Do you invest on the basis of AAA rating?
In this issue:
» India is one of the biggest arms buyer
» US CEOs are pessimistic on the economy
» Should you buy commodities now?
» Has the government committed a Satyam-esque scam?
» ...and more!
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Credit rating agencies were the most notorious villains of the credit crisis. The reason why they are so deadly is because they helped stoke one of the biggest financial crises in the history of the world. Moreover they have managed to go scot free. Not only that, they are still committing the same mistakes and no one is doing anything about it, yet.
A recent report by the Securities and Exchange Commission (SEC) finds that these rating agencies are not doing enough to protect their integrity. There are numerous examples of inadequate controls that the SEC found in its first annual review of these agencies. Inadequate policies to prevent conflict of interest, failure to adhere to their own formulas while assigning ratings, and inadequate disclosures are just some of the them. Ratings were also sometimes leaked before the actual reports were published.
Well, even Indian rating agencies are following the footsteps of their not so illustrious parents. In a recent management meeting with a small cap company, we found that a top Indian rating agency charged the entity Rs 5 lakhs for an 'independent' rating view on the stock. What's worse is that a higher payment fee was negotiated when it came to renew the report, with a better rating. When ratings can be bought, and formulas cannot be trusted, we believe that these firms need a complete regulatory overhaul. Only then can investors start trusting these ratings once again.
Do the ratings given by rating agencies govern your investment decision on stocks? Do you find them reliable? Share your comments or share your views on our Facebook page
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Chart of the day | |
*includes educational cess of 3%
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This has been one of the prime reasons that the government's misguided stimulus packages did not really work as they banked on Americans consuming more at a time when many were losing jobs. That said, there are some CEOs who are still a bit optimistic than the others although they admit that growth if any has been rather slow. Further, downgrading of US debt and higher oil prices have only added to the uncertainty surrounding the US economy. All in all, it looks like tough times are here to stay for the US economy for some time to come.
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Accounting for government liabilities on account of subsidies appear as off balance sheet items. This means that the liabilities are not supported by assets in the government's balance sheet. While Mr Raju's attempts were to meet shareholders' expectation of quarterly earnings growth guidance, Finance Ministers shoulder the responsibility of pleasing the vote bank. In either case, wishful thinking takes precedence over rationality. However we believe that the similarity ends here. Satyam's books were open for scrutiny only to its auditors. However, the governments accounting policies are available for public scrutiny. The fact that government's liabilities on account of subsidies far exceed tax collections is not news to anyone. Nor is the accounting of off balance sheet items illegal as per law. But be it government or financial institutions that build up huge off balance sheet exposure, each have to eventually repent for the excesses.
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Indian stock markets were very volatile through this week on the back of disturbing global cues. The BSE Sensex ended the week higher by 1.8%. Among the other world markets, there was mixed response. China (down by 3.2% and Brazil (down by 1.7%) were the biggest sufferers. Singapore and Hong Kong were also on the losing side. However, France and Germany were both up by 6% each.
04:50 |
Weekend investing mantra |
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9 Responses to "Do you invest on the basis of AAA rating?"
mahesh
Oct 3, 2011What else is a credible alternative to retail investor while investing in fixed income instruments who is risk averse and is in top tax bracket?
R.Radhakrishnan
Oct 3, 2011Yes, the rating agencies in US did not cover themselves with glory in the recent financial crisis. Riveting to India, it is imperative that these agencies do not commit the same errors. Your reporting of an agency seemingly trading their rating is disturbing. In our land of scams, do we need another? I hope this is taken note of and remedial steps are taken before it goes out of hand.
Yes, I do give prime importance to credit rating before investing.
Nitin
Oct 2, 2011very true1 rather than targeting small fry like IFAs SEBI and RBI would do much better to regulate these so called credit rating agencies.
anupam garg
Oct 1, 2011though it continues to amaze me how can these rating agencies continue, despite being responsible for such a chaos...may b coz they hav taken inspiration from the fact tht no punishment or not even severe criticism was done
many stakeholders hav vested interests associated with rating agencies...the word 'trust' doesn't even come under consideration
shome suvra
Oct 1, 2011In India credit rating is done on the parameters of industry risk, market position, management evaluation, accounting quality, financial stability and operating efficiency of a company. These information s are collected from plant visit, records and management meetings, industry experts, business operating heads, bankers, auditors, dealers, distributors, consumers, competitors and suppliers. Every system has its loopholes if not implemented properly.
N.S.Sivaram
Oct 1, 2011Sir,
I definitely follow ratings.Without any CAPEX so many firms looted share holders money by inflating share prices and after making money brought down the prices resulting bankruptcy of poor investors.The investment advisers also made huge money.That is why this huge cry
Jaydeep Shah
Oct 1, 2011The rates of taxation has to be seen in context of how much of the taxes direct & indirect is ploughed back in the economy by the govt, and how much goes into paying interest on the debt. A large chunk of the taxes does not find its way to the intended use, and gets leaked. Also the figure 30.9 % is misleading as India has one of the highest rates of indirect taxes, such as Excise Duty, Customs duty, Vat and Central sales tax. have also to be seen. We do not have a vatable system for the indirect taxes so far.
Nikhil Sutradhar
Nov 9, 2011Pl Supply AAA rating list of Indian Company.