The Indian Credit Rating agencies are governed by the Securities and Exchange Board of India (Credit Rating Agencies) Regulations, 1999 (“the Regulations”). SEBI however recognizing the need for more stringent oversight introduced the SEBI (Credit Rating Agencies) Regulations, 2018, which replaced the earlier regulations. These updated regulations aimed to reinforce the credibility and accountability of CRAs and enhance transparency in their operations.
In terms of CRA Regulations 2018, the CRA must be promoted by a person belonging to one of the following:
(i) A public financial institution
(ii) A scheduled commercial bank
(iii) A foreign bank operating in India with RBI approval
(iv) A recognized foreign CRA with a minimum of 5 years of experience in rating securities
(v) Anybody corporate having a minimum net worth of Rs. 100 crore for the last 5 years according to its audited financial statement
Regulations:
The regulations necessitate CRAs to establish a rating committee responsible for their credit rating determination. The process shall be uninfluenced and unbiased, as decisions are made collectively and independently. Each CRA shall conduct periodic reviews and monitoring of credit ratings to ensure their accuracy and relevance. The new information if any impacts the rating of the issuer client they shall adjust the rating accordingly.
Conflict of interest: In case the issuer company and the CRA have common Independent Directors, rating of securities is allowed only where the common director does not take part in the rating process and disclosure of the same effect is made by the CRA therein.
CRAs cannot issue ratings for its associate or subsidiary company, the associate company refers to a company where CRA owns 10% or more shares whereas a subsidiary company is a company in which CRA owns 50% or more shares. CRAs are required to have robust policies and procedures in place to manage and disclose potential conflicts of interest that could compromise the integrity of their ratings.
The III Schedule of the Regulations requires CRAs to not rate securities in which there exists a conflict of interest between the issuer of the securities and the CRA. This includes securities where a promoter of CRA (holder of 10% shares in the CRAs) is the issuer, or the issuer is the borrower or subsidiary or associate of the promoter.
Code of Conduct: Credit Rating Agencies have to adhere to a comprehensive code of conduct that encompasses ethical practices, professional integrity, and the avoidance of conflicts of interest. By following this code, CRAs maintain the impartiality and objectivity of their credit rating opinions.
Regulatory Reporting: CRAs are required to submit regular reports to SEBI, detailing their financials, operations, and compliance with regulations. This enables SEBI to maintain a vigilant oversight of their activities, ensuring adherence to established standards.
Disclosure and Transparency: The CRAs are mandated to disclose the definitions and symbol of the concerned rating and the information relating to the analysis of various factors and the rating methodology u/r 18 of the Regulations. However, the CRAs are prevented from disclosing any confidential information to any person except as permitted by law u/r 23 of the Regulations. To enhance investor understanding and confidence, CRAs are obligated to disclose information about their rating methodologies, processes, and rating performance on their websites and annual reports. This transparency assists investors in comprehending the basis of credit ratings and assessing the reliability of the ratings provided.
Liability: As per regulation 34, CRAs will be held liable for any act or omission contravening the Act, the Regulations, or any other regulations made therein under Chapter V of SEBI Intermediaries Regulations.
Accountability: The CRAs shall appoint an internal auditor and keep a copy of the auditor’s report for each such accounting period u/r 21 and 22 of the Regulations. As per Regulation 19, SEBI also has the power to call for information or conduct investigations in the affairs of the CRAs whenever required.
Related posts:
