The Regulatory Framework for Credit Rating

Agencies SEBI Regulations

The Securities and Exchange Board of India (Credit Rating Agencies) Regulations, 1999 empower SEBI to regulate CRAs operating in India. In fact, SEBI was one of the first few regulators, globally, to put in place an effective and comprehensive regulation for CRAs.

SEBI regulation for CRAs has been designed to ensure the following:

Credible players enter this business (through stringent entry norms and eligibility criteria)

CRAs operate in a manner that enables them to issue objective and fair opinions (through well-defined general obligations for CRAs)

There is widespread investor access to ratings (through a clearly articulated rating dissemination process).

The applicant should be registered as a company under the Companies Act, 1956 and possess a minimum network of ` 5 crore.

The following are some of the General Obligations specified in the CRA regulations. CRAs are amongst the very few market intermediaries for which such detailed operating guidelines have been prescribed under the regulations.

Code of Conduct stipulated by SEBI

Agreement with the client

Monitoring of ratings

Procedure for review of rating

Internal procedures to be framed by the CRA

Disclosure of Rating Definitions and Rationale by the CRA

Submission of information to the Board

Compliance with circulars etc., issued by the Board

Appointment of Compliance Officer

Maintenance of Books of Accounts records, etc.

Confidentiality

Rating process

These regulations cover issues with respect to confidentiality of information and disclosure with respect to the rationale of the rating being assigned. Several other provisions exist, like the regulator‘s right to inspect a CRA. An important feature of the regulation is that CRAs are prohibited from rating their promoters and associates.

SEBI Code of Conduct

SEBI‘s code of conduct for CRAs addresses some of the basic issues relating to conflicts of interest. The Code of Conduct is designed to ensure transparent and independent functioning of CRAs. Some of the salient provisions of the Code of Conduct are:

A CRA shall make all efforts to protect the interests of investors.

A CRA shall at all times exercise due diligence, ensure proper care and exercise independent professional judgment in order to achieve and maintain objectivity and independence in the rating process.

A CRA shall have in place a rating process that reflects consistent and international rating standards.

A CRA shall keep track of all important changes relating to the client companies and shall develop efficient and responsive systems to yield timely and accurate ratings.

A CRA shall disclose its rating methodology to clients, users and the public.

Regulating Authority

In India, the regulating authority of Credit Rating Agencies and financial instruments are SEBI, RBI and IRDA. The list of various financial instruments, and the relevant regulators, are given below:

Products / Instruments requiring mandatory rating before issuance

Regulatory prescription of use of ratings for investment purposes

International Regulations

The International Organization of Securities Commission (IOSCO) has formulated a Code of Conduct Fundamentals for the working of CRAs. The IOSCO Code of Conduct broadly covers the following areas:

Quality and integrity of the rating process – This includes the measures to ensure quality of the rating process and monitoring and updating by the CRAs.

CRA‘s independence and avoidance of conflicts of interest – The procedures and policies to ensure the same.

CRA‘s responsibilities to the investing public and issuers – These address issues such as transparency and timeliness of ratings disclosure and the treatment of confidential information.

Disclosure of the code of conduct and communication with market participants – This requires CRAs to disclose to the public in accordance with the IOSCO Principles regarding the activities of Credit Rating Agencies