Credit Rating Agency Registration with SEBI in India
- Advisory on Application filling for SEBI registration.
- Business Case Analysis for New Applicant.
- Advisory on building an SOP for the agency.
- Compliance and regulatory support post-registration.
- End to End Liaising with SEBI during registration.
Overview of Credit Rating Agencies
The importance and level of acceptance for credit rating agencies have increased widely over the years among investors of the Indian financial market especially in the last twenty years. To put it simply, opinions of the credit rating agencies do have a significant impact on the investor’s mind compared to what was its impact two decades back. The world is growing fast and with the advent of new methods of analysis brought by powerful software, credit rating agencies are able to derive reliable data to research and give ratings.
Credit rating is generally defined as an opinion of the expert of the agency on the credit quality of a firm or the ability of a debt issuing firm to serve the instrument. Thus, credit rating agencies give a simple link between returns and risk by doing some calculations based on the company’s financial history, liabilities, and current assets. Any investors can then use this assessment of the company to make his/her decision to invest in the company by comparing the offered return to risk levels.
Credit rating agencies first appeared in the world in the year 1940 after the colossal financial crisis of 1937 in New York and the subsequent formation of rating agency Standards & Poor in 1941. By the decade of 70s, there were many credit rating agencies operating across the world. The trend reached India by 1987 when CRISIL was established. The company’s scope was further noticed after the establishment of ICRA and CARE in 1991 and 1993, respectively. In 1995, the first private sector-based credit rating institution came into being named Duffs & Phelps Credit Rating India Pvt. Ltd.
Regulation and Structure of Credit rating Agencies
Credit agencies are regulated under the framework released by SEBI under its Credit Rating Regulations of 1999. As per these regulations, any new agency willing to start the activities of credit rating agencies in India must get itself registered with the SEBI. Although the SEBI’s regulations only cover the rating of securities and not the foreign exchange, fixed deposits, real estates, etc.
These agencies act as one of the market intermediaries involved in the business of rating securities offered by way of right issues or public issues. These entities rate the debtors on their ability to pay the debt on time. The large-scale borrowers (Government Organisations or big corporate houses) are rated by these agencies and thus they do not rate any individuals. The assessed entities by credit rating agencies include companies, state governments, special purpose entities, local Government bodies, countries, and non-profit bodies.
The following points can summarize the work of Credit Rating Agencies:
- Credit rating is simply the assessment of the borrower’s willingness or ability or repays the rated debt according to the terms and conditions of the grant.
- If only there are significant changes observed in a company’s operating and financial aspects, its credit rating is changed.
- In essence, credit rating is just an opinion and not a recommendation to hold, sell, or purchase a borrower’s security.
- Only entities and not the issuers are rated by Credit Rating Agencies.
The following documents are required for Credit Rating Agency registration:
- The Incorporation Certificate of the applicant agency.
- Details of the directors/administration related to the company and documents regarding their professional profile.
- Information regarding the contact information about the applicant.
- Proofs showing a minimum net worth of Rs. 5 crores.
- Other sorts of business information associated with the company.
- Infrastructure certificates or documents stating adequacy of infrastructure to run the activities of the Credit Rating Agency.
- Memorandum of Association (MOU) and Articles of Association (AOU) of the Entity stating its objectives.
- Any other relevant document as asked during document verification.
Procedure for Credit Rating Agency Registration
- The person/entity willing to commence any activity as a Credit Rating Agency has got to apply to the Board within the sort of application made in Form A as prescribed within the SEBI regulations alongside a non-refundable fee.
- The board shall not consider the regulations unless the applicant is promoted by an individual belonging to any of the subsequent categories:
- Public financial organization
- Any Foreign Bank Operating in India with RBI approval
- Scheduled full-service bank
- A foreign Credit Rating Agency having a minimum of five years’ experience in rating securities and recognized by the laws effective within the country of its operation.
- The board before granting the certificate satisfies itself on whether the applicant suits the subsequent parameters of registration or not.
- The board could reject an incomplete application or if there are any mistakes in the application. Other cause of rejection could be the company’s failure to meet the standards set for registration. However, the SEBI in most cases gives 1-month time to all applicants to rectify any mistakes or submit any necessary document asked by them. if the board is satisfied with the application and all the documents then it will intimate the applicant and upon receipt of the required licensing fee, it will grant a registration certificate in form B as per the regulations. The registration certificate granted by SEBI for this entity is valid for 5 years.
Eligibility Criteria to Get Credit Rating Registration
- The applicant must be a corporation registered under the Companies Act, 2013 to carry any specified rating activity in its Memorandum of Association (MOA).
- The minimum net worth of rupees five crores
- The infrastructure must be adequate which enables it to supply rating services as per the provisions of the Act and Regulations.
- The applicant must be a fit and proper person as per the standards laid down within the regulations.
Credit rating is generally defined as an opinion of the expert of the agency on the credit quality of a firm or the ability of a debt issuing firm to serve the instrument. Thus, credit rating agencies give a simple link between returns and risk by doing some calculations based on the company’s financial history, liabilities, and current assets.
The assessed entities by credit rating agencies include companies, state governments, special purpose entities, local Government bodies, countries, and non-profit bodies. These agencies act as one of the market intermediaries involved in the business of rating securities offered by way of right issue or public issues. These entities rate the debtors on their ability to pay the debt on time. The large-scale borrowers (Government Organisations or big corporate houses) are rated by these agencies and thus they do not rate any individuals.
- The applicant must be a corporation registered under the Companies Act, 2013.
- Should have adequate infrastructure to support the activities of a credit rating agency.
- The minimum net worth of rupees five crores.
- The applicant must be a fit and proper person as per the standards laid down within the regulations.
In essence, credit rating is just an opinion and not a recommendation to hold, sell, or purchase a borrower’s security. However, investors can then use this assessment of the company to make his/her decision to invest in the company by comparing the offered return to risk levels.
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