Weekend reading links

1. On Shein's business strategy.

Shein’s low prices and vast choice led to meteoric success in western markets, particularly the US. Algorithms scour the web for trending ideas and feed them to designers, who then place orders with a network of about 7,000 contract suppliers, many clustered in Panyu, a manufacturing suburb of Guangzhou. The company tests the popularity of new designs via ultra-small orders, only ordering more when it is sure there will be demand. This model allows Shein to offer millions of designs at any one time, according to a person familiar with the company, compared to tens of thousands at other mass market retailers.

2. China is upending the politics of climate change and energy transition.

Countries like Brazil, India, and Vietnam are rapidly expanding solar and wind power. Poorer countries like Ethiopia and Nepal are leapfrogging over gasoline-burning cars to battery-powered ones. Nigeria, a petrostate, plans to build its first solar-panel manufacturing plant. Morocco is creating a battery hub to supply European automakers. Santiago, the capital of Chile, has electrified more than half of its bus fleet in recent years. Key to this shift is the world’s new renewable energy superpower: China. Having saturated its own market with solar panels, wind turbines and batteries, Chinese companies are now exporting their wares to energy-hungry countries in the developing world. What’s more, they’re investing billions of dollars in factories that make things like solar panels in Vietnam and electric cars in Brazil. In effect, Chinese industrial policy is shaping the development trajectory of some of the world’s fastest-growing economies... 

But these countries are increasingly meeting large portions of their energy needs with renewable power, both for the cost savings and for energy security reasons. Many are trying to reduce the amount of fossil fuels they import to relieve pressure on their foreign currency reserves. Rapidly falling prices of Chinese technology are enabling them to do that... Ethiopia last year took the extraordinary step of banning the import of new gasoline-powered cars. Nepal reduced import duties on electric vehicles so much that they are now cheaper than cars with internal combustion engines. Brazil raised tariffs on all car imports to compel Chinese automakers like BYD and Great Wall Motors to set up plants inside Brazil.

This is the important point

With Chinese exports of solar panels, wind turbines and batteries hitting records this year, Beijing increasingly has a vested interest in making sure the rest of the world moves faster in adopting renewable energy. Many American and European leaders have expressed alarm at China’s growing dominance, which has undercut their own industries. But at the summit, plenty of emerging countries seem fine with the arrangement. “You can’t insist that China has to lower its emissions” and then, later, “complain that China is putting cheap E.V.s all over the world,” Mr. Corrêa do Lago, the Brazilian diplomat shepherding this year’s international climate talks, known as COP30, in the Brazilian city of Belém, said. “If you are worried about climate, this is good news.”

3. Notwithstanding the rocketing valuations, the bull case for AI is in this stat and graph.

Those worried about an AI bubble can point to S&P 500 capital expenditure as a fraction of GDP being higher than the levels seen during the dotcom bubble. Yet, the equivalent capex numbers are only about 40 per cent of operating cash flow — far lower than the over 70 per cent levels seen during the dotcom mania.

The headline result of the study from researchers at Zhejiang and Columbia universities — Generative AI and Firm Productivity: Field Experiments in Online Retail — was simple. Most of their GenAI experiments increased revenue, in some cases by a large margin. The largest gain was recorded when the platform added an AI assistant before the point of purchase — sales rose by 16.3 per cent and the conversion rate, the share of visitors who become buyers, increased by 21.7 per cent... Smaller and newer sellers, along with less experienced buyers, saw a disproportionate lift... An even tougher comparison, which pitted a hybrid AI system that escalated complex issues to humans against a team of human agents, produced an 11.5 per cent sales increase. This dovetails with what we’ve seen at HSBC in experiments in which we pit AI against humans in investment research. The results suggest AI is best used to augment human analysts, rather than trying to replace them.

4. Striking statistic about the value of electricity demand management at a time when data centre demand for power is surging.

One study from Duke University found that if data centres agreed to curtail their consumption just 0.25 per cent of the time (roughly 22 hours over the course of the year), the grid could provide power for about 76GW of new demand. That’s like adding about 5 per cent of the entire grid’s capacity without needing to build anything new.

5. PLI statistics

Launched in FY2022, these schemes span 14 sectors with total expected capex of close to Rs. 4.0 trillion under these initiatives. As of March 2025, capex of ₹1.8 trillion has led to incremental sales of ₹16.5 trillion, with exports accounting for 30–35 per cent of this growth... Only 16 per cent of the total incentive outlay (₹3 trillion) is expected to be disbursed or become eligible by end-FY2026, with the balance contingent on future production and sales milestones... The incentive scheme for mobile Phones has transformed India from a net importer to a net exporter of mobile phones. Production increased by 146 per cent between FY2021 and FY2025, and exports have risen eightfold. Despite this, local value addition remains limited, with high-value components still largely imported.

6. Changing attitudes towards Israel among Americans. 

According to a Gallup poll earlier this year, 59 per cent of Democrats said they were sympathetic to the Palestinians, compared to 21 per cent for Israelis. Back in 2001, more than 50 per cent of respondents said their sympathies lay more with the Israelis, versus 16 per cent who sympathised more with the Palestinians... A separate Washington Post poll last month found 32 per cent of Jewish Americans thought the US was too supportive of Israel, up from 11 per cent just over a decade ago. “Polls show that 77 per cent of Democrats deem what has happened in Gaza to be a genocide, and that Israel should be held accountable,” said Chi Ossé, a Democratic member of the New York City council and strong supporter of Mamdani.

7. How much energy does AI consume?

A GPT-4 model can use up to 463,269 megawatt-hours of electricity per year, according to research by academics at the University of Rhode Island, University of Tunis and Providence College. That is more than the annual energy consumption of more than 35,000 US homes.

8. The disappearing Chinese military leadership due to Xi Jinping's anti-corruption purges raises questions about the professionalism of the Chinese armed forces.

When the Communist Party's Central Committee met last month, 27 senior PLA officers who formed 64% of its members with a military background were missing, either due to investigation or having been removed from their jobs or party membership. 

9. India's digital economy fact of the day

While India’s population of 1.4bn offers enviable scale, its market has proven difficult to monetise. According to Sensor Tower, Indian internet users downloaded 24.3bn apps in 2024 and spent 1.13tn hours on them, but total spending was just $1bn.

10. Credit rating agencies are again in focus after the rise in defaults in the private credit industry.

Second-tier shops that have shot to prominence by catering to the booming private credit market, which has grown to some $3tn in recent years. Smaller, specialist providers such as Morningstar DBRS, Kroll Bond Rating Agency, HR Ratings and Egan-Jones have seized market share by offering private capital groups the chance to shop around. Some of the world’s biggest asset managers, including Blackstone and Apollo, are now among the most frequent users of ratings from firms beyond the big three. But as sudden bankruptcies at First Brands and Tricolor have fuelled fears that cracks are emerging in the private credit universe, some financial heavyweights are warning that ratings arbitrage could pose risks to the wider financial system... UBS chair Colm Kelleher said, “What you’re seeing now is a massive growth in small rating agencies ticking the box for compliance of investment.” Private letter ratings are not disclosed publicly, but can be used to determine capital requirements.

As private capital groups have boomed — and piled into the insurance industry, buying up life insurers — so has the demand for private letter ratings on everything from debt issued by individual portfolio companies to slices of asset-backed securities packaged into bonds destined for investment-grade buyers. Insurers affiliated with the private capital groups use those investment-grade credit ratings to trim the capital they are required to have to back their long-term obligations to retirees. As their needs have grown, the big private capital firms have turned to the smaller agencies as they seek a faster, more flexible service to suit their complex needs... Egan-Jones, which first began issuing private ratings in 2014 and now has more than 22,000 transactions to its name, has come under scrutiny for the sheer volume of ratings it has been able to issue with relatively few analysts in very little time. Egan-Jones has just 20 or so analysts and managed to issue more than 3,600 ratings last year alone, making it the most prolific grader of loans to individual businesses. Egan-Jones told the FT it had issued another 3,400 so far in 2025.

Reforming the sovereign credit rating agencies

The Ministry of Finance, Government of India has published an excellent and much needed examination of the methodologies adopted by sovereign rating agencies. It's a rare example of India taking the lead in setting the agenda for a debate on a critical part of the plumbing of the international financial market system. 

Given the central role played by credit ratings in determining cost of capital for sovereigns, its reform should be one of the most important priorities for global financial market reform. This assumes greater significance in the context of the climate change financing agenda on channeling private capital to developing countries.  

The basic argument is that the rating functions of rating agencies rely disproportionately on qualitative measures of sovereign risk that are in turn drawn from data sources whose methodologies are both questionable and biased. They are doubly distorted - their bias under-estimates the sovereign risks of western countries and over-estimates that of the developing countries. This amplifies the cost of capital for developing countries. 

Avinash Persaud has highlighted this over-estimation problem with financial markets in general by pointing to the striking difference between FX futures cost and the actual FX depreciation experienced by developing countries compared to their developed counterparts. The cost of FX hedging considerably overstates the actual risk, thereby resulting in large overpayments by developing countries. It amounted to an average of 4.65 percentage points for a sample of developing countries on their historical five year forward FX rates. This overpayment of scarce capital should be seen as a market-driven subsidy from the developing country governments to western private financial institutions. 

The paper informs that sovereign ratings are defined by the agencies themselves as forward looking assessments of the "ability" and "willingness" of countries to repay their debts. But its analysis finds that they place a disproportionate emphasis on "willingness to pay", drawing on qualitative indicators. Given the subjectivity associated with such "willingness" to pay assessments, the paper argues that developing countries pay a "perception" premium instead of a "risk" premium in their sovereign borrowings.

It does an excellent job of unpacking the blackboxes of each rating agency, to the extent possible given the opacity surrounding them. It exposes the likely failings and problems with the qualitative measures, and asymmetricities in their application to developed and developing countries. What comes out is not very edifying. 

The summary of the paper is,

Our review of the credit rating methodologies reveals that there is considerable reliance on qualitative variables to capture ‘willingness to pay’. The enormous degree of opaqueness in the methodology makes it challenging to quantify the impact of qualitative factors on credit ratings. The significant presence of qualitative factors in credit rating methodologies also gives rise to bandwagon effects and cognitive biases amply reflected in various studies, generating concerns about the credibility of credit ratings. From our quantitative analysis, we find that over half the credit rating is determined by the qualitative component. Institutional Quality, proxied mostly by the World Bank’s Worldwide Governance Indicators (WGIs), emerges as the foremost determinant of a developing economy’s credit rating, which presents a problem since these metrics tend to be non-transparent, perception-based, and derived from a small group of experts, and cannot represent the “willingness to pay” of the sovereign. Their effect on the ratings is non-trivial since it implies that to earn a credit rating upgrade, developing economies must demonstrate progress along arbitrary indicators while simultaneously contending with the discriminations the ratings tend to carry. 

Reform in the credit rating process is the need of the hour. As the rated sovereign is obligated to be completely transparent, establishing symmetry of obligations warrants that the rating agencies make their processes transparent and avoid employing untenable judgements. Enhanced transparency in credit rating may compel the use of hard data and likely result in credit rating upgrades for a good number of sovereigns... Reforming the sovereign rating process will correctly reflect the default risk of developing economies, saving them billions in funding costs.

The paper uses the example of India as a case study and does an econometric modelling to assess the degree of correlation between fiscal performance, external debt variables, monetary variables, national income, and governance impact ratings. The first four capture the "ability" to pay and the last reflects "willingness" to pay. 

We can infer that better governance, a healthy fiscal position, and low external liabilities emerge as the most important determinants of India’s rating... We observe that the composite governance indicator has the largest and statistically significant coefficient of 15.85 within our specification. To put it another way, the composite governance indicator explains approximately 68 per cent of our assigned rating (the governance coefficient divided by the sum of all absolute coefficients). Further, in terms of sensitivities, the assigned credit rating to India is most sensitive to changes in the governance parameter. For a 0.74 unit change in the average WGI score, India stands a chance to be upgraded from BBB- to BBB. Such a high sensitivity to the governance indicator implies that they are granted a far higher than specified weightage in the methodology documents published by the rating agencies... the influence of the composite governance indicator and perceived institutional strength surpasses the collective influence of all other macroeconomic fundamentals when it comes to the chances of earning India and other developing economies an upgrade. The effect is non-trivial because it implies that to earn a credit rating upgrade; developing economies need to demonstrate progress along arbitrary indicators, which are also criticised for being constructed from a set of several one-size-fits-all perception-based surveys.

These calculations vary widely with the likely ratings and rating changes that can be inferred from the models disclosed by the rating agencies themselves. These variations can be explained only in terms of subjective assessments in the rating agencies calculations. The paper could have gone one step more and made an assessment of the likely additional interest payment made by India due to this "perception" premium. 

I'm inclined to believe that apart from the cognitive biases discussed in the paper, the reliance on qualitative factors betrays some laziness on the part of rating agencies. It appears as an excuse to cover up for inadequate diligence on the macroeconomic side. In the absence of standardised and good quality measures of macroeconomic data and forecasts, rating agencies ought to be exploring proxies, innovative methodologies, and look at more granular data to evaluate sovereign credit worthiness. However, a rating methodology that relies on this approach cannot use the standardised and simplified templates that agencies currently deploy. Instead, sovereign ratings will have to be a bespoke exercise anchored around some basic principles and a common objective function. 

It's understandable that making the entire rating process quantitative, objective, and public may not serve the purpose. After all, if everything is made public then the only differentiator between different rating agencies would be the parameters included and their respective weights. You don't need a professional agency to do such evaluations. 

It has to be acknowledged that there's a fundamental information asymmetry problem with sovereign ratings. Unlike corporates who are regulated, sovereigns are not accountable to disclose their accounts in a standardised format. Apart from publicly available documents and certain disclosures made to the IMF, there are no independently evaluated data on current national macroeconomic indicators. There are wide variations in quality of this data across countries and quality is questionable especially in low income countries. This is unlikely to change. In the circumstances, it may be necessary to settle for second best strategies. 

Historical data on macroeconomic indicators (specifically the variances in important economic, fiscal, monetary, currency, and external parameters) and risk incidence episodes (high inflation periods, sovereign defaults, policy induced shocks etc) may be good practical second-best measures of a country's capability and willingness to repay its debts. They rely on the only two reliable measures - variances of macroeconomic indicators (measures macroeconomic stability) and repayment track record. This should be complemented with some subjective assessment, based on a commonly applied set of principles, of the country's economic prospects given the likely global economic conditions. The rating agency could then be held accountable for that subjective assessment. 

This approach should be no worse than the outcomes from the current rating approach. The history of corporate credit ratings is replete with countless examples of extremely embarrassing defaults even immediately after investment rating endorsements. After all, the objective is a comparative measure to assesses the relative credit worthiness across countries. Shedding inherently biased and secondary (for credit worthiness assessment) measures on institutions and governance and qualitative assessments should not detract from the basic comparative evaluation objective of any sovereign ratings exercise. In any case, in an inherently complicated exercise, adding too many parameters, and that too deeply subjective ones, ends up only amplifying the noise and detracting from credibility. 

In the circumstances, I propose the following steps as a leadership agenda for Government of India:

1. Refine the methodology used in the paper based on a rigorous enough peer-review. The GoI could then support a credible research institution in the country use this methodology to calculate and make available the variations between the ratings given by the agencies and that calculated using this method, the magnitude of the "perception" premium in terms of cost of capital, and the additional debt service burden incurred by the country. This database should be updated on a continuing basis and should strive to become a reference source for debates on rating agency reform. 

This research agenda could be expanded to build on the work of Avinash Persaud and create a historical data depository for all countries on their market priced sovereign bond yields, foreign exchange futures, credit default swaps etc and their actual realised rates. This database could be updated continuously and form an area of high-value policy research. There are several examples of such databases like that on cross-border capital flows, cross-border tax evasion etc. and those maintained by various UN and other international agencies on a variety of sectors. Finally, the sovereign rating reform research agenda could expand into a wider research agenda of reforms to the seriously flawed process of corporate credit ratings. 

2. Posit the outlines of an alternative ratings methodology focused on parameters of macroeconomic stability and track record of risk incidence, with a principles-based assessment of economic prospects. Prepare a draft concept paper, have it circulated widely internationally to solicit feedback, organise a conference, and have it introduced as a reform agenda in multilateral fora. Have this included as a top priority item in the the Government of India’s international diplomacy agenda. Pursue it actively and diligently with a 3-5 year timeframe for change. 

3. Formulate a narrative around the imperative for change to the ratings methodology. The climate finance agenda could provide the most appropriate and current anchor. The need to attract large volumes of private capital to developing countries is widely acknowledged as being central to any meaningful efforts to address climate change. It's also becoming clear that cost of capital is the biggest deterrent to attracting such capital. And as we have seen above, the prevailing sovereign ratings with their "perception" premia impose a prohibitive additional cost on borrowings by developing countries. The need for reform becomes clear and important.  

4. Identify an institution to host standards management guidance and regulation of rating agencies. This institution could cover the wider area of corporate ratings too. The BIS sets the agenda on the harmonisation and continuous calibration of banking sector risk parameters and the OECD provides the forum for international negotiations on tax avoidance practices of multinational corporations through its Base Erosion and Profit Shifting (BEPS) initiative. The IMF or another multilateral institution could be encouraged to take the lead on reforming the rating agencies. In fact, in the context of the wider corporate credit ratings, the IMF has already written about the need for a global regulatory mechanism for credit rating agencies and outlined some principles for such ratings.

One more item that should be on the agenda for the Government of India in its financial market shaping efforts should be to champion reforms to the international arbitration system on inter-state dispute settlements. As I blogged here and here, it subordinates sovereign law, elevates contractual obligations beyond even sovereign law, and is heavily biased towards multinational corporations and against developing country governments. India could put forth an objective and neutral framework for international arbitration to replace the current one-sided mechanism. UNCITRAL should be encouraged to take the lead on reforming the international arbitration process. India could put forth its agenda and demonstrate genuine global leadership in pushing forward both these issues.

The global oligopolies in financial services market

The global market in financial market services is characterized by implicit collusive oligopolies. Consider management consultancy, auditing and assurance, credit rating, and credit/debit card payment processing. There are 3-4 firms that dominate the global market in each of these. In fact, many core financial services - M&A advisory, underwriting, asset management, etc - are also oligopolies. The problems with these gatekeepers are not just about monopoly, but also about systemic risk creation. 

In 2020, the big four accounting firms - EY, Deloitte, KPMG, and PwC - made up 74% of the market share, and audited the vast majority of the biggest firms. The three big rating agencies - Moody's, S&P's, and Fitch Ratings - control 95% of the global rating market, with the first two alone controlling 80%. In 2021, Visa, Mastercard, and Amex made up 97.8% of the US credit card payment processor market, with the first two alone making up 87.3%. Globally, Visa, Union Pay, and Mastercard made up 96%, with Union Pay being the Chinese equivalent. These are all staggering numbers and point to a vice-like grip on these markets. The situation is not much better in financial services like M&A advisory and debt issuance underwriting, especially with large and cross-border transactions. 

What makes the aforesaid markets distinctive and therefore a matter of serious concern is that they are almost essential services in their respective markets. Consultants and auditors are either a necessity or a statutory requirement for businesses. Credit ratings are an essential signature to operate in the financial markets. And payment processors are the gatekeepers to the primary retail transactions platforms. And, all these are all global services with global networks and economies of scale, thereby further increasing the entry barriers. 

These markets are all oligopolies. Oligopolistic markets are characterised by a small number of firms that have similar business models and pricing structures, and who therefore present a similar supply side to an effectively captive market. Besides, their implicit collusion forms insurmountable entry barriers and makes them price givers. Finally, these firms also pose concentration risks, which in turn create perverse incentives. 

FT recently pointed to the common factor behind the three recently failed US regional banks - Silicon Valley Bank, First Republic, and Signature. KPMG was the auditor in all three cases. The FT writes,

In all three cases, KPMG gave the banks’ financial statements a clean bill of health as recently as the end of February... Scrutiny of KPMG’s work was likely to fall on whether its staff were sufficiently independent from the banks they audited, whether they paid proper attention to red flags, and whether they had the right skills to judge the quality of financial statements in an environment that had changed significantly because of rising interest rates, accounting experts said. 

If this were a competitive market, three high-profile failures in just over a month, with clearly documented internal audit failures, would have been enough to tarnish the reputation of the auditor. But unfortunately, in all these markets, egregious omissions and commissions with disastrous consequences for their clients have been common. But the service providers have faced little by way of financial or reputational losses and appear Teflon coated. 

I have blogged about the problems posed by auditors (here and here), consultants (here, here, here, here, and here), and credit rating agencies (here, here, here, and here). The role of egregious auditing omissions by EY in the collapse of payments firm Wirecard is now well documented. Despite numerous high-profile failings with serious adverse impacts, they have continued to offer their services as though nothing has happened. 

In fact, the markets for gatekeeping services of modern capitalism offer good examples of the failure of market discipline. These recurrent revelations are also an indictment of the audit regulator in the US, the Public Company Accounting Oversight Board (PCAOB). This is all the more inexcusable given PCAOB's own assessment showing deficiencies in more than a fifth of audits by the Big Four and in nearly 60% among KPMG's non-US affiliates.

The biggest irony about risk mitigation is that the market which provides assurance and internal controls assessment services itself suffers from an unhealthy level of risk concentration. 

There could also be questions about KPMG’s broad role in the financial system. The firm holds a singular role as auditor of more US banks than any of the other Big Four, and it audits a larger proportion of the country’s banking system by assets than any other firm, according to data from Audit Analytics. As well as being auditor to Wells Fargo, Citigroup, Bank of New York Mellon and three dozen other listed banks, it also audits the Federal Reserve... Publicly listed banks paid the firm more than $325mn in fees in 2021, the last year for which full data is available, with the sector accounting for about 14 per cent of KPMG’s fees from public clients. That compared to 8 per cent at PwC, 3 per cent at EY and 2 per cent at Deloitte.

This market concentration poses several concerns. It ensures monoculture and a lack of internal diversity in auditing practices. There emerge collective blindspots, often conveniently deliberate oversights, within the industry. Apart from firms being left with limited choices, safeguards like auditor rotation become virtually meaningless exercises. 

While revolving doors and conflicts of interest in the consulting industry and policy-making are now widely documented, the extent of perversion in this instance is shocking. 

KPMG alumni have also gone on to play significant roles in the banking sector, including at former clients. The chief executives of Signature and First Republic were both former KPMG partners. Accounting professors said regulators were likely to pay close attention to Signature’s appointment of Keisha Hutchinson, who was the lead partner on the KPMG audit team at the bank, to be its chief risk officer in 2021, less than two months after she signed the 2020 audit report. Securities and Exchange Commission rules require a 12-month cooling off period before an audit partner is hired by a company into a role that oversees financial reporting, although that is usually interpreted to mean chief financial officer or financial controller roles.

Such conflicts of interest arising from revolving doors and cosy personal ties are a much bigger problem with the big management consultants and Wall Street banks. In fact, in recent years, this has been a concern in central banks too.

Weekend reading links

1. A very comprehensive presentation by Nathaniel Bullard on the various issues involved in the decarbonation project. This is a stark reminder of the problem with modern economic growth - 1950s appear to have been the CO2 emissions take-off period.

But per capita CO2 emissions appear to have peaked

As a result, economic growth and emissions appear to have decoupled.

In the US, the entire net additions in primary energy is from renewables.

2. Saudi Arabia led OPEC announce further cuts in oil production to shore up prices. While this would be a blow to a world economy already grappling with inflation and an impending slowdown, it would be a boon to the Russians.

3. As China conducts a high intensity naval exercise in international waters near Taiwan and Japan in response to the Taiwanese President Tsai Ing-wen's visit to the US, Gideon Rachman has an oped in FT calling for western unity in containing China's aggressive intentions.

There are three main arguments for sticking up for Taiwan. The first is about the future of political freedom in the world. The second is about the global balance of power. The third is about the world economy. Together they amount to a compelling case to keep Taiwan out of Beijing’s clutches... the Indo-Pacific region as a whole has several thriving democracies including Japan, South Korea and Australia. They all depend to some extent on a security guarantee from the US. If China crushed Taiwan’s autonomy, either by invading or by strongarming the island into an unwilling political union, then US power in the region would suffer a huge blow. Faced with a prospect of a new hegemonic power in the Indo-Pacific, the region’s countries would respond. Most would choose to accommodate Beijing by changing their foreign and domestic policies... The implications of Chinese dominance of the Indo-Pacific would also be global, since the region accounts for around two-thirds of the world’s population and of gross domestic product. 

If China dominated the region, it would be well on the way to displacing the US as the world’s most powerful nation. The idea that Europe would not be affected by that shift in global power is absurd... Taiwan produces over 60 per cent of the world’s semiconductors and about 90 per cent of the most sophisticated ones. The gadgets that make modern life work, from phones to cars and industrial machinery, are run with Taiwanese chips. But the factories that produce them could be destroyed by an invasion. If Taiwan’s chip factories survived but fell under Chinese control, the economic implications would be huge. Control of the world’s most advanced semiconductors would give Beijing a chokehold over the world economy. As the US has already discovered, replicating Taiwan’s semiconductor industry is much harder than it sounds. All these considerations — economic, strategic, political — make a compelling case for the US and its allies to protect Taiwan. No one in their right mind wants a war between America and China. But now, as in the past, it is sometimes necessary to prepare for war — to keep the peace.

The operative part is that it's necessary to prepare for war to keep peace. 

This is sound advice for appeaceniks like Emmanuel Macron who has implied France will not protect the island since there is a "great risk" for Europe in getting "caught up in crises that are not ours." At a time when China has been conducting aggressive naval exercises and tensions between China and US are on the boil, it's difficult to see Macron's statement, and that too while on a visit to China, as anything other than appeasement. The damage it would have in adversely impacting the delicate deterrence on Taiwan is real. This is a good summary.

Sensing the damage, Germany's foreign minister Annalena Baerbock during a visit to Beijing and EU's foreign policy chief Josep Borrell have both warned China against using military force against Taiwan. Baerbock said that "a unilateral, to say nothing of a violent, change of the status quo would be acceptable to us Europeans."

4. Ruchir Sharma points to how dominant Big Tech has become in the US and how non-disruptive US capitalism has become

Today, all of the top five US companies are tech businesses and together they represent more than 20 per cent of the stock market — the highest concentration since the 1960s and more than double the figure a decade ago. The decline in competitive churn is a side-effect of the rescue culture that has been growing since the 1980s. Ever since the US Federal Reserve stepped in to prop up the market after the 1987 crash, the stock market has grown dramatically, from half the size of the US economy to two times larger at its peak in 2020. One might assume an expanding market should create room for more churn, but no, not in America. The number of US companies that remain in the top 10 from one decade to the next has risen steadily, from just three in 1990 to six at the end of the 2010s. And while churn has weakened in the US, it remains relatively robust across much of the world. From the start to the end of the 2010s, just two companies remained on the top 10 list in Japan, four in Europe, four in China and two in the global list, Microsoft and Alphabet. Today, the top five US companies are bigger than the next five by the largest margin since the early 1980s. The top two alone account for nearly half the market cap of the top 10, up from 35 per cent at the start of the pandemic. Apple is now number one, and is nearly six-times larger than UnitedHealth Group, in 10th place. Three decades ago, Exxon was number one but just over twice the size of the tenth company, BellSouth.

The biggest beneficiary of the bank bailouts in the US are the big technology companies. This is reflected in the rebound in their stocks after the bailouts were announced. The bailouts also reflect the regulatory capture by Big Tech, a point highlighted by the Texas mayor 

In Texas, the mayor of Fort Worth recently said that the “main thing” worrying business leaders is this question: if SVB had served the oil industry rather than tech, would the government “have stepped up the same way?”

5. The recent banking crisis that was triggered by SVB had its roots in classic asset-liability mismatches, excessive exposure to long-term government securities (50% of assets, compared to 29% in India), concentration of credit risk (startups), and liquidity risk (disproportionate share of bulk deposits). In its context, TT Rammohan draws attention of the RBI's "intrusive" regulatory approach which has prevented bank runs in India,

It is fair to suggest that the Indian banking system is better equipped to pre-empt the sort of risks we are talking about...The average holding of government securities in the Indian banking system today is 29 per cent of liabilities. The majority of holdings are held to maturity and hence insulated from market risk... The Reserve Bank of India (RBI) monitors concentration risk closely. It has in place stringent norms for risk exposure to a borrower. Exposure to “sensitive” sectors, namely, real estate, commodities and the capital market, is restricted. The RBI is quick to draw attention to excessive exposure to any industrial sector or product. As for liquidity risk, the RBI watches dependence on “bulk” deposits like a hawk. Where the dependence is high in absolute terms or out of line with that of peers, the RBI asks for the proportion to be brought down in a specified time-frame. 

The RBI’s monitoring of boards and management is more intense than elsewhere. Appointments to the posts of chairman and managing director at banks require the RBI’s approval. The RBI typically approves terms of three years but may approve a shorter tenure. There are age limits for the managing director and chairman. There are norms for the composition of bank boards and for the audit and risk management committees. Most regulators limit themselves to fixing the ratio of variable pay to fixed pay of the chief executive officer (CEO). The RBI does this and, in addition, regulates the fixed pay of the CEO. It understands only too well the link between executive pay and systemic risk in banking. Two reports that the RBI makes available to bank management are noteworthy: The Annual Financial Inspection report and the Risk Assessment Report. These highlight the entire gamut of risks, shortcomings in systems and processes, the functioning of the board, lapses in compliance, etc. Those who have sat on bank boards will vouch for the high quality of these reports.

The RBI need not be apologetic about its approach to regulation and supervision. The approach is intrusive, no doubt. It can be irritatingly prescriptive. It will be seen as micro-management. But it serves a purpose, namely, shoring up stability in banking.

6. Poonam Gupta points to the bias with credit rating agencies in their assessments of developed and developing countries

A UN paper attributes the bias to the location and origin of the staff of the credit rating agencies. The headquarters of credit rating agencies are located in the US. This itself contributes to the bias in favour of the US. Besides, they fear being legally sued by advanced economies for granting them ratings lower than what they think they deserve. A majority of the managers and analysts in the rating agencies have been trained at universities based in advanced economies, resulting in “group think” and “home bias”. Finally, given the oligopoly in the rating industry, the raters mimic one another, perpetuating the bias...

Our own analysis of the credit ratings of the G20 countries confirms this bias. We compute the average numerical ratings of the three largest credit rating agencies, viz., Moody’s, S&P Global, and Fitch, on a scale of 1 to 20. While the average rating of an advanced economy is almost a perfect 19, that of an emerging market is 7.5 points lower, at close to a junk grade of 11.6 (the junk grade is accorded to a rating of 11 and below). The differential is not explained by the levels of growth rate, debt or fiscal deficit of these countries. The emerging countries live under the perennial threat of a potential downgrade to below the junk grade. India’s average rating in 2022 was 12, just one notch above the speculative grade.

7. Interesting article on the changing trends in urban planning, from grids to radial plans to cut de sacs.

8. Finally on the importance of property prices to the developed economies,

In developed economies... real estate is formalised, and mortgages are 30 per cent to 60 per cent of banking credit... Not only is housing an important source of economic demand, accounting for 10 per cent to 24 per cent of gross domestic product (GDP), but it is also an important asset for most households. Most importantly, being a long-term asset, its value is highly sensitive to interest rates... In major markets, nearly a fifth of loans have loan-to-value ratios more than 80 per cent: A 20 per cent price drop would mean a distressed mortgage... We estimated a 0.9 percentage point impact on global growth if housing construction in the US, China, Germany, Canada, and Australia were to fall back to trend: Most of it due to slower construction, and the rest due to weaker consumption caused by negative wealth effects as house prices fall.

The Economist has an update on property markets in developed countries.  

Weekend reading links

1. Even after nearly a decade, Uber continues to lose money, $6.8 bn of net loss last year. It's also facing regulatory headwinds like higher payments and protections for drivers and caps on commissions charged on restaurants. Reflecting these troubles, its share price hovers at its 2019 listing price. 

2. India's market regulators are doing what has not been done by regulators elsewhere. First the SEBI delicensed Brickwork Ratings and barred two executives of CARE for ratings related malpractices. Now the RBI has barred Haribhakti & Co from undertaking any type of audit assignments in central bank regulated entities for two years. This is the fist such debarment under Section 45 MAA of the RBI Act of 1934. The auditor audited SREI Infrastructure Finance Ltd and SREI Equipment Leasing, the Boards of both which have been superseded by RBI on governance concerns, including insider trading, and defaults in meeting payment obligations. Both are being taken for insolvency proceedings. 

See this and this on the problems at SREI.

3. Interesting data on the profile of India's unicorns, of whom there have been 33 this year till date.

Underlining the plenitude of capital available in the market, there was just one unicorn with a revenue multiple of less than 10 out of the 25 startups which turned unicorn this year for which data are available.

In 19 of the unicorns of this year for which data is available, there were just 8 with founders equity more than 25%. In fact, for a group of 50 startups, including those from 2021, the medial holding of founders is just 15%. 

Finally, the roll call of foreign investors in these 2021 unicorns.

4. Fascinating account in FT of the  rise and fall of former Austrian Chancellor and People's Party leader  Sebastian Kurz. Kurz, 35 now, won one of Austria's biggest ever electoral victories in September 2019, with 37.5% of vote for People's Party. But a scandal involving use of tax payer money to bribe media organisations into providing positive coverage has forced him to quit as Chancellor. He's now facing the heat of an investigation which threatens to unveil other more damaging deeds. Prosecutors and opposition accuse him of a Kurz system, a network of patronage connecting the Chancellory to the country's economic, political, and media systems. 

5. Saudi Arabia labour market facts of the day,

In just four years, the participation of women in the labour force has almost doubled to 33 per cent... For five years after Prince Mohammed launched his Vision 2030 reform plan, unemployment hovered stubbornly above 12 per cent, with youth joblessness at more than 30 per cent... Almost 2m foreign workers have left the kingdom since 2017 as the government raised tariffs on them and their dependants... expatriates, which account for about a third of the kingdom’s 33m population...Foreigners still account for about 77 per cent of private sector jobs. In retail, for example, where nationals now dominate the customer-facing side of many outlets, Saudis still only represent 28 per cent of the total workforce of 640,000.

6. Tim Harford has a nice summary on the now abandoned Ease of Doing Business rankings,

Doing Business was a victim of its own success. There are two types of statistics in the world: the ones that politicians ignore and the ones that politicians want to manipulate. The demands for manipulation will never go away, but the answer is not to cancel the gathering of statistics. It is to defend the independence of the statisticians.

One could also add that the statistical method should undergo constant improvement to account for emergent deficiencies. 

7. Jens Wiedmann, the hawkish long-standing President of Bundesbank announced his resignation early this week. During his decade long career and the Bundesbank and in the ECB's Governing Council, Wiedmann had been the voice of dissent against ECB's extended monetary accommodation. He played the role of the orthodox central banker, cautioning against inflation and monetary profligacy, and also against central banks venturing into areas like preventing climate change. This FT editorial has a good summary

Weidmann’s hawkish views, in keeping with many in his country and the reputation of the Bundesbank, meant he was often in the minority and would be passed over to become the next ECB president in favour of Christine Lagarde, with no prior experience of central banking. Still, to his considerable credit, he was a team player, often defending the ECB against unreasoned criticism in his home country. Critically, he rejected the potentially explosive assertion of the constitutional court that the ECB’s quantitative easing programme represented monetary financing...

Either way, Weidmann’s career showed that there was ultimately nothing for the eurozone’s institutions to fear from forceful dissent. Even while it annoyed Draghi, disagreement between members of the ECB’s governing board, which includes the head of the national central banks, did not prevent the ECB from acting decisively in moments of crisis. If anything, a loud voice reflecting the views of more hawkish member states, often in the north, helps build consensus and ensure that the institution — protected from political influence by international treaty — truly reflects the views of all it serves.

Wiedmann's role in the ECB is a great example of why strong and mature institutions need credible dissenting voices. 

It can be said that Weidmann's dissent contributed to keeping the ECB honest in its internal deliberations on continuing its monetary accommodation, and may even have enhanced the credibility of ECB's decisions than would otherwise have been. 

8. Justin Fox has a good article which examines the impact of Covid 19 in Sweden in light of the country's relatively relaxed pandemic policies. On both Covid 19 casualties and economic performance, the country appears to have done no better or worse than others, making it difficult to draw any definitive conclusions.

It's also a good pointer to the difficulty of drawing generalisable enough headline lessons about specific approaches on any such issue. As the article shows with several different statistics, it's always possible to selectively quote statistics to claim success or failure. 

9. Equity funding available for startups globally has soared this year.

Reflecting this, the number of unicorns too have risen.

This says it all,

There are now almost 850 unicorns — startups valued at more than $1 billion — more than 50% higher than this time a year ago.

10. Interesting McKinsey graphic which highlights the disconnect between employees and employers on labour market attrition - why employees leave and what employers think is the real reason.

11. The Economist has an article on Samsung as it grapples with its priorities in the rapidly changing market. Samsung's low valuation, apart from it being listed only in Korea, has to do with it not being a western firm. In terms of real value creation and long-term prospects, it's had to see how Apple can even compare with Samsung. 

12. Livemint reports on how Covid 19 has been a devastating blow for the Rs 1 trillion low-cost private schools in India. 

Of these 400,000-plus private schools, a bulk—over 320,000—are actually affordable private schools (those that charge a fee of less than ₹2,000 per month). School entrepreneurs claim that tens of thousands of these budget schools have now either permanently shut or are on the verge of shutting down... Contrary to the popular perception of a private school as an institution that’s all about high fees, swanky buildings and a ready physical-digital infrastructure that could take care of any eventuality, the low-cost budget school is often run with bare minimum facilities... According to Central Square Foundation, at least 90 million children—or 75% of all private school students—are enrolled in private unaided schools. And around 70% of the students in private schools pay less than ₹1,000 per month in fees and 45% pay less than ₹500 per month in India, according to the Union ministry of statistics... The National Independent Schools Alliance estimates that in the aftermath of the coronavirus outbreak, private budget schools will be facing an annual loss of ₹77,000 crore... low-cost private school teachers are now earning as little as ₹5,000-10,000 a month. Post pandemic, teacher salaries have dropped steeply—between 30-65%—and there is no surety that the salary will be credited by the end of the month.

Weekend reading links

1. A status check on the share of e-commerce in India's retail market,

India has, as of now, nearly 13 million retail grocery stores (or kirana stores), contributing 10 per cent to India’s gross domestic product and accounting for 8 per cent of India’s employment. So-called “modern retail” is just 8,000 outlets, which make up a mere 0.05 per cent of the total and online e-commerce less than 2 per cent of retail sales.

2.  This is purely self-serving,

Praveer Sinha, chief executive officer and MD, Tata Power, had said in an interview in September that in the case of some imported coal-based plants, it was “absolutely unviable” to have a fixed-price agreement.

In case of the UMPP bids, the bidders had the option of quoting fixed tariffs or allowing fuel price pass-through, and Tata and other chose fixed tariffs. And when the Indonesian government changed its regulations by hiking domestic duties, the bidders found their fixed price tariff structure unviable and have been demanding fuel price pass-through.

3. More on India's missing middle class

The percentage of households owning a car, computer, AC, TV, and Fridge increased from just 2% to 3% over the 2014-19 period. 

4. Citing Covid 19, the Adani Group have sought time till December 2021 to take over the three airports of Trivandrum, Guwahati, and Jaipur. For the record, AAI had declared Adani Group the winner of six airports in February 2019. It assumed management control of Lucknow, Ahmedabad and Mangalore airports in November 2020. 

In stark contrast to the delays in assuming control of these airports, the Group has swiftly moved in to assume control of the Mumbai International Airport. 

The Group had bid very aggressively to win the six airports - in contrast to the Rs 85 and 69 per passenger revenue share quoted by GMR, the Group offered Rs 177 and 174 respectively. 

5. On the Chinese power crisis,

Some of those consequences have stemmed from production cuts in provinces struggling to meet strict year-end energy efficiency targets. Plants in other regions have been affected by coal shortages, soaring coal costs and electricity price caps, which mean they can only generate power at a loss. On Monday Chinese coal futures reached record highs after a big coal-producing region was affected by flooding.

6. Disruptions of supply chain and acute lorry driver shortage is leading to pile up of ships in English ports,

Congestion at ports has been widespread across the world since the end of last year when the pandemic wreaked havoc on supply chains by triggering volatile demand for goods, factory closures and restricted operations at ports. As a result, shipping a container between China and Europe costs more than six times as much as a year ago. However, the situation at ports in the UK has been particularly severe because of its acute lorry driver shortage. Felixstowe port said a shortage of drivers meant that it was taking about 10 days before cargo could be taken inland to be unloaded, up from the usual four-and-a-half days... “The pre-Christmas peak, combined with haulage shortages, congested inland terminals, poor vessel schedule reliability and the pandemic, has resulted in a build-up of containers at the port,” the port said.

And this on ships stuck outside ports, 

Globally, there are now 584 container ships stuck outside ports, nearly double the number at the start of the year... The snarl-ups in supply chains are reflected in a surge in shipping costs: the average global price of shipping a 40 foot container is now close to $10,000, three times higher than at the start of 2021 and almost 10 times pre-pandemic levels... Similar logistical problems have hit ports on the west coast of the US. Although the number of ships waiting at sea has fallen from a record 76 in September to 57 now, shortages of port workers and truckers means it takes up to 12 days for ships to drop anchor and unload containers, delaying the delivery of everything from sneakers to tropical fruits and Lego. That is why it takes three times longer compared with pre-pandemic times to clear vessels at Los Angeles and Long Beach.

7. Spain has imposed a windfall tax to plough back some of the large increases in profits of utilities due to the soaring natural gas prices. 

Spain’s big electricity companies — notably Iberdrola, the multinational utility, and Endesa, the subsidiary of Italy’s Enel — are making their first payments under the country’s temporary windfall levy, which rises in tandem with the price of gas. Spain’s leftwing government initially estimated that based on prices last month, the measure would raise €2.6bn during its six months in force, taking funds from utilities that benefit from the impact of gas on the electricity price but which do not have corresponding gas costs of their own. But the continued increase in gas prices means the levy may now cost the companies involved more than €5.5bn, which the groups argue shows that it was disproportionate and ill-conceived.

8.  NYT has an article on the central issue in US-China relations, the issue of Taiwan. A few days back, Xi Jinping said that Taiwan independence "was a grave lurking threat to national rejuvenation" and affirmed his commitment to unite Taiwan with China. 

The biggest destabilising force is the possible breakdown of the belief that US forces could at the least tied down the Chinese military. 

In war games since at least 2018, American “blue” teams have repeatedly lost against a “red” team representing a hypothetical Chinese force — in part by design, since the exercises are intended to test officers and war planners. In a game simulating a war around 2030, reported earlier by Defense News, the “blue” team struggled even when given new advanced fighter planes and other weapons still on the Pentagon’s drawing board. The classified game culminated with China launching missile strikes against American bases and warships in the region, and then staging an air and amphibious assault on Taiwan, according to a Defense Department official. The officials concluded that Taiwan, backed by the United States, could hold out for maybe two or three days before its defenses crumbled. The Pentagon’s annual assessments of China’s military have since 2000 chronicled its evolution from a large but ineffective force into a potential rival. Its latest report said Chinese capabilities have already surpassed the American military in some areas, including shipbuilding, conventional ballistic and cruise missiles, and integrated air defense systems. All three would be essential in any conflict over Taiwan...

“This really is the grimmest time I’ve seen in my more than 40 years working in the military,” Taiwan’s minister of defense, Chiu Kuo-cheng, told lawmakers on Wednesday. China already had the means to invade Taiwan, though still at a high price, he said. “By 2025, the cost and attrition will be squeezed lowest, and so then it could be said to have ‘full capability’.”

The point is about what's going on in the minds of the top leadership about Taiwan. Do they think that they've enough strength to overwhelm US and annexe Taiwan? Do they think that the Americans would find the damage of a direct confrontation unacceptably high as to not back Taiwan the full hog in case of a war? Do they think that the Biden administration's increasing level of diplomatic and military support will embolden Taiwan and increase the resolve of pro-democracy forces in Taiwan.

9. Latest in the (un)ease of doing business in China, chinfrom the travails of Microsoft's LinkedIn,

Microsoft Corp.’s LinkedIn is shuttering a localized version of its professional networking platform in China, becoming the last major U.S. social media provider to pull out of the country and marking the demise of a rare U.S. tech success there. LinkedIn said it made the decision in light of “a significantly more challenging operating environment and greater compliance requirements in China.” ... In exchange for being allowed to operate, the company agreed to restrict some content to adhere to state censorship rules. The service had about 52 million users on mainland China. Other U.S.-based social media platforms such as Twitter Inc. and Facebook Inc. have long been banned.

Signs of turbulence for Microsoft emerged in March. LinkedIn said then that it had paused sign-ups for new members in China while it worked to ensure compliance with local laws. Earlier that month, China’s internet regulator reprimanded LinkedIn executives for failing to control political content, according to the New York Times.In May, a prominent critic of China based in the U.K. said LinkedIn froze his account and removed content criticizing the country’s government, the latest in a series of allegations that the networking website had censored users — even outside of the Asian nation — to appease authorities in Beijing.

10. New Yorker has a fascinating profile of CORE (Curriculum Open-Access Resources in Economics), an initiative anchored by a free online introductory text book The Economy, created by a team led by Samuel Bowles and Wendy Carlin, and which seeks to "teach economics as if the last thirty years had happened", 

Compared with other textbooks, “The Economy” sometimes seems to reverse foreground and background. “Principles of Economics,” written by the Harvard economist N. Gregory Mankiw, declares that “markets are usually a good way to organize economic activity”; “Macroeconomics,” by Paul Krugman and Robin Wells, tells students that “markets move toward equilibrium.” Bowles and Carlin, in contrast, present market failure as far more pervasive, and not as a rare deviation from a generally efficient and desirable status quo. Most economics textbooks, they argue, in a recent paper on economics pedagogy, lead students to “reasonably conclude that the economy is about interactions in competitive markets (a positive statement) that function pretty well (a normative one) and in which governments ought not to meddle.” core provides reasons and evidence to challenge all three positions. 

Recently, Bowles and Carlin published a statistical analysis, comparing the relative frequency of topics in core’s “The Economy” with other textbooks. Some of the words that appear more commonly in “The Economy” are “Gini” (a measure of inequality), “bargaining,” “environment,” “global,” and “democracy.” Their analysis also shows that core offers greater coverage of economic history and thought, game theory, behavioral economics, and comparative international development. It’s not that the other textbooks omit these topics entirely but that core foregrounds them. Bowles told me about an informal rule among publishers that no more than fifteen per cent of the material in a new textbook should deviate from the dominant ones. He estimates that the figure for core is closer to seventy per cent.

11. The returns generated by US University endowments,

The Massachusetts Institute of Technology reported that its endowment had gained 56 percent in its most recent fiscal year, which ended in June. Yale also published its latest returns Thursday, with its endowment up 40 percent over the same period, its third-highest annual return since 1970. Dartmouth posted a return of nearly 47 percent. Duke reported a 56 percent return. Harvard, which runs the biggest endowment (worth $53 billion), said Thursday that its fiscal-year return lagged many of its rivals, rising a mere 34 percent... A big reason for the gains is investments with private equity firms, which in some years have received more in fees than endowments have paid out in tuition help. Harvard’s private equity investments, worth a third of its total portfolio, returned 77 percent in its latest fiscal year. Venture capital funds are also recording huge returns: The University of North Carolina logged a 142 percent return from that portion of its $10 billion endowment.

Also, sample this from 2015,

Last year, Yale paid about $480 million to private equity fund managers as compensation — about $137 million in annual management fees, and another $343 million in performance fees, also known as carried interest — to manage about $8 billion, one-third of Yale’s endowment. In contrast, of the $1 billion the endowment contributed to the university’s operating budget, only $170 million was earmarked for tuition assistance, fellowships and prizes. Private equity fund managers also received more than students at four other endowments I researched: Harvard, the University of Texas, Stanford and Princeton.

12. Finally, India's market regulator appears to be doing what should already have been done in scrutinising and penalising the actions of credit rating agencies (CRAs). World over, the CRAs have largely got a free pass despite egregious failings and culpability in many incidents, including the global financial crisis. 

Markets regulator Securities and Exchanges Board of India (Sebi) has decided to cancel the license of one CRA—Brickwork Rating—and ban from the markets two former senior officials of another—CARE Ratings... At Brickwork Ratings, the regulator found egregious violations on two counts—lack of independence of the rating committee and lapses in following procedures while rating instruments. CARE Ltd’s two former senior officers—former managing director Rajesh Mokashi and former chairman S.B. Mainak—will be barred from the securities markets owing to the lack of independence and checks while they rated the debt instruments issued by IL&FS group or its subsidiaries... In the case of Brickwork, there is a case of repeated lapses and lack of independence... 

There are seven registered credit ratings agencies in India—CRISIL, CARE, Acuité Ratings & Research Limited, Brickwork Rating, India Rating and Research and Infomerics Valuation and Rating. The global biggies—S&P, Moody’s and Fitch—don’t rate Indian corporate bonds. CRISIL is majority owned by S&P. Such severe action on a credit rating agency is rare globally. The only big example is a 2013 ban by US Securities and Exchange Commission on Egan-Jones Ratings Company and its president for 18 months. Even then the bar was for omissions in statements while seeking registration and not for lapses in the ratings process.  

This about the relationship between Brickwork and Essel Group is at the heart of SEBI's ire,

The Sebi investigation report in the matter, which will form part of the impending order, cites issues in ratings of papers issued by companies such as Diamond Power, Great Eastern Energy Corp. and firms that are part of the Essel group—namely Essel Corporate Resources and Zee Entertainment Enterprises Ltd. The issues ranged from delay in downgrading to not assigning any rating while the ratings were withdrawn due to so-called non-cooperation by the company... It again goes back to the controversial agreement between mutual funds and Zee promoters in January 2019. Seven mutual fund houses who held Essel group papers in their various debt schemes came to an agreement that although the companies were unable to stick to the repayment schedules of the debt papers, they will be given a lifeline. The funds would not invoke the underlying shares and dump them into open market. They instead extended the maturity dates of the papers from these companies. 

The market regulator has been particularly angry at this. Kotak Mahindra Mutual Fund and HDFC Mutual Fund have both faced regulatory orders over this. While HDFC MF settled the matter, Kotak Mahindra MF was slapped with a ₹50 lakh fine and a ban on launching fixed maturity plans for six months. The regulator in its investigation report has noted that the rating agency downgraded the two instruments only by one notch when ordinarily such breach of obligations should result in a multi-notch downgrade or default.

Also this about Brickwork,

In a previous order on Brickwork in August 2018, Sebi had found a flagrant conflict of interest. It found that D. Ravi Shankar, founder director at Brickwork, was both involved in rating as well as in approving the fee charged for this service—a practice deemed a complete no-no in the ratings industry. This practice happened in 71 cases involving a rated amount of around ₹86,842 crore. 

Another stunning instance involved the rating of debt instruments issued by Cox and Kings. On 24 June 2019, both CARE and Brickwork reaffirmed their highest rating of A1+ for Cox and Kings’ commercial paper (CP) issue. Brickworks even highlighted high receivables. Both CRAs also gave a ‘Stable’ outlook, which indicates a low possibility of rating change over the medium term. Yet a mere 3 days later, on 27 June 2019, Cox & Kings defaulted on ₹150 crore of payments on CP. It was only after the default that ratings were downgraded by several notches to default.

This about CARE merited cancellation of its license too,

In the case of CARE, some of the conflicts were first highlighted by a July 2019 audit report by Grant Thornton. As per CARE’s shareholding pattern between 2007 and 2013, IL&FS Ltd and ILFS Financial Services (IFIN) were equity shareholders and held a 5-9% stake. During the same period, CARE was rating instruments of IFIN, IL&FS and IL&FS Transportation Networks Ltd. “It appears that the rating agencies were potentially aware of the issues in the IL&FS group. However, the various strategies deployed by the then key officials of IL&FS group and certain favours/gifts provided to rating agency officials suggest the possible reasons for consistent good ratings provided to IL&FS group during the period June 2012 to June 2018," said Grant Thornton in the audit report.

This is all excellent work. It's also worth pondering whether any financial market professional could have had the courage to undertake such actions. So kudos to the SEBI leadership for cracking down on CRAs.