Ratings: Manufacturing cos need them

Suresh Krishnamurthy

THE MID-TERM review of the monetary and credit policy has mandated credit ratings for the term-deposits of development financial institutions.

Apart from the fact that most development financial institutions already have such ratings, the credit rating's need is felt more in the case of manufacturing companies. There are a host of unlisted manufacturing companies that tap the retail fixed deposit market. A large proportion of these are not rated. Information about these companies, available in the public domain, is mostly dated.

Even in the case of listed manufacturing companies, the fixed deposit application form contains dated information and in an era of rapid changes in the industrial scenario this is clearly not enough. Not that investors make their investment decisions on the basis of the financial performance of companies.

In fact, there is evidence to believe that investors are swayed more by reputations, perceptions and coupon rates rather than by financial performance. This, however, only strengthens the case for more information for investors.

A rating which puts the credibility of the rating agency in the line would go a long way in providing additional information to a company. Indeed, in the past, ratings have proved to be quite misleading. However, things have changed for the better and there is reason to believe that over time this would improve further.

Also, companies that raise money through the fixed deposit route should be equated to companies that raise money through on-tap bonds. The latter are required to file an offer document.

As such, companies that raise retail fixed deposit money should be made to file a detailed offer document which is updated every quarter. In fact, over time, there has to be a move towards the standardisation of the fixed deposit market such that the tradability of the instrument increases.

The segmentation in the market should in the end be restricted to whether an issue is a private or public offer. The segmentation into fixed deposits and bonds, non-standardisation of fixed deposits and extreme lack of liquidity in the secondary market for bonds only acts to the detriment of investors. In contrast, issuers are capitalising on these inefficiencies to raise money at fine rates and, unless pushed by the regulator, much movement ahead on these issues is quite unlikely.