Context:
New SEBI Guidelines for Credit Rating Agencies (CRAs) issued under SEBI Act (1992) and Regulation 20 of CRA Regulations.
- It will enhance the Ease of Doing business for CRAs and protect investor interests.
Key guidelines:
- Communicating rating to companies: By CRAs and within one working day of the rating committee meeting.
- Appeal against rating: Companies can request a review or appeal of the rating decision have three working days of the rating committee meeting.
- Public disclosure: CRAs must publish a press release on their website and inform the stock exchange/debenture trustee within seven working days of the rating committee meeting
- Record maintenance: CRAs must keep records of these disclosures for 10 years.
Credit Rating and Credit rating agency (CRA):
- A credit rating represents the viewpoint of a specific credit agency regarding an entity’s capacity and willingness to meet its financial commitments fully and within the established due dates.
- The credit rating agency assesses a debtor’s creditworthiness by scrutinizing both qualitative and quantitative characteristics of the entity under consideration.
- Regulated by – Securities and Exchange Board of India (SEBI)
- Regulated under Credit Rating Agencies Regulations, 1999 of the SEBI Act, 1992.
- 7 credit agencies in India: CRISIL, CARE, ICRA, SMREA, Brickwork Rating, India Rating and Research (Fitch Ratings) and Infomerics Valuation and Rating.
- 3 prominent CRAs control around 95% of the overall ratings market:
- Moody’s Investor Services
- Standard and Poor’s (S&P)
- Fitch Group
- Types of Credit Ratings –
- Investment grade ratings mean the investment is considered solid
- Speculative grade rating implies that investments are high risk.
- Factors affecting Credit Ratings –
- Current cash flows and income
- Market outlook and issues that might prevent timely repayments
- Amount currently owed and type of debts
- Payment History
Baa3 rating carry a moderate level of credit risk. They fall within the medium-grade category and might exhibit some speculative attributes.
SEBI guidelines on Standardization of Rating Scales:
- Standardized symbols and their definitions have been devised for issuer rating or corporate credit rating.
- Rating Symbols (AAA, AA, A, BBB, BB, B, C and D) should have CRAs first name as prefix.
- Use of modifiers (+ or -): To reflect the comparative standing within the categories of AA to C.
- Standard descriptors for Rating Watch and Rating Outlook –
- Rating Watch: CRAs view on expected direction of rating movement in short term.
- Rating Outlook: CRAs view on expected direction of rating movement in near to medium term.
| Credit Rating Agency | Credit Bureau |
| A CRA provides an opinion relating to future debt repayments by borrowers. | A credit bureau provides information on past debt repayments by borrowers. |
About SEBI:
- Constituted in 1988 as the regulator of capital markets in India through resolution of the Government.
- Became Statutory body under SEBI Act, 1992
- In 2015, commodity markets regulation was given to SEBI by merging Forward Market Commission.
- Functions under Ministry of Finance
- 3 Main powers – Quasi-judicial, Quasi-legislative and Quasi-executive
Source: Economic Times
Previous Year Question
Consider the following statements:
1. In India, credit rating agencies are regulated by Reserve Bank of India.
2. The rating agency popularly known as ICRA is a public limited company.
3. Brickwork Ratings is an Indian credit rating agency.
Which of the statements given above are correct?
[UPSC Civil Services Exam – 2022 Prelims]
(a) 1 and 2 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3
Answer: (b)
Explanation:
Statement 1 is not correct: In India, credit rating agencies are regulated by Securities and Exchange Board of India (SEBI).
