Why does this matter to me?
11 years later & back home in India, I was reminded of all this when the SEBI turned its focus
on credit rating agency ICRA and their role in the IL&FS default, which effectively triggered the entire ongoing NBFC liquidity crisis.
Unlike many global regulators, SEBI not only rejected ICRA’s settlement claim, they decided to expand their probe & investigate the role of this rating agency (and others) in the IL&FS crisis.
The guard of credit rating agencies has again failed, but this time the regulator - who is supposed to guard these guards - stepped in with the objective of protecting interests of investors. SEBI believes the IL&FS default “had market-wide impact, caused losses to a large number of investors and affected the integrity of the market.”
But what if the regulator hadn’t done this, or accepted a settlement? Did you know that debt mutual funds invest in bonds based on the issued ratings? And interestingly, did you also know that the top 3 rating agencies in India are all subsidiaries of the top 3 global credit rating agencies?
- CRISIL is owned by Standard & Poor’s (S&P)
- ICRA is a subsidiary of Moody’s
- CARE is a part of Fitch Ratings
Hmm, these are the same agencies who maintain, even today, that their ratings are only indicative & cannot be relied upon - yet this is exactly what most market participants continue to do, often blindly.
If you’ve invested in debt mutual funds, chances are you are impacted by this. A lot of debt/hybrid mutual fund investors have suffered in 2019 due to the IL&FS defaults and the following DHFL crisis. One of the reasons for that is because these funds invested in bonds that were “highly rated” and risk-free.
The defaulted IL&FS bonds had the highest AAA rating from ICRA. Certain DHFL bonds also had AAA rating from ICRA & CARE. That’s putting them at par with not only the Indian Government issued bonds, but also the Treasury securities issued by the US Government!
The Latin phrase mentioned in the title literally means “Who will guard the guards themselves?” While we are lucky to have a pro-active SEBI, remember that you yourself are the ultimate line of defence. So if you someone tells you that these bonds are safe because they are highly rated, remember this story and accompany the given rating with your own analysis. Or just avoid the tempting additional return if you don’t understand how/why the investment is riskier than FDs.
Especially if you see a “secure” AAA rating.