Credit rating agency in pipeline

KATHMANDU: The capital market will have first credit rating agency soon, as India’s leading credit rating agency Icra has already started the procedure for setting up a rating agency here.

“Icra has applied for a ‘No Objection Letter’ after submitting the required documents,” said director of Securities Board of Nepal (Sebon) — the capital market regulator — Niraj Giri.

A foreign credit rating agency has to obtain ‘No Objection Letter’ from the capital market regulator to register the company in Nepal.

“The regulation requires Nepali credit rating agency to have a minimum of 25 per cent stake of foreign credit rating agency so that Nepal Investment Bank Ltd (NIBL) is planning to start the agency in association with Icra Ltd,” he added.

Moody’s Investor Service hold the majority stake in Icra.

“We are informed that they have already completed preparation of basic requirements,” Giri said, adding that the credit rating agency can be expected to come into operation soon.

According to the recently endorsed Credit Rating Agency Regulation, the companies planning to issue ordinary shares, bonds, debentures, preference shares exceeding Rs 30 million in value have to get themselves rated by a rating agency. The rating agencies also have to continue rating once rated companies for next two consecutive years as well.

The rating agency can charge the companies rating fee ranging between Rs 150,000 and 0.10 per cent of the total offering on the first year and follow up fee maximum of Rs 50,000 or 0.01 per cent of the offering.

The regulation also stated that the rating agency has to start the functioning within two years after obtaining the licence.

The credit rating agencies rate the credit worthiness and financial soundness of an entity — individuals, company or country based on their financial indicators. They assign ratings on bonds and other forms of debt instruments so investors can judge how likely an issuer — governments and corporations — could pay the debt back.

They are also supposed to be a simple yet effective indicator aiding the ordinary investors influencing their decision regarding the purchase of the securities.

However, the regulator is also conscious that the investors need to be educated regarding the functioning of the rating agencies along with clarifying the meaning of ratings. “The general public has to be educated that the investor should not take decisions solely based on the ratings issued by the rating agencies which might pose as a challenge,” expressed Giri.

The recent downgrade of United State’s credit rating by Standard & Poor has created ripples throughout the global stock and commodity markets.

The rating agencies were also sharply criticised after the 2008 financial crisis. They were accused of contributing to the crisis because they didn’’t warn about the dangers of sub-prime mortgages as investors lost billions of dollars when the mortgages went bad.

Likewise, the rating agencies had even failed to detect the problems the companies such as Lehmann Brothers Holdings and Enron on time. Enron’s rating even remained at investment grade four days before the company went bankrupt.

Proportionate Share Allotment System

KATHMANDU: Securities Board of Nepal (Sebon) has officially issued Share Allotment Directives 2068 to implement Proportionate Securities Allotment System. According to the new guidelines, shares will be distributed proportionately to all the applicants of Initial Public Offering (IPO) irrespective of amount applied for. The proportionate allotment will designate the shares to the applicants according to the proportion of the applied amount and there will not be any reason for the applicants to provide multiple applications to obtain larger number of shares. It will help remove the instances of fake application in the public offerings. The directive has segregated 40 per cent of total issue for the retail applicants. The retail applicants are defined as those who apply for unit shares amounting upto Rs 50,000. Sebon and merchant bankers have already started the discussion on developing software that will ensure proportionate allotment.