Measures for Ease of Doing Business for Credit Rating Agencies

Margesh Rai

28 Nov, 2024

Credit Rating Agencies (CRAs) play a crucial role in the financial sector by evaluating the creditworthiness of issuers and their debt instruments. These assessments are essential for guiding institutional and individual investors in making informed investment decisions, facilitating efficient capital allocation of robust regulatory oversight for Credit Rating Agencies to ensure their impartiality, transparency and accuracy. In India, the SEBI has implemented significant regulatory measures for ease of business for Credit Rating Agencies, aiming to uphold the integrity of capital markets and protect investors’ interests.

SEBI Notifies Timeline & Disclosure for Credit Rating Agencies in Doing Business

A SEBI on July 4, 2024, has established specific timelines for handling appeals from issuers regarding rating actions conducted as part of periodic rating surveillance for ease of business for Credit Rating Agencies. According to these timelines, the credit rating must be communicated to the issuer within one working following the rating committee meeting. Issuers are allowed three working days from the Rating Committee meeting to request a review or appeal of the rating.

Further, the CRA must release a press release and notify the Stock Exchange or Debenture Trustees within seven working days of the Rating Committee meeting. The Credit Rating Agencies must record the disclosures for 10 years.

Although a maximum timeline of one working day has been set, Credit Rating Agencies are encouraged to communicate the rating to the issuer on the same day as the Rating Committee meeting whenever possible. This circular will take effect from August 1, 2024. Compliance with this guideline will be monitored through the semi-annual internal audit for Credit Rating Agencies as mandated by Regulation 22 of the CRA regulation for the SEBI registered Credit Rating Agency.  

SEBI has issued new guidelines for ease of doing business for Credit rating agencies. These guidelines also include requirements for timely disclosures, such as daily updates on non-cooperative issuers and retention of declined ratings for 12 months, to ensure orderly market regulations and that stakeholders receive timely notification about issuers who fail to cooperate with rating agencies.

What are the Key Aspects of SEBI Regulation in Credit Rating Agencies? 

SEBI’s regulations require the Credit Rating Agencies (Credit Rating Agencies) to obtain registration before commencing rating activities in India. Credit Rating Agencies need to maintain strict eligibility criteria, including thresholds of minimum net worth and track record and governance standards, ensuring that only financially stable and credible entities operate as Credit Rating Agencies. Key aspects of SEBI’s regulation include:

1. Prepare a Code of Conduct

Credit rating agencies are required to strictly adhere to a code of conduct that encompasses ethical practices, professional integrity, and the avoidance of conflicts of interest. This ensures that only financially stable and reputable entities are authorized to operate as Credit Rating Agencies.  

2. Maintain Transparency

Credit rating agencies are required to present information about rating methods, processes, and rating performance on their websites and in their annual reports. This helps investors understand the basis of credit ratings and their reliability.

3. Conflict of Interest Management

Credit Rating Agencies have robust policies & procedures to manage and disclose potential conflicts of interest that will compromise the integrity of ratings. This ensures objective ratings are free from the influences held externally.

4. Process Ratings and Committees

SEBI mandates Credit Rating Agencies to establish independent rating committees responsible for determining credit ratings, which also ensures unbiased decisions together and independently.

5. Review and Monitoring

Credit Rating Agencies must regularly review & monitor credit ratings to ensure accuracy and adjust ratings if new information affects an issuer’s creditworthiness.

6. Reporting of Regulatory

Credit Rating Agencies are required to submit periodic reports to SEBI stating their financial operations and complaints with regulations. This enables SEBI to manage risks and ensure adherence to established standards.

Boosting MSMEs: Attractive Incentives for Credit Ratings

The Ministry of MSME has launched a program to subsidize the cost of credit ratings for MSMEs, offering up to Rs 40,000 through authorized rating agencies. MSMEs benefit from better access to credit, increased stakeholders’ trust, and government-backed subsidies for rating expenses. The enhanced risk evaluation accelerates lending decisions, benefiting MSMEs and the financial sector.

Conclusion

In conclusion, SEBI’s regulatory measures and specific timelines for credit rating agencies are designed to ensure transparency, accuracy, and efficiency in the financial sector. These regulations protect investors’ interests and streamline business operations for Credit Rating Agencies. Additionally, the Ministry of MSMEs program to subsidize credit ratings for MSMEs enhances their creditworthiness and access to finance. These initiatives collectively foster a more robust and reliable financial framework.

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