Credit Rating

Suspension, Cancellation and Surrender of CRA Registration Certificate

The SEBI issued a circular “Suspension, Cancellation or Surrender of Certificate of Registration of a Credit Rating Agency” on 13^th October 2022. The said circular is issued to ensure orderly migration of ratings. It is directed by the SEBI that listed entities that have obtained a rating from a Credit Rating agency whose CRA registration certificate is suspended, cancelled or surrendered shall have to obtain a new rating from the registered Credit Rating Agency. Further, the circular has provided the detailed compliance procedure for the concerned CRA during the cancellation, surrender, and suspension of the CRAs registration certificate.

What is CRA Registration Certificate?

The Credit Rating Agencies (CRA) are responsible for doing calculations based on the financial statements of the firm issuing debt. Hence, they provide a comprehensive view regarding the returns and risks of a firm issuing debt through a recognised stock exchange. They are one of the market intermediaries involved in the business of rating securities offered through the right and public issues. The agencies further rate the debtors on their ability to pay the debt based on the calculations obtained from the financial statements.

The Credit Rating Agencies are required to obtain a Registration certificate from the SEBI for carrying on the activities of rating securities. The application is to be made to SEBI, who will, after examining the relevant documents and conditions, grant a registration certificate in accordance with Credit Rating Regulations 1999^[1]. The certificate act as an authenticity for the investors as they will invest in the securities based on those ratings.

Compliance after submission of Request for Surrender of Registration Certificate

The concerned Credit rating agency shall need to comply with the following conditions after submitting the request for the surrender of the registration certificate to SEBI:

1. The CRA shall prominently display on its website the request letter for the surrender of the registration certificate.
2. The CRA shall communicate to its clients within 15 days from the date of the request letter.
3. The CRA is not allowed to undertake new clients.
4. The CRA shall allow its clients to withdraw any assignment without extra cost.
5. The CRA shall facilitate orderly migration of rating to SEBI-registered CRA.
6. The CRA shall comply with all the regulations until it holds the CRA Registration Certificate.
7. The CRA shall, when required, send information to SEBI and pay such fees as necessary.
8. The CRA shall supply such records and documents as may be required by SEBI

Compliance after Winding Up of CRA

If the request letter for the CRA registration certificate gets accepted, then the concerned Credit Rating Agency shall comply with the following conditions:

1. The CRA shall return the registration certificate to SEBI
2. The CRA shall not represent itself as the holder of the certificate after surrendering the registration certificate.
3. The CRA shall suspend undertaking activity.
4. The CRA shall cooperate with SEBI for all the undertaken activities mentioned under CRA until it is wound up.
5. The CRA shall make provisions regarding any incurred liabilities.
6. The CRA shall provide any records or information to SEBI within the time period required under the CRA regulations till the time it is wound up.

Compliance during the period of Suspension of the CRA Registration Certificate

The concerned CRA, during the period of suspension, shall comply with the following conditions:

1. The CRA shall suspend all the undertaken activities.
2. The CRA shall coordinate with SEBI in regard to all the activities undertaken by it.
3. The CRA shall make provisions regarding any incurred liabilities.
4. The CRA shall provide any records or information to SEBI within the time period required under the CRA regulations until it is wound up.

Validity of Ratings assigned by the CRA

The validity of the rating assigned by the CRA under Suspension, cancellation and surrender shall be according to the following:

1. Cancellation of CRA registration Certificate: The credit ratings assigned by the CRA shall be valid till the time or whichever is earlier:
2. The client withdraws the assignment
3. The client migrates the assignment to another registered CRA
4. The CRA is wound up.
5. Surrender of CRA registration Certificate: The credit ratings assigned by the CRA shall be valid till the time or whichever is earlier:
6. The client withdraws the assignment
7. The client migrates the assignment to another registered CRA
8. The date of acceptance of the Surrender by SEBI
9. Suspension of CRA Registration Certificate: In case of suspension of registration certificate, the credit rating governed by such CRA shall not be valid during the period of suspension.

Requirements for Listed entities after Suspension, Cancellation or Surrender of Registration Certificate

The current framework has mandated that the services of CRAs whose registration certificate is cancelled, suspended or surrendered shall not be used by the listed entities or issuers for complying under SEBI regulations. Further, the listed entities who require credit rating can obtain the same from SEBI registered Credit Rating agencies.

Provisions not applicable after suspension, cancellation or Surrender of Registration Certificate

The framework has mandated that the below-mentioned provisions of the SEBI regulations shall not be applicable for the CRAs from the date of order of cancellation or suspension and order of request application for surrender of CRA registration certificate.

Paragraphs	Circular	Date
Para 2(I) to 2(III)	SEBI/HO/MIRSD/MIRSD4/ CIR/P/2017/28	31st March 2017
Para 2	SEBI/HO/MIRSD/DOP2/CIR/P/2018/95	6th June 2018
Para 3(b)	SEBI/HO/MIRSD/CRADT/CIR/P/2020/2	3rd January 2020
Para VII	SEBI/HO/DDHS/DDHS-RACPOD2/P/CIR/2022/ 113	25th August 2022

Issue of Undertaking for withdrawal of Credit Rating

The framework requires the issuer to furnish an undertaking that the credit rating for securities listed or proposed to be listed are available with other registered CRAs. However, while making an undertaking, it is also required that confirmation be received from other SEBI-registered CRA on the availability of credit rating for such securities. Further, the Credit rating agency whose CRA registration Certificate is cancelled, suspended or surrendered shall comply with the circular SEBI/HO/MIRSD/MIRSD4/CIR/P/2016/119 dated 1^st November 2016.

Conclusion

The framework provides an orderly migration of credit rating from the CRA whose CRA registration is cancelled, surrendered, or suspended to the SEBI-registered CRA. The framework will provide transparency in the migration process and ensure timely compliance with various requirements mentioned under CRA guidelines. Moreover, the validity of the rating upon cancellation or suspension of the registration certificate shall be valid till the date the concerned CRA get wound up or the date of acceptance of surrender by SEBI. The framework will ensure that the credit ratings for listed and non-listed securities are not hampered during the migration stage. Henceforth, all the concerned CRA shall comply with all the provisions whose registration certificate is cancelled, suspended, or surrendered.

Read Our Article: How to Set Up a Credit Rating Agency in India?