Credit Rating Actions: Bhasmasurs and the Theatre of the Absurd

Will the government now take action to clean up this act in the Theatre of the Absurd?

Theatre has been practiced as an art form for thousands of years. From Sudraka's Mricchakatika in the 5th century CE to Shakespeare's Hamlet in the 17th century CE and beyond, theatre has explored the line between illusion and reality. However, it was in Europe during the 1950s and 1960s that a new theatrical movement led by writers such as Samuel Beckett and Jean Genet emerged. It was defined by an obsession with absurdity in all its forms — philosophical, dramatic, existential, and emotional — and pushed theatre to extremes in terms of what reality (and unreality) looked like. It was dubbed "Theatre of the Absurd", and it was frequently more terrifying than entertaining. 

The financial sector, particularly capital markets, has often resembled live theatre too. On the market stage, larger-than-life heroes, villains, armies, and comics have appeared in scripted and improvised performances. Except that, like the European playwrights’ movement, recent capital market absurdities have been more nightmarish than amusing. 

The backstory of the latest version of this capital markets theatre genre is well known. In Scene I of Act I of this play, a credit rating agency (CRA) was found to be in repeated violation of its license conditions by regulators, and after multiple warnings and opportunities to comply and improve itself, its license was cancelled. This cancellation order was overturned by the appellate authority, which directed that a penalty other than license cancellation be imposed. 

Unexplained Downgrade

Scene II of Act I is currently in progress and playing out in full public view. The main protagonist in this scene, Neyveli Lignite Corporation (now known as NLC India), is a profitable, creditworthy company in which the government of India, through the ministry of coal, owns nearly 80 percent of its paid-up equity capital. It has been a navratna public sector undertaking for over 65 years and has long had a AAA credit rating for its profitability, cashflows, ability to service debt, and government ownership. Despite this track record and the fact that no major credit event had impacted the rating, the newly resurrected CRA from Scene I, Act I one fine day unilaterally decided to downgrade the rating to BB+, a precipitous drop of four grades. 

The impact of this thermonuclear equivalent on the world of credit and debt has been immediate, as NCL India has gone from having the highest degree of safety in terms of timely servicing of financial obligations and carrying the lowest level of risk to having a moderate risk of default in terms of timely servicing of financial obligations (as defined by the CRA itself).

The bond market is primarily made up of institutional investors, such as provident funds, pension funds, and so on, who have stringent investment rating rules. A bond's valuation and trading are also inextricably linked to its credit rating, which summarises the instrument's risk. The rating downgrade therefore immediately puts the entire fund-raising, pricing, value, and trading of NLC India bonds under the cloud. According to the re-empowered CRA, the issuer did not cooperate in providing information, and the rating was based on the best available information. According to NLC India, it had written to the CRA withdrawing its consent to be rated, in line with the regulator’s cancellation of the CRA’s licence earlier. The NLC India case is not the only one. Bond issuances by others, including the Indore Municipal Corporation, have also been downgraded, allegedly without sufficient substantiation.

Wreaking Havoc

The NLC India credit rating case exemplifies the absurdity and impunity with which power is frequently aggregated and exercised within market regulatory frameworks by unaccountable arbiters. In the first instance, an appellate authority overturned the well-considered decision of not one, but two financial regulators. In the second instance, as a direct result of the first, an equally arbitrary CRA with the restoration of its unaccountable powers wreaks havoc in capital markets. In both cases, arbitrary and capricious whimsy, devoid of context, logic, effort, or comprehension of consequences.

Markets operate on the principles of logic, efficiency, and transparency. It is this that enables the trust of its participants and allows markets to function and grow. Regulators are increasingly aware of this and are making efforts to explain the reasoning behind their actions. Appellate authorities, as well as those it seeks to resurrect against market forces by restoring arbitrary and unaccountable powers to those found unfit to hold or exercise them in regulatory action, appear to be of the King Canute school of thought regarding rolling back market waves. It is now up to market forces to act, while holding the CRA, regulators, and appellate authorities accountable for the disruptions caused by the CRA's incompetence.With fact often being stranger than fiction, it is perhaps not unsurprising that it is a government-owned navratna that is the first target of the arbitrariness of unaccountable Bhasmasurs. Perhaps those who don’t learn from mythology are condemned to repeat it. The state of corporate market regulatory and appellate frameworks and their unaccountability have come to the notice of the Supreme Court of India too. Will the government now take action to clean up this act in the Theatre of the Absurd? 

Sandeep Hasurkar is an ex-investment banker and author of `Never Too Big To Fail: The Collapse of IL&FS’. Views are personal, and do not represent the stand of this publication.