06, Apr 2011
Participants at an interation programme on modalities for credit rating agencies, which the capital market regulator is planning to allow in the country, suggested to introduce provisions to penalise deliberate manipulation of ratings by crediy rating agencies. "The rating agencies' credibility is of utmost importance and the regulation will make sure that agencies' interests do not reflect in their ratings," said Dr Shurbir Poudel, chairman of Securities Board of Nepal (Sebon) at the programme.
"The provision for penalty can be subject to changes thus it will be mentioned in the directives not in the proposed Act," he said, adding that the operation of these agencies will improve corporate governance in the listed companies. Presence of these agencies will also ensure that companies are not able to raise money from public if they are not credible enough. "We can hope that establishment of credit rating agencies will make the companies more responsible and improve their governance," Poudel added. The proposed regulation will make credit rating mandatory for the companies that want to tap the capital market for funds.
Any company that plans to issue corporate debentures or preferential shares needs to get itself rated by a credit rating agency, according to the draft prepared by the capital market regulator. Also, it is mandatory for the company that is issuing bonus and right shares exceeding Rs 100 million in value to get themselves rated, the draft says. The draft also has provisions for any individual borrower that needs to borrow over Rs 100 million from banks and financial institutions to get their credit ratings done. The regulation will also open up partnerships with foreign credit rating agencies. A foreign credit rating agency can own 25 per cent to 75 per cent equity in the credit rating agency. "As credit rating agency is a novel concept, it is better if the agencies can be established in partnership with foreign credit rating agency so that agencies in Nepal can take benefit of their expertise," he informed.
"There are companies that score well in fit and proper test despite being troubled thus credit rating agencies need to look beyond such covers," said Nepal Rastra Bank (NRB) director Bashudev Adhikari. He also pointed out that the minimum limit set for mandatory credit rating should be brought down to include rating of IPOs of regional development banks and finance companies. The participants also emphasised on the need of clarifying the indicators on which credit rating agencies will rate the companies in order to remove any distortions or ambiguities in the future and their credibility can be intact.
"The credit rating fee should be subject to competition. Therefore, there is no need to mention in the proposed Act. Moreover, in case of large IPOs, even a small rate as fee is really a big amount for the exercise, said Dipak Raj Kafle, former chairman of Sebon. Based on the financial indicators of a company or an individual, the rating agencies rate their credit worthiness and financial soundness. The ratings help layman investors to decide for themselves whether or not to be involved with that particular company, along with helping the banks and financial institutions in making decision regarding lending to the company.