Internal Audits for Credit Rating Agencies

The role of credit rating agencies has been the subject-matter of discussion ever since the sub-prime crisis erupted, and the industry has been subjected increased scrutiny and regulation. However, much of that has not affected India, and there has been no serious overhaul of the system regulating rating agencies in India. SEBI, in its recent annual report observed as follows (on page 18):

The poor performance of these agencies, especially in the context of the East Asian financial crises and the sudden collapse of Enron, has brought renewed criticism of their methods, their regulatory status and their role in financial markets. Following recent sub-prime crisis, there is a world wide demand for tightening regulations for CRAs. Though the recent crisis has not impacted India as much as it did others, there is a need to learn from their experiences.

One measure recently introduced by SEBI though is that credit rating agencies will be required to conduct an internal audit on a half-yearly basis that covers all aspects of operations and procedures. This appears to be a form of self-regulation in order to enhance standards. Some news reports on this development are available here and here.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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