What are SEBI Norms for Credit Rating Agencies?

Ashish M. Shaji

12 Jan, 2021

Credit rating refers to the opinion of a recognised entity on the creditworthiness of an issuer or instrument. It is an informed opinion on the relative degree of risk with timely payment of interest. In this article we shall look at various SEBI norms for Credit Rating Agencies (CRA).

What are Credit Rating Agencies?

These agencies evaluates and assess an individual’s or a company’s creditworthiness. It considers the income of a debtor and credit lines to analyse the ability of the debtor to repay the debt or analyses if there is any credit risks.

SEBI has the right to regulate and the right to authorize these agencies under SEBI Regulations 1999 of the SEBI Act. Some of the key CRAs include the following-

• Credit Rating Information Services of India Limited;
• Investment Information and Credit Rating Agency;
• Credit Analysis and Research Limited.

What is the need for regulation of Credit Rating Agencies?

Despite the great utility of credit ratings, there have been doubts casted on their reliability and accuracy. Critics believe that these agencies suffer from heavy conflicts of interest as they are hired from issuers themselves to rate their instruments.

It is also a point of debate that CRAs lag behind the market indicators. They believe that though initial ratings are accurate but they don’t maintain adequately updated ratings. However, CRAs defend themselves by saying that this is due to the fact that they present a long term view of repayment prospects.

Despite risks associated with credit ratings, the CRAs were not regulated in developed countries until the global financial crisis of 2007. After the crisis, there was a widespread recognition that CRAs were complicit to the crisis.

As per critics, CRAs failed in estimating the market risk and thus were unable to adjust the credit ratings accordingly. It caused the regulators to review the regulatory framework governing CRAs and bring in more stringent norms for CRAs.

After the global financial crisis, Securities Exchange Board of India set up a committee to review the regulatory framework for CRAs in India. The committee didn’t suggest large scale reforms to this framework as India had one of the most extensive regulatory framework regarding the same and there was not enough evidence of systematic misconduct by CRAs.

However there have been incidents now and then that have raised concerns for the need to have better norms for regulation of CRAs.

SEBI Norms for Credit Rating Agencies

In India, CRAs are regulated by the Securities Exchange Board of India. It was one of the first regulators globally to bring about a comprehensive framework for regulating these agencies through SEBI (Credit Rating Agencies) Regulations 1999^[1].

Some of the regulations for CRAs cover the areas as mentioned below:

• The regulations require that CRAs should be companies promoted by persons who have experience in the credit rating field.
• The CRAs should have a minimum net worth of 5 crore rupees.
• It should also have adequate infrastructure, professionals to carry out the activity of providing credit ratings.
• CRAs are required to comply with the Code of Conduct prescribed by the market regulator, SEBI, which includes maintaining integrity, confidentiality etc.
•  As per SEBI regulations, the conflict of interests has been attempted to be reduced.
• They are also required to maintain an arms’ length relationship between credit rating activities and any other activity.
• As per the regulations, these agencies are required to have an internal audit, and be open to investigation and inspection.

What are the new SEBI norms?

Some of the new norms are as follows:

• Rating agencies have to state the probability of default of the instruments for the benefit of investors. The probability of default shows the likelihood of a default.
• SEBI shall prepare and share standardized and uniform probability of default benchmarks. Probability will be based on 10 year marginal default rate and the economic cycle.
• The CRAs will have to publish information in the rating of debt instruments on their performance in comparison with the benchmark in consultation with SEBI. It will allow investors to judge the performance of CRAs better.
• Disclosure of factors also introduced by SEBI to which the rating is sensitive. Rating agencies would have a section on rating sensitivities in SEBI press release. It can explain the level of operating and financial performance levels which is crucial for users to know the factors that can impact the creditworthiness of an entity.
• SEBI expects CRAs to make meaningful disclosures on the liquidity position of clients using simple terms. It should come with proper explanations to assist end users understand them better.
• SEBI has also asked CRAs to issue Issuer not co-operating ratings for companies that don’t co-operate with disclosure of loan defaults.  

What are some of the registered Credit Rating Agencies?

As per SEBI, the following credit rating agencies are registered to compute and share credit report/score with financial institutions:

• CRISIL Limited

CRISIL stands for Credit Rating Information Services of India Limited. It is one of the oldest agencies that were set up in the year 1987. CRISIL is operational in countries like UK, US, China etc. and of course, India. This agency stepped in to infrastructure rating in 2016.

• ICRA Limited

ICRA stand for Investment Information and Credit Rating Agency. It is a joint venture of Moody’s and Indian Financial and Banking Service Organization. This organization assigns corporate governance rating, performance rating, mutual fund rating etc.

• India Ratings and Research Private Limited

This is a wholly owned subsidiary of the fitch group. It is infamous for accurate and timely credit opinions on the credit market. It covers corporate issuers, urban local bodies, managed funds etc. Its headquarters is located in Mumbai and other branch offices are located in different parts of the country.

Conclusion

SEBI norms is believed to have enhanced the quality of information made available to investors. SEBI has a comprehensive regime for Credit Rating Agencies in India. However, certain concerns still remain.

Read our article:How to Set Up a Credit Rating Agency in India?