How a domestic rating agency wants to take on the big guns

The board of Care Ratings last month approved setting up CareEdge Global IFSC Ltd for the purpose, managing director and group chief executive of CareEdge—a group level brand identity—Mehul Pandya said in an interview. The company has applied to markets regulator Securities and Exchange Board of India (Sebi) for a no-objection certificate, and would later approach Gift City regulator International Financial Services Centres Authority (IFSCA).

If the proposal goes through, Care Ratings will be the first Indian rating agency to rate sovereign debt, a space dominated by global companies such as S&P, Moody’s and Fitch. The ratings on sovereigns show the capability of a government to repay debt.

“This shall be a long-term project for us,” said Pandya, who heads the three-decade-old company. “Current regulations do not allow us (Care Ratings) to rate any foreign currency denominated debt,” said Pandya, adding the Gift City subsidiary will allow it to rate foreign debt.

Pandya said the agency is fine-tuning the rating methodology, and is ready to launch once regulatory approvals are in.

International rating agencies have faced repeated criticism from Indian government officials, who have accused them of being biased against India. In August last year, Moody’s Investors Service affirmed India’s long-term local and foreign-currency issuer ratings at Baa3, and retained the stable outlook, while flagging risks emanating from “high debt burden”.

In December, a collection of essays by the office of India’s chief economic advisor also raised this issue. “The enormous degree of opaqueness in the methodology makes it challenging to quantify the impact of qualitative factors on credit ratings,” said the first essay.

Emails sent to Moody’s and Fitch Ratings remained unanswered, while a spokesperson for S&P declined to comment on the criticism of them being biased.

For an economy of India’s size with its growing global heft, it was imperative that some domestic institution provides a credible alternative to the global agencies, Pandya said.

“Our long-term investors also suggested that we start thinking in this direction and we started it around seven-eight months ago. India’s sovereign rating is only one element of this, and it cannot be an objective on our part to improve India’s sovereign credit, which has to be a merit-based outcome,” said Pandya.

Pandya also said there needs to be thoughtful debates surrounding the approach of the global rating agencies towards the various economies that they have been assessing so far. Saying that he does not want to criticize any rating agency, he said that during its preparation for the sovereign ratings programme, Care Ratings found lacunae in the current methodologies.

“In the case of sovereign ratings, there has been heavy focus by global rating agencies on the per capita gross domestic product (GDP). We say that it is an important element but at the same time, repayment ability also emanates from the sheer size of the GDP and the rate at which that economy is growing,” said Pandya.

Hence, Care has decided to use per-capita GDP as a metric, but in purchasing power parity (PPP) terms. As per Investopedia, a website demystifying jargon, PPP is the exchange rate at which one nation’s currency would be converted into another to purchase the same and same amounts of a large group of products.

“We also believe that an economy of our size, capex (capital expenditure) is indeed required and have brought in an element of the gross fixed capital formation into the assessment,” said Pandya.