Mumbai: Homegrown Care Ratings Ltd plans to start its sovereign debt rating service with countries in Asia and Africa, followed by Europe in the long term, a top executive said. The agency, which is creating a subsidiary in GIFT City for the purpose, will start with countries where it already has some presence, such as Nepal, Mauritius and South Africa.
Care Ratings’ board last month approved setting up CareEdge Global IFSC Ltd for the purpose, CareEdge managing director and group head – group-level brand identity – Mehul Pandya said in an interview. The company has applied to market regulator Securities and Exchange Board of India (Sebi) for a no-objection certificate, and would later contact Gift City regulator International Financial Services Centers Authority (IFSCA).
If the proposal goes through, Care Ratings will be the first Indian rating agency to rate sovereign debt, a space dominated by global companies like S&P, Moody’s and Fitch. The sovereign ratings show a government’s ability to repay debt.
“This will be a long-term project for us,” said Pandya, who heads the three-decade-old company. “The current regulations do not allow us (Care Ratings) to rate any foreign currency debt,” Pandya said, adding. the Gift City subsidiary will allow it to assess foreign debt.
Pandya said the agency is fine-tuning the assessment methodology, and is ready to launch once regulatory approvals are in place.
International rating agencies have faced repeated criticism from Indian government officials, who have accused them of being biased against India. In August last year, Moody’s Investors Service affirmed India’s long-term local and foreign currency ratings at Baa3, and maintained the stable outlook, while flagging risks emanating from a “high debt burden”.
In December, a collection of essays by the office of India’s chief economic adviser also raised this issue. “The enormous degree of opacity in the methodology makes it challenging to quantify the impact of qualitative factors on credit ratings,” said the first essay.
Emails sent to Moody’s and Fitch Ratings went unanswered, while a spokesperson for S&P declined to comment on criticism that they are biased.
For an economy the size of India with its growing global reach, it was imperative that some domestic institution provide a credible alternative to the global agencies, Pandya said.
“Our long-term investors also suggested that we start thinking in this direction and we started it about seven-eight months ago. India’s sovereign rating is only one element of this, and it cannot be a goal from our side to improve the sovereign credit from India, which has to be a merit-based result,” Pandya said.
Pandya also said that there needs to be thoughtful debates around the approach of the global rating agencies to the various economies they have rated so far. While saying that he did not want to criticize any rating agency, he said that during its preparation for the sovereign ratings program, Care Ratings found gaps in the current methodologies.
“In the case of sovereign ratings, there has been a heavy focus by global rating agencies on the per capita gross domestic product (GDP). We say that it is an important element, but at the same time, repayment capacity also comes out of the large size of the GDP and the rate at which that economy is growing,” Pandya said.
Therefore, Care decided to use per capita GDP as a metric, but in purchasing power parity (PPP) terms. According to Investopedia, a website demystifying jargon, PPP is the rate at which one nation’s currency would be converted into another to buy the same and equal quantities of a large group of products.
“We also believe that in an economy of our size, capex (capital expenditure) is indeed required and brought an element of the gross fixed capital formation into the valuation,” said Pandya.