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Years After Tobacco Deals Sold, SEC Says Rating Agencies Still Conflicted
The latest Securities and Exchange Commission examination of credit rating firms found problems similar to those documented in ProPublica's investigation of tobacco bonds
 
In our story last month about credit rating agencies and tobacco bonds, we detailed numerous instances in which bankers pressured Standard & Poor's, Fitch and Moody's to give favorable treatment to bond issues being put together on behalf of state and local governments.
 
Documents showed that the bankers brazenly played one firm against another to relax rating criteria and grade risker, longer-term tobacco bonds. These actions mostly pre-dated the 2008 financial crisis, in which the raters earned widespread criticism for giving high marks to bum mortgage securities packaged by Wall Street.
 
Now, a new report from the rating agencies' regulator, the Securities and Exchange Commission, found similar conflicts of interest at the firms, which are supposed to evaluate the riskiness of various debts at arm's length from the banks and issuers they serve.
 
The SEC's annual examination of the firms' business practices, published on the same day as ProPublica's ratings story, cited numerous examples of how the firms continued to compromise the objectivity of their rating process during the 2013 calendar year. For instance:
One of the top three rating firms changed its rating criteria "in a manner that addressed" concerns from business managers and proved advantageous to a trade group that had lobbied for the changes, the SEC said, concluding that "business and market-share concerns influenced the substance of the criteria." 
 
One of the top three rating firms took financial models that were developed by outside parties and used them for its credit rating process – without independently verifying their validity. It turned out that "errors in these third-party models resulted in changes to a substantial number" of the firm's outstanding ratings, the SEC said. 
 
The SEC also uncovered instances of analysts having access to business performance data, such as market share, which could influence their decision making when assigning ratings. The failure to separate analysts from business activity was particularly egregious at one smaller rating firm, which allowed an analytical supervisor to participate in sales and marketing activities for ratings while also participating in determining those ratings.
 
The SEC's report does not name specific credit rating firms, other than indicating whether they were the three largest firms, S&P, Moody's and Fitch, or their smaller competitors. The SEC also made recommendations for improving their procedures to avoid the problems identified in the report. In statements reacting to the SEC's report, S&P, Moody's and Fitch each said they continue to enhance their policies and procedures.
 
Rating criteria – the standards that agencies use to evaluate repayment risk across various types of debts – are not supposed to be negotiated for the sake of winning business. But ProPublica found evidence that criteria for tobacco bonds — debts backed by payments from a massive 1998 settlement with cigarette manufacturers — were heavily negotiated by bankers.
 
In marketing documents collected by ProPublica across 22 tobacco bond offerings, bankers for UBS, Bear Stearns, Citigroup and others repeatedly took credit for getting the firms to bend their criteria. The raters earn hefty fees if they're chosen to rate an issue.
 
"Bear Stearns is the ONLY firm in two years to have negotiated new rating criteria pertaining to stress tests and tobacco sector fundamentals," the now-defunct investment bank said in a 2005 marketing document typical of the firm's claims of influence over the rating process.
 
After our story published, Wisconsin responded to a ProPublica public records request with a disc containing dozens of tobacco bond records dating to 2001. They include more claims by bankers saying they had swayed the rating firms.
 
In 2008, bankers from Lehman Brothers told Wisconsin that S&P had agreed to hear arguments for rating the state's tobacco bonds "even if" the debt couldn't satisfy the firm's "newly-minted, more stringent" rating criteria, according to a proposal submitted by the bank three days after its historic Sept. 15, 2008, bankruptcy.
 
 
Courtesy: ProPublica
 

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Nifty, Sensex may make a major move – Tuesday closing report
Nifty will go down sharply if it closes below 8,250
 
In Monday’s closing report, we had mentioned that NSE’s CNX Nifty may go sideways. However, for the positive trend to continue the Indian benchmark has to stay above 8,270. The 50-share Nifty opened Tuesday in the positive and stayed in the green for major part of the session. Each time the index moved lower it took support at Monday’s close and bounced back. However after 2pm, the index witnessed a sharp fall, breaching the support and recovered to close marginally higher.
 
The S&P BSE Sensex opened at 27,612, while Nifty opened at 8,346. The benchmarks hit a high at 27,670 and 8,357, respectively. Sensex hit a low of 27,325 and closed at 27,426 (down 160 points or 0.58%), while Nifty hit a low of 8,268 and closed at 8,299 (down 24 points or 0.28%). India VIX rose 2.31% to close at 16.4825. NSE recorded a volume of 79.89 crore shares. The Nifty made several unsuccessful attempts to head higher but has been stuck around 8,300.  It is now ready to make a major move. If it closes below 8,250, the downfall will be sharp and quick. If not, it will struggle to move higher.
 
India's Index of industrial production (IIP) increased at five-months high pace of 3.8% in November 2014, recovering from the sharpest pace in three-years at 4.2% recorded in October 2014. The annual rate of inflation based on the combined consumer price indices (CPI) for urban and rural India rose to 5% in December 2014 from nine-year low of 4.4% in November 2014, while snapping consistent decline for last four sequential months.
 
The government will release data on WPI for December 2014 at 12 noon on Wednesday.
Finance Minister Arun Jaitely had said that the government has taken major steps to improve the investment climate in the last several months and it will continue to do so.
 
Oil prices continued to move lower on Tuesday with Brent crude and US WTI both falling to their lowest in almost six years as the global supply glut continued.
 
Emami (6.57%) was among the top two gainers in ‘A’ group on the BSE. The stock hit its 52-week high today. FIIs holding in the company fell from 17.23% to 16.47% as on December 2014, while DIIs holding and retail holding increased from 1.43% and 8.60% to 1.52% and 9.27% respectively.
 
Unitech (5.29%) was the top loser in ‘A’ group on the BSE. It was recently in news as CBI was considering the closure of Tata Realty-Unitech land deal case. The case was re-opened to probe into whether funds from the Rs1,700 crore Tata Realty-Unitech land deal were diverted for spectrum purchase. The case may soon be closed on the ground that the Supreme Court had not directed the agency to carry out more investigations into the matter.
 
Wipro (1.18%) was among the top two gainers in the Sensex 30 pack. There is a report that Rishad Premji, now the chief strategy officer of Wipro could assume the vice chairman's position in the coming months.
 
With the recent fall in the stock prices of PSU Coal India and ONGC, the finance ministry is learnt to be reconsidering sale of stake in these companies. ONGC (2.37%) was the top loser in the Sensex 30 stock.
 
On Monday, US indices closed deeply in the red after openly sharply higher. Asian indices showed mixed performance. KLSE Composite (0.80%) was the top gainer while Nikkei 225 (0.64%) was the top loser.
 
China's exports climbed more than estimated last month as stronger demand from abroad helps bolster growth. Overseas shipments rose 9.7% in December from a year earlier. Imports fell 2.4%, leaving a trade surplus of $49.61 billion, the customs administration said in Beijing.
European indices were trading higher. US Futures too were trading in green.
 

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SEBI bars Infinity Realcon from raising funds via securities
According to SEBI probe Infinity Realcon issued redeemable preference shares to 24,718 investors and mobilised about Rs19.32 crore between 2009 to 2013
 
Market regulator Securities and Exchange Board of India (SEBI) has barred Infinity Realcon Ltd from raising funds from investors through issue of securities. SEBI also barred the company and its directors from dealing in markets till further directions. 
 
SEBI said it found that Infinity Realcon had garnered crore of rupees from nearly 25,000 investors via issuance of non-convertible debentures (NCDs) and redeemable preference shares (RPS) through such activities had prima facie violated various norms.
 
According to SEBI, the company issued RPS to 24,718 investors and mobilised about Rs19.32 crore during 2009-10 to 2012-13. Besides, amount raised through issue of debentures was Rs1 crore.
 
SEBI observed that Infinity Realcon issued NCDs and RPS to over 50 persons, which under the rules made it a public issue of debt securities and hence would require a compulsory listing on a recognised stock exchange.
 
The company was also required to file a prospectus, among others, which it failed to do.
 
"Infinity Realcon has prima facie engaged in fund mobilising activity from the public, through the Offer of RPS and NCDs", and as a result of such activity has violated the provisions of Companies Act, SEBI Whole Time Member S Raman said in an interim order.
 
Accordingly, SEBI has asked Infinity Realcon not to "mobilise any fresh funds from investors through RPS and NCDs or through the issuance of equity shares or any other securities, to the public and/or invite subscription, in any manner whatsoever, either directly or indirectly till further directions."
 
Besides, the company and its directors are prohibited from issuing any offer document for soliciting money from the public for the issue of securities, in any manner whatsoever, either directly or indirectly, till further orders.
 
The company and its directors are "restrained from accessing the securities market and further prohibited from buying, selling or otherwise dealing in the securities market, either directly or indirectly, till further directions", the order said.
 
SEBI has also asked the entities not to dispose any of the properties or assets acquired by that company through the issue of redeemable preference shares, without prior permission from the regulator as well as not to divert the funds raised from public.
 
Further, Infinity Realcon Debenture Trust has been prohibited from continuing with his present assignment as a debenture trustee in respect of Infinity Realcon's issue and also from taking up any new assignment in a similar capacity.
 
These "directions shall take effect immediately and shall be in force until further orders."
 

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COMMENTS

subhankar Das

11 months ago

As I was the investor in this company I want to ask what about the return of the deposits. I was supposed to get the money by 2014 but now its 2016. Is there any process or submission that we have to do. let me know provision because its too late to get a reply from any one. i have registered the complain in number of websites connected to this issue.

Rupali Panchadhaye

12 months ago

As I was the investor in this company I want to ask what about the return of the deposits. I was supposed to get the money by 2014 but now its 2016. Is there any process or submission that we have to do. let me know provision because its too late to get a reply from any one. i have registered the complain in number of websites connected to this issue.

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