All credit rating agencies are governed under the SEBI regulations. Credit Rating Agencies are generally promoted by the public financial institutions, scheduled commercial banks, and foreign banks operating in India. For doing any rating related assignment, the agency must be registered under the SEBI Regulations. Any Indian as well as foreign financial institution can get themselves registered under the SEBI Regulations for doing rating related assignments.
SEBI (CREDIT RATING AGENCIES) REGULATIONS,1999:
Registration of Credit Rating Agencies
(a) Application: An application should be made by every person proposing to commerce any activity as a credit rating agency to SEBI for the grant of a certificate of registration for the purpose;
(b) Grant of registration: Every person already carrying on any activity as a credit rating agency, should make an application to SEBI for the grant of a certificate within a period of three months;
(c) Application Fee: An application for the grant of a certificate should be made to SEBI accompanied by a non – refundable specified application fee;
(d) Renewal of Registration: Any person who fails to make an application for the grant of a certificate within the specified period ceases to carry on rating activity.
Promoter of Credit Rating Agency
The following institutions can act as the promoter of the Credit Rating Agencies:-
(i) A public financial institution;
(ii) A scheduled commercial bank;
(iii) A foreign bank operating in India with the approval of the Reserve Bank of India;
(iv) A foreign credit rating agency recognized under Indian Law and having at least five years‟ experience in rating securities;
(v) Any company or a body corporate, having continuous net worth of minimum Rs.100/- crores as per its audited annual accounts for the previous 5 years in relation to the date on which application to SEBI is made seeking registration.
Note: The credit rating agency should comply with the provisions of the Act, the regulations and the guidelines, directives, circulars and instructions issued by SEBI from time to time.
Eligibility Criteria:
(a) The applicant is set up and registered as a company under companies act, 2013;
(b) The applicant has, in its MOA, specified rating activity as one of its main objects;
(c) The applicant has a minimum net worth of Rs. 5 Crores; However, a credit rating agency existing at the commencement of these regulations, with a net worth of less than Rs. 5 crores, shall be deemed to have satisfied this condition, if it increases its net worth to the said minimum within a period of three years of such commencement.
(d) the applicant has adequate infrastructure, to enable it to provide rating services in accordance with the provisions of this act and these regulations;
(e) the applicants and the promoters of the applicant, have professional competence, financial soundness and general reputation of fairness and integrity in business transactions, to the satisfaction of SEBI;
(f) neither the applicant, nor its promoter, nor any director of the applicant or its promoter, is involved in any legal proceeding connected with the securities market, which may have an adverse impact on the interest of investors;
(g) neither the applicant, nor its promoters, nor any director, or its promoter has at any time in the past been convicted of any offence involving moral turpitude or any economic offence;
(h) the applicant has, in its employment, persons having adequate professional and other relevant experience to the satisfaction of the SEBI;
(i) neither the applicant nor any person directly or indirectly connected with the applicant has in the past been:
(1) refused by SEBI a certificate under these regulations;
(2) subjected to any proceedings for a contravention of act or of any rules or regulations made under the act;
(j) the applicant, in all other respects, is a fit and proper person for the grant of a certificate;
(k) grant of certificate to the applicant is in the interest of investors and securities market;
Validity Period of Registration:
The period of validity of certificate of registration shall be 3 years. The Certificate can be renewed on payment of additional fee & shall be valid for additional period of 3 years or less.
Monitoring of Ratings
(i) Credit rating agency should continuously monitor the rating of the securities rated by it.
(ii) It should also disseminate information regarding newly assigned ratings and changes in earlier rating promptly through press releases and websites.
Confidentiality: It is the duty of every credit rating agency to treat all the information supplied to it by the client as confidential and no credit rating agency shall disclose the same to any other person, except where such disclosure is required under any law.
Code of Conduct: (Dec 2007) Every credit rating agency is required to abide by the Code of Conduct as per SEBI Regulations:
(i) A credit rating agency should observe high standards of integrity and fairness in all its dealings with its clients;
(ii) A credit rating agency should fulfil its obligations in an ethical manner;
(iii) A credit rating agency should render high standards of service at all times, exercise due diligence, ensure proper care and exercise independent professional judgment;
(iv) The credit rating agency should avoid any conflict of interest of any member;
(v) A credit rating agency should not indulge in unfair competition;
(vi) A credit rating agency should not make any exaggerated statement, whether oral or written, to the client either about its qualification or its capability;
(vii) A credit rating agency should always ensure that all professional dealings are effected in a prompt and efficient manner;
(viii) A credit rating agency should not divulge to other clients any confidential information about its client;
(ix) Credit rating agency should not make untrue statement or suppress any material fact;
(x) A credit rating agency should not generally and particularly in respect of issue of securities be rated by it by a party:
(a) To creation of false market;
(b) Passing of price sensitive information to brokers.
(xi) A credit rating agency should maintain an arm‟s length relationship between its credit rating activity and any other activity;
(xii) A credit rating agency is required to abide by the provisions of the Act, regulations and circulars.
Compliances for Credit Rating Agencies & Rating process
(i) Credit rating agency should file a copy of the process with SEBI for record and also file with SEBI any modifications or additions from time to time.
(ii) It should in all cases follow a proper rating process.
(iii) Credit rating agency is required to have professional rating committees, comprising members who are adequately qualified and knowledgeable toassign a rating.
(iv) All rating decisions, including the decisions regarding changes in rating, should be taken by the rating committee.
(v) Credit rating agency should be staffed by analysis qualified to carry out a rating assignment.
(vi) Credit rating agency should inform SEBI about new rating instruments or symbols introduced by it.
(vii) Credit rating agency should exercise due diligence in order to ensure that the rating given by the credit rating agency is fair and appropriate.
(viii) A credit rating agency should not rate securities issued by it.
(ix) Rating definition as well as the structure for a particular rating product, should not be changed by a credit rating agency, without prior information to SEBI.
Securities Issued by Promoter
(i) Credit rating agency shall not rate a security issued by its promoter.
(ii) No credit rating agency should rate a security issued by an entity, which is a borrower of its promoter or a subsidiary of its promoter or an associate of its promoter.
(iii) No credit rating agency should rate a security issued by its associate or subsidiary.
Procedure for Inspection and Investigation
SEBI has the power to appoint one or more persons as inspecting officers:
(i) To undertake inspection or investigation of the books of account, records and documents of the credit rating agencies;
(ii) To investigate into complaints received from investors, clients or any other person on any matter having a bearing on activities of the credit rating agency;
(iii) To judge the appropriateness of the ratings may be ordered by SEBI.
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