SEBI (Credit Rating Agencies) Regulations, 1999

SEBI (Credit Rating Agencies) Regulations, 1999 (Part 1)

Definition: The SEBI (Credit Rating Agencies) Regulations, 1999, outline the guidelines for credit rating agencies in India, including registration, eligibility criteria, and general obligations.
Details: The regulations aim to ensure that credit rating agencies operate in a fair and transparent manner, providing accurate and reliable ratings to investors.

Key Concepts

Registration as a Credit Rating Agency: To register as a credit rating agency, an applicant must meet certain eligibility criteria, including being a body corporate, having a minimum net worth of Rs. 25 crores, and having adequate infrastructure to provide rating services.
Eligibility Criteria: The applicant must also satisfy conditions such as being set up and registered as a company under the Companies Act, 2013, having rating activity as one of its main objects, and having professional competence, financial soundness, and a good reputation.
Promoter of Credit Rating Agency: The promoter of a credit rating agency must belong to certain categories, such as a public financial institution, a scheduled commercial bank, or a foreign credit rating agency with a minimum of five years' experience in rating securities.
Certificate of Registration: SEBI grants a certificate of registration to eligible applicants, which is valid unless suspended or cancelled, and is subject to payment of registration fees.
General Obligations of Credit Rating Agencies: Credit rating agencies must enter into written agreements with clients, monitor ratings, carry out periodic reviews, and disclose rating definitions and rationale to the public.
Submission of Information to SEBI: Credit rating agencies must comply with SEBI's guidelines and furnish information as sought by SEBI, including copies of their balance sheet and profit and loss account.
Maintenance of Books of Accounts: Credit rating agencies must maintain books of accounts, records, and documents, including copies of their balance sheet, profit and loss account, and auditor's report, for a minimum period of five years.

Important Terms

Credit Rating Agency: A body corporate engaged in the business of rating securities.
Rating: An opinion regarding securities, expressed in the form of standard symbols or any standardized manner.
Registration Fees: Fees paid by credit rating agencies to SEBI for registration and renewal of registration.
Net Worth: The minimum amount of capital required by a credit rating agency to operate, which is Rs. 25 crores.
Promoter: A person or entity that sets up and supports a credit rating agency.

SEBI (Credit Rating Agencies) Regulations, 1999 (Part 2)

Compliance Officer: Every credit rating agency shall appoint a compliance officer to monitor compliance with the Act, rules, and regulations.
Auditor's Report: Credit rating agencies must rectify deficiencies in the auditor's report within two months.
Confidentiality: Credit rating agencies must treat client information as confidential and not disclose it unless required or permitted by law.

Key Requirements for Credit Rating Agencies

Rating Process: Credit rating agencies must specify their rating process, file a copy with SEBI, and follow a proper rating process.
Rating Committee: Credit rating agencies must have professional rating committees with adequately qualified and knowledgeable members.
Rating Decisions: All rating decisions must be taken by the rating committee.
Analysts: Credit rating agencies must have qualified analysts to carry out rating assignments.
Disclosure: Credit rating agencies must disclose their rating methodology, possible sources of conflict of duties and interests, and any changes in rating.

Restrictions on Credit Rating Agencies

Shareholding: A credit rating agency cannot hold 10% or more shareholding and/or voting rights in another credit rating agency.
Rating of Securities: A credit rating agency cannot rate securities issued by its promoters, associates, or subsidiaries.
Code of Conduct: Credit rating agencies must follow a code of conduct that includes protecting investors' interests, maintaining integrity and fairness, and avoiding conflicts of interest.

Code of Conduct for Credit Rating Agencies

Protecting Investors' Interests: Credit rating agencies must make all efforts to protect investors' interests.
Integrity and Fairness: Credit rating agencies must observe high standards of integrity, dignity, and fairness in their business conduct.
Due Diligence: Credit rating agencies must exercise due diligence and independent professional judgment in the rating process.
Disclosure: Credit rating agencies must disclose their rating methodology, possible sources of conflict of duties and interests, and any changes in rating.
Compliance: Credit rating agencies must comply with the provisions of the Act, regulations, and circulars applicable to their activities.

SEBI (Credit Rating Agencies) Regulations, 1999 (Part 3)

Definition: The SEBI (Credit Rating Agencies) Regulations, 1999, outline the guidelines for credit rating agencies in India.
Details: The regulations cover various aspects, including registration, eligibility, and code of conduct for credit rating agencies.

Key Concepts

ESG Rating Providers: Environmental, Social and Governance (ESG) Ratings are opinions about an issuer or security regarding its ESG profile or characteristics, issued using a defined ranking system.
ESG Rating Provider: A person engaged in or proposing to engage in the business of issuing ESG ratings, requiring a separate Certificate of Registration from SEBI.
Code of Conduct: SEBI has prescribed a separate Code of Conduct for ESG Rating Providers in the Seventh Schedule of the Regulations.

Case Study: SEBI Order against 3 Rating Agencies in the matter of IL&FS

Facts of the case: SEBI imposed a fine of Rs 25 lakh each on ICRA, CARE Ratings, and India Ratings and Research Pvt Ltd for their role in the IL&FS crisis.
Findings of the case: SEBI observed that the rating agencies failed to exercise proper skill, care, and due diligence, resulting in real and severe financial loss to investors and shaking investor faith in credit ratings.
Order: SEBI enhanced the penalty amount to Rs 1 crore each on the three rating agencies for violating the provisions of the code of conduct of CRAs.

Review Questions

The promoter of a credit rating agency shall have a continuous net worth of minimum Rs. 100 crores for the previous five years.
The certificate of registration as a credit rating agency is valid permanently until suspended.
The renewal fee to keep the registration in force as a credit rating agency is Rs. 10 lakhs (not listed, but Rs. 10 lakhs is the correct answer).
Yes, it is a violation as per the SEBI code of conduct for credit rating agencies to encourage client-facing employees to assure a higher rating to clients than competitors.