to know the ratings of big corporate houses and other companies to analyse their prospects and whether they comply with tax and auditing requirements.
The ministry has, reportedly, taken the move to examine the financial accountability of private companies, increase their efficiency and promote corporate culture in the country.
The government decision to make ratings by investors and companies, listed or otherwise, mandatory is the right one. Getting the decision implemented might prove easy in the case of listed companies. But it could prove difficult as far as private firms and companies are concerned.
There are about 81,000 private companies and firms registered with the Registrar of Joint Stock Companies and Firms (RJSC&F). The actual number of companies now in operation is difficult to gather since many such registered entities do not submit audited accounts and other documents to the RJSC&F as required under law.
It would not be possible for the credit rating agencies to conduct rating of such a large number of companies and firms. However, such rating would not be that difficult if the authorities concerned is interested to know about the financial standing and compliance status of a selected number of big corporate and business houses.
However, the government would have to make necessary legal provisions first to ask the companies to go for their credit ratings. But mandatory provision for credit rating could prove troublesome in the case of unlisted private companies.
Credit rating involves some expenditure on the part of the companies. The companies would not mind such expenditure while seeking loans or floating bonds. But they might not be willing to spend money just to satisfy the need for information on the part of the government.
However, two-pronged action might help the government reach its goals. On the one hand, it should ask the SEC to make regular credit rating mandatory for all listed issues and, on the other, the central bank should ask all banks to get credit ratings of large clients barring the individual ones.
The greater demand for credit rating would, obviously, create pressure on the credit rating agencies the number of which is only two at the moment. The SEC, in the meanwhile, should look into the capacity and the level of expertise of the rating agencies and, if necessary, ask the agencies to beef up their capacity as required under rules concerned.
The rules should ensure that every credit rating agency, during the lifetime of listed securities rated by it, continuously monitor the rating of such securities. It should also be made mandatory for every credit rating agency to disseminate information regarding newly assigned ratings, and changes in earlier rating promptly through press releases and websites. In the case of listed securities, such information should be also provided simultaneously to the concerned bourses.
The responsibility for the publication of rating results in the case of listed issued should not be left to the companies concerned. Rather, rating agencies should make public the details, including analysis of various factors justifying a favourable assessment as well as factors constituting investment risks. The SEC, being the lawful guardian, will need to keep its watchful eyes on the operations of the rating agencies.