How companies continue to cherry-pick credit ratings

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Editor's note: Despite several regulatory reforms over the last few years, the spectre of rating shopping continues to loom over India. Since the collapse of the Infrastructure Leasing and Financial Services group in 2018-19, regulators have introduced several new rules to improve practices within the credit rating industry. It was revealed that credit rating agencies were influenced by IL&FS executives to provide preferable ratings. That was the most egregious episode of how rating agencies were corrupted by their powerful clients. The Securities and Exchange Board of India introduced several new rules on rating agencies with regard to their fee structure, ability to monitor companies and decision-making powers. SEBI has also penalized credit rating agencies over their lapses and governance issues.  While these moves have brought more transparency and fixed many gaps in the rating process, they have primarily focused on the way credit rating agencies operate. They have not, however, addressed the ability of companies to pick ratings that are more to their liking.  India follows the “issuer pay” model where companies—bond issuers and bank borrowers—pay for credit ratings. As a result, …