In a historical first, the Securities and Exchange Commission of Pakistan (SECP) has publicly reprimanded the two most well known credit rating companies following onsite inspections of their premises.
In separate orders passed against each of the two credit rating companies, the SECP warned Pakistan Credit Rating Agency (PACRA) and JCR VIS Credit Rating Company that any non-compliance of the regulatory framework in the future would render them liable to monetary penalties.
The SECP did not impose any monetary penalties considering the willingness shown by the companies to comply with the regulatory framework.
These are the only two Pakistani companies that issue credit ratings that assess a debtor’s chances of default and its ability to pay interest payments on time.
The onsite inspections were followed by separate show-cause notices to the two companies on October 16, 2015. The contents of the show-cause notices were similar by and large. Both companies responded to the show-cause notices in writing and their representatives attended the subsequent hearings in person.
The regulator’s inspection found that the companies were non-compliant with a substantial part of the ‘code of conduct’ for Credit Rating Companies/Agencies. The code requires that the credit rating criteria should be well defined so that analysts can interpret the information appropriately – a clause that the SECP inspection found both companies to be violating prima facie.
Similarly, the code requires that the companies must keep the record of discussions with the issuer of a security, its management, auditors and creditors that have a bearing on the credit rating to ensure the quality of the rating process – something the SECP inspection found missing.
Other objections raised by the SECP included a lack of monitoring of outstanding ratings, absence of compliance officers, and the appointment of unqualified analysts to carry out rating assignments.
In the case of JCR VIS, the SECP Director Nasir Askar noted that the majority of the rating analysts possessed an average experience of a year and a half only. The company also ‘admitted the fact that their analysts had little relevant expertise.’
In addition, the SECP also highlighted the issue of independence and conflict of interest in the case of PACRA. The credit rating company has set up a subsidiary by the name of ‘PACRA Analytics’ that serves the same clients that its parent company is serving. However, the credit rating company asserted in its response that the practice was in line with international precedents.
“I am of the view that the independence of the rating agency and the integrity of the rating process can be compromised by potential conflicts of interest,” Askar wrote in the final order, adding that the practice may affect the company’s transparency, fairness and independence.
A veteran of the capital markets said credit rating companies in Pakistan did not enjoy the credibility and significance their counterparts in the developed countries did.
“Their poor performance is reflective of their lack of institutional capacity,” he said while requesting anonymity.
He noted that debt-issuing parties in Pakistan seek credit ratings mainly because they are required to do so under the law. “These ratings serve little purpose beyond that,” he said.
