CHAPTER - 4

REGULATORY FRAMEWORK OF CREDIT RATING AGENCIES IN INDIA Credit rating is entirely a new concept in the history of Indian corporate sector and is intended for investors‟ guidance and protection. It came into limelight only when Securities Exchange Board of India (SEBI) made credit rating compulsory for the Indian companies. The Securities and Exchange Board of India (Credit Rating Agencies) Regulations, 1999 empower SEBI to regulate credit rating agencies operating in India. Thus, SEBI

regulates the credit rating

agencies under the SEBI (Credit Rating Agencies) Regulations, 1999 of the Securities and Exchange Board of India Act, 1992 (15 of 1992). In fact, SEBI was one of the first few regulators, globally, to put in place an effective and comprehensive regulation for Credit Rating Agencies. SEBI regulates the functioning of credit rating agencies in order to protect the interest of investors and to make the system more helpful to them. Credit rating agencies are amongst the very few market intermediaries for which such detailed operating guidelines have been prescribed under the regulations. In terms of the SEBI Regulations, a credit rating agency has been defined as a body corporate which is engaged in or proposes to be engaged in, the business of rating of securities offered by way of public or rights issue. The term „securities‟ has been defined under the Securities Contract (Regulation) Act, 1956. The following regulations regarding functioning and affairs of Credit Rating Agencies in India have been prescribed by SEBI: (i)

Conditions for setting up a Credit Rating Agency.

(ii)

Process of getting Certificate of Registration.

(iii) Obligations of Credit Rating Agency towards SEBI. (iv) Conditions to be followed while Assigning Ratings. (v)

Restrictions on Ratings.

(vi) Inspection and Investigation by SEBI. 75

(vii) Liability in Case of Default. (viii) Internal Audit of Credit Rating Agencies. (ix) Transparency and Disclosure Norms. All these heads are further explained in the following paragraphs: 4.1 1.

CONDITIONS FOR SETTING UP A CREDIT RATING AGENCY Eligibility Criteria: Certain conditions have been prescribed by

SEBI, for granting certificate of registration to the body corporate, which must be fulfilled by the body corporate in order to get the certificate. These conditions include the following:  The body corporate must be registered as a company under the Companies Act, 1956.  The Rating activity must be specified as one of its main object in the Memorandum of Association by the Body Corporate.  The Body Corporate must have adequate infrastructure so that it can provide rating services in accordance with the provisions of the act.  The Body Corporate must have a minimum net worth of rupees five crore but the Body Corporate set up before the commencement of these regulations and having net worth less than Rupees Five crore must be allowed to increase its net worth to the required amount within a period of three years from such commencement.  The Body Corporate and its promoters must have professional competence, financial soundness and general reputation of fairness and integrity in business transactions.  The Body Corporate, its promoters or directors might not be convicted of any offence involving moral turpitude or any economic offence, any time in the past.  The Body Corporate, its promoters or directors might not be involved in any legal proceedings connected with the securities

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market, which may have an adverse impact on the interest of the investors.  The employees of the Body Corporate must have an adequate professional and relevant experience to the satisfaction of the board.  The Body Corporate in all respects must be fit and proper for the grant of a certificate.  The grant of certificate must be in the interest of the investors and securities market.  The Body Corporate or any of its associates must not, in the past, be refused by the board to grant a certificate under these regulations and they must not have contravened the act or any of rules or regulations made under the act`. 2.

Promoters of a Body Corporate: The Body Corporate, wanting

to get the certificate of registration as a Credit Rating Agency must be promoted by the persons, which include the following:  A public financial institution, as defined in section 4A of the Companies Act, 1956.  A scheduled commercial bank included in the second schedule to the Reserve Bank of India Act, 1934.  A foreign credit rating agency recognized by law in force in the country of its incorporation and having at least five years experience in rating securities.  Any company or a body corporate having continuous net worth of minimum rupees one hundred crore as per its audited

annual

accounts for previous five years prior to filing application with the board for the grant of certificate. 4.2 1.

PROCESS OF GETTING CERTIFICATE OF REGISTRATION Application for Grant of Certificate: The body corporate which

fulfils the required eligibility criteria and which wants to commence activities as a credit rating agency shall make an application to SEBI

77

for the grant of certificate of registration. The application shall be accompanied with the application fees of Rs. 50,000 being paid by way of a bank draft in favour of “Securities and Exchange Board of India” payable at Mumbai. Any person/ body corporate already working as a credit rating agency, on the date of commencement of the SEBI (Credit Rating Agencies) Regulations, 1999 is also required to apply for the grant of certificate of registration within a period of three months from such commencement (the time period may be extended up to six months by SEBI in special cases) failing which the said credit rating agency shall cease to carry on the rating activities. The application to be filled, for the grant of certificate of registration, shall contain the following particulars:  Particulars of the Applicant: The application should contain the following information of the applicant: 

Name of the applicant



Telephone Number and Fax Number



Address of the registered office



Address of the branch office, if any



Name of the contact person of the company



The date of incorporation of the applicant company



The objects of the applicant company, including both main and ancillary



The authorized, issued, subscribed and paid-up capital of the company



The category to which the applicant company belongs, i.e., Limited company (Public or Private) or Unlimited company



If the company is listed then the names of Stock Exchanges and the latest share prices should be specified



Whether the applicant company belongs to the category of companies already undertaking rating activities or whether the company is proposing to undertake rating activities. 78

 Eligibility Criteria: The applicant company should specify the category to which their promoter(s) belong to, which include : 

A public financial institution



A scheduled commercial bank



A foreign bank



A foreign credit rating agency



In case the promoter is the company with continuous net worth of Rupees one hundred crore for previous 5 years, a certificate by a Chartered Accountant certifying the same shall be enclosed.



Particulars of Directors/ Key Personnel: The application should contain the following particulars regarding Directors:



Name



Qualification



Experience



Shareholding in the company



Directorship in the company.

The particulars regarding Key Personnel should include: 

Name



Designation in the company



Qualification



Previous position held



Experience



Date of appointment in the company



Functional areas.



Information regarding Infrastructure: The application should contain following details regarding infrastructure:



Computing facilities



Facilities for research and database available with the company



Whether existing infrastructure is adequate to carry on rating activities



Any further plan for addition/ improvement of infrastructure.

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 List of Major Shareholders: This should contain the following: 

Name of the shareholder



Number of the shares held in the company



Percentage of total paid up capital.

 Particulars of Associate Concerns: The application should contain the details of associate companies/ concerns including: 

Name



Address



Type of activity handled



Nature of interest of applicant company in associate



Nature of interest of promoter(s) of applicant company in associate.

 Details

of

Business

Information

of

the

Applicant:

The

application should contain the following details regarding business information of the company: 

History



Major events and present activities



Details of experience in credit rating and other activities



The projected volume of activities if the company is proposing to engage in credit rating activities



The details of securities rating activities handled by the company during last three years including – Name of the client, type of security, size of the issue, year of issue, security/ instrument rated and whether they are listed or unlisted.

 Details of Financial Information of the Applicant: The details of Financial Information of the applicant should include: 

Details of net worth



The audited annual reports for the last three years should be enclosed



Name and address of the principal bankers of the applicant company should be specified



Name and address of the auditors should also be specified.

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 Any Other Relevant Information: The application should also contain the details regarding: 

All pending litigations against the applicant company, directors and employees specifying the nature of dispute, name of the party and status.



Indictment or involvement in any fraud or economic offences by the applicant or any of its Directors or key managerial personnel in the last three years.

 Declaration by the Directors: The application shall contain a declaration regarding the truth of the information given in the application signed by atleast two directors. 2. Clarification Regarding Application: SEBI, if not satisfied with the filled application may ask the applicant to furnish such information or clarification as SEBI may consider necessary for the purpose of processing of the application. SEBI may also ask the applicant or its authorized representative to appear for personal clarification in connection with the grant of a certificate. 3. Conditions for Grant of Certificate of Registration: The grant of certificate by SEBI shall be subject to the following conditions:  The credit rating agency shall comply with the provisions and regulations of the act and the guidelines, directions, circulars and instructions issued by the Board from time to time on the subject of credit rating.  The credit rating agency shall inform the Board in writing in case any information/ particulars furnished by credit rating agency are found to be false or misleading on a particular matter or if that information has undergone a subsequent change. 4. Registration Fees, Grant of Certificate of Registration and its Validity: After being satisfied by the eligibility criteria of the applicant/ corporate body regarding the grant of certificate of registration, SEBI shall grant a certificate but this grant of certificate is subject to the payment of registration fees of Rs. 5,00,000 being

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paid by way of bank draft drawn in favour of “Securities and Exchange Board of India” and payable at Mumbai. This certificate of registration carries the registration code and the period of validity of certificate which shall be three years. 5. Application for Renewal of Certificate: As the validity of the certificate of registration as given above is three years, so the credit rating agency must apply to SEBI for renewal of certificate atleast three months before the expiry of the period of validity. This application

for

renewal

of

certificate

of

registration

must

be

accompanied by the desired renewal fee of Rs. 10,00,000 being paid by way of bank draft drawn in favour of “Securities and Exchange Board of India” and payable at Mumbai. This application shall be dealt with in the same manner as if it were an application for the grant of a fresh certificate. 6. Objection on Application and Refusal to Grant Certificate: Any application for a certificate, which is incomplete or does not confirm to the requirements of the Board shall be rejected by the board, but after giving the applicant a reasonable opportunity to

remove the

objections. The period of thirty days from the date of receipt of relevant communication from the Board should be given to the applicant to remove objections. The Board may, on sufficient reason being shown, extend the time for removal of objections by such further time, but not exceeding 30 days. The decision of SEBI, regarding not to grant or renew the certificate shall be communicated by the Board to the applicant within a period of 30 days of such decision, along with the reasons for such decisions. 7. Reconsideration of Decision of Rejection: After the decision of the Board to reject the application is communicated to the applicant, the applicant may apply to the Board for reconsideration of such decision within a period of 30 days from the date of receipt of

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communication. SEBI shall consider this application and must intimate the applicant regarding its decision as early as possible. 8. Consequences of Refusal to Grant/Renew Certificate: SEBI‟s decision of not granting the certificate of registration to the new applicant or not renewing the certificate of registration of the existing credit rating agencies shall have the following consequences:  The new applicant shall not undertake any rating activity.  The existing credit rating agency shall cease to carry on any rating activity but in order to protect the interest of the investors, SEBI may allow those existing credit rating agencies to complete their rating assignments, which had already entered into it and that too during the pendency or the period of validity of the certificate. In order to protect the interest of the investors, who are related to



that credit rating agency, whose application for grant or renewal of certificate had been rejected, SEBI may issue directions with regard to transfer of records, documents and reports relating to activities of such credit rating agency and may appoint any person to take charge of such records, documents and reports. 4.3

OBLIGATIONS OF CREDIT RATING AGENCIES TOWARDS SEBI SEBI

has

fixed

certain

obligations

and

informational

requirements which must be properly obliged by credit rating agencies. All these obligations are discussed below: 1.

Code of Conduct to be Followed: Every credit rating agency

shall follow the code of conduct given by SEBI. A few of them include the following:  Every credit rating agency shall fulfill its obligations in prompt, ethical and professional manner and shall make all efforts to protect the interest of the investors.

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 A credit rating agency shall exercise due diligence and follow independent professional judgment along with high standards of integrity, dignity and fairness in the conduct of its business.  The decisions of credit rating agency regarding the rating evaluations shall be supported by adequate reasoning and in depth rating researches.  The rating standards adopted by the rating agency should be in consistence with international rating standards.  A credit rating agency should not indulge in unfair competition with other agencies.  A credit rating agency shall closely monitor all the factors that might affect the credit worthiness of the issuer and it shall notice all the important changes relating to the client companies.  A credit rating agency shall disclose the rating methodology to the related parties and wherever necessary it shall disclose to the clients possible sources of conflict of duty and interest which could be a roadblock in the fair judgment.  A credit rating agency shall not make any untrue statement and shall not exaggerate the facts.  A credit rating agency shall abide by the provisions of the Act, regulations and circulars by maintaining an appropriate level of knowledge and competence.  A credit rating agency or any of its employees shall not give any investment advice about any security in the publically accessible media.  A credit rating agency shall maintain an arm‟s length relationship between its credit rating activities and any other activities and it shall not offer any fee based service to the rated securities beyond credit ratings and research.  An internal code of conduct should be developed by credit rating agency for governing its internal operations and duties of its employees and officers.

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 A credit rating agency shall ensure that the decision makers shall have access to all the relevant information about the business and the compliance officer shall be provided with the adequate freedom and powers for effective discharge of his duties.  A credit rating agency shall ensure that good corporate policies and corporate governance are in practice. 2. Written Agreement with the Client: To make the agreement a legal obligation on the parties, it must be in writing so that the parties cannot refuse to it on a later date and similar is the case with credit rating agencies. Every credit rating agency shall enter into a written agreement with each client, whose securities it proposes to rate and every such agreement shall include the following provisions:  The rights and liabilities of each party shall be defined and fees to be charged by credit rating agency shall be specified.  The client shall agree to cooperate with the credit rating agency to enable it to arrive at timely and accurate decision regarding the rating and the client shall agree to cooperate with the credit rating agency for the periodic review of rating.  The rating assigned to the securities of the client shall be disclosed to the client, irrespective of whether the rating is or is not accepted by the client. 3. Review of Rating and its Procedure: Every credit rating agency shall continuously monitor the ratings of the securities during their lifetime and shall disseminate such information through the press releases and websites and in case the securities are listed, the concerned stock exchanges shall also be informed. Further, these published ratings shall be periodically reviewed by the credit rating agency but in case where the client does not cooperate with credit rating agency, it shall carry out review on the basis of the best available information. The credit rating agency shall continue to monitor and review the rating till the securities rated are outstanding

85

or the company whose security is rated is wound up or merged or amalgamated with another company. 4. Building the Internal Framework: Credit rating agencies are required to built an appropriate internal framework for monitoring the trading of securities of its clients by its employees, so that the employees are enable to adhere to the Securities and Exchange Board of India (Insider Trading) Regulations 1992, Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to the securities market) Regulations 1995 and other laws relevant to trading of securities. 5. Disclosure of Information to the Public: Credit rating agencies are required to disclose the definitions of the concerned rating and its symbol, the rationales of ratings along with the analysis of factors and risks on which the ratings are based. The rating agencies shall also make it clear to the public that the ratings do not constitute recommendations to buy, hold or sell any security. 6. Submission of Annual Reports: A credit rating agency is required to furnish the copies of its Balance Sheets and Profit & Loss Account, at the close of each accounting period to SEBI. Moreover, a credit rating agency shall, within the specified period or within a reasonable time, furnish all the information as called for by the board. 7. Compliance with Circulars: It is obligatory for every credit rating agency to comply with such guidelines, directives, circulars and instructions as may be issued by the board from time to time, on the subject of credit rating. The requirement is in addition to the compliance of the regulations, 1999. 8. Appointment of Compliance Officer: Every credit rating agency is required to appoint a compliance officer, who shall be responsible for monitoring the compliance of the Act, notifications, guidelines, instructions, rules and regulations, etc. as issued by the board or Central Government. He shall immediately and independently report to the board if any non compliance is observed by him. This clause is

86

inserted

by

SEBI

(Investment

Advise

by

the

Intermediaries)

(Amendment) Regulations 2001, w.e.f 29-05-2001. 9. Obligations to Maintain Books of Accounts and Records: It is obligatory upon every credit rating agency to keep and maintain various books of accounts for a minimum period of five years and the board shall also be informed about the place where these books are maintained. The required accounts, records and documents include:  Copy of Balance Sheet, as on end of each accounting period;  Copy of Profit and Loss Account for each accounting period;  Copy of Auditor‟s Report on its accounts for each accounting period;  A copy of agreement entered into with each client;  Ratings assigned to various securities including upgradation and downgradation of the ratings so assigned;  Rating notes considered by the rating committee;  Record of decisions of the rating committee;  Correspondence with each client;  Letter assigning rating;  Particulars of fees charged for rating and such other records as the board may specify from time to time. 10. Audit of Accounts: Every credit rating agency shall get its accounts audited by the auditor and shall, within the period of two months from the date of auditors‟ report, rectify the deficiencies if any made out in the auditor‟s report. 11. Obligations to Maintain the Confidentiality: Every credit rating agency shall maintain the confidentiality of client‟s information as supplied to it by them and it shall not disclose such information to any person. Such disclosure can be made only when it is required or permitted by law or any other law for the time being in force.

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4.4 CONDITIONS TO BE FOLLOWED WHILE ASSIGNING RATINGS SEBI has prescribed certain conditions for credit rating agency, which must be

fulfilled during the process of rating:

1. Every credit rating agency shall specify a particular rating process, copy of which should be filed with the board for record and any further modifications or additions should also be intimated to the board. 2. Every credit rating agency shall appoint adequately qualified and knowledgeable persons and form a professional rating committee to assign a rating. All the rating decisions including the decisions regarding changes in rating shall be taken by the committee. 3. Adequately qualified analysts shall be appointed by every credit rating agency for carrying out a rating assignment. 4. Every credit rating agency shall inform the board about new rating instruments or symbols introduced by it but a credit rating agency shall not change the rating definition or structure of a particular rating product without prior information to the board. 5. Due diligence must be exercised by credit rating agency while rating a security to ensure that the rating assigned is fair and appropriate. 6. A credit rating agency shall not rate the securities issued by it. 7. The ratings assigned to the securities of a client including the changed ratings, shall be disclosed to the concerned stock exchange through press release and websites for general investors by the credit rating agency. 4.5 RESTRICTIONS ON RATINGS Certain restrictions have been placed by SEBI on rating of securities issued by promoters or by certain other persons. These include:-

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1. No credit rating agency shall rate the securities issued by its promoter, here promoter means a person who hold 10 per cent or more, of the shares of credit rating agency. 2. Securities issued by a person who is a chairman, director or employee of a credit rating agency or its rating committee, shall not be rated by such credit rating agency. This regulation is enforceable within three months from the date of commencement of SEBI regulations. 3. Any credit rating agency shall not rate a security issued by an entity which is either a borrower, a subsidiary or an associate of its promoter and if there are common Chairman, Director and Employees between credit rating agency and these entities. 4. A credit rating agency can rate a security issued by its associate having

a

common

independent

Director

with

it

or

rating

committee, if such person does not participate in the discussion in rating decisions and disclosure regarding this thing should be made in the rating announcements of such associate company. 5. None of the above restrictions shall apply to securities, whose rating has already been done by a credit rating agency before the commencement of these regulations and as such these securities shall, subject to various other provisions of these regulations, continue to be rated. 4.6 INSPECTION AND INVESTIGATION BY SEBI 1. Inspection/ Investigation of Books of Accounts/Documents: SEBI has right to inspect/ investigate the books of accounts, records and documents of credit rating agency and for this purpose SEBI may appoint one or more persons as inspecting officers. But these inspections, shall not ordinarily go into an examination of the appropriateness of the assigned ratings on the merits. But the inspections to judge the appropriateness of the assigned ratings may be ordered by the board only in case of complaints which are serious

89

in nature and for this purpose officers of the board or independent experts, with relevant experience or combination of both may be employed for the purpose of investigation. 2. Notice before Inspection and Investigation: Under the SEBI (Credit Rating Agencies) Regulations1999, SEBI is empowered to inspect or investigate the books of accounts, records and documents of any credit rating agency but before doing so, it shall give atleast 10 days written notice to the credit rating agency for that purpose. But, in certain cases SEBI may not give such notice to the credit rating agency if it is not required in the interest of the investors. 3. Obligations

of

Credit

Rating

Agency

on

Inspection

or

Investigation by the Board: During the course of an inspection or investigation, the credit rating agency, against whom the inspection or investigation is being carried out, shall be bound to discharge all its obligations as given by the board including the following –  It shall be the duty of that credit rating agency, its every director, officer or employee, to produce before the inspecting/ investigating officer, such books, accounts and documents as required by him within a reasonable time as may be specified by the said officer.  The credit rating agency shall allow the inspecting officer, to have reasonable access to the premises occupied by such credit rating agency or by any other person on its behalf.  For the purpose connected with the inspection or investigation, the inspecting/ investigating officer shall be entitled to examine or record the statement of any officer, director or employee of the credit rating agency and the inspecting/ investigating officer shall be provided with all the assistance required by him in connection with the inspection or the investigation, which he reasonably require. 4. Submission of Report to SEBI by Inspecting Officer: On the completion of inspection or investigation the inspecting/ investigating officer shall as soon as possible, submit a report to the board provided

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that if directed to do so by the SEBI, he may also submit an interim report. 5. Action on Inspection or Investigation Report: The board or chairman shall, after consideration of inspection or investigation report, take such action as the board or chairman may deem fit and appropriate, including action under the Securities and Exchange Board of India (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations 2002. 4.7 LIABILITY IN CASE OF DEFAULT Under the SEBI (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations 2002, if a credit rating agency fails to comply with any condition subject to which a certificate has been granted or contravenes any of the provisions of the act or these regulations or any other regulation made under the act, then such credit rating agency shall be dealt with in the manner provided under the Securities and Exchange Board of India (Procedure for holding

Enquiry

by

Enquiry

Officer

and

Imposing

Penalty)

Regulations, 2002. 4.8 INTERNAL AUDIT OF CREDIT RATING AGENCIES SEBI

has

authorized

Chartered

Accountants,

Company

Secretaries or Cost and Management Accountants (who are in practice and who do not have any conflict of interest with the credit rating agency) to carry out internal audit for Credit Rating Agencies on a half yearly basis. These guidelines are issued in exercise of the powers conferred by Section 11 (1) of the Securities and Exchange Board of India Act, 1992 read with the provisions of Regulations 19(1), 20 and 22 of the SEBI (Credit Rating Agencies) Regulations, 1999 to protect the interest of investors in securities and to promote the development and regulation of securities market. Such audit shall include the following:

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1. The Audit shall cover all aspects of credit rating agency‟s operations and procedures, including investor grievance redressal mechanism, compliance with the requirements stipulated in the SEBI Act, Rules and Regulations made there under, and guidelines issued by SEBI from time to time. 2. The audit report shall include a summary of operations and of the audit, covering the size of operations, number of transactions audited and the number of instances where violations / deviations were observed while making observations on the compliance of any regulatory requirement. 3. The report shall state the methodology adopted, deficiencies observed, and consideration of response of the management on the deficiencies. 4. The audit report shall comment on the adequacy of systems adopted by the credit rating agency for compliance with the requirements of regulations and guidelines issued by SEBI and investor grievance redressal. The report of the internal audit shall be received by a credit rating agency within two months from the end of the half-year and the Board of Directors of the credit rating agency shall consider the report and take necessary steps to rectify the deficiencies, if any. Then, the credit rating agency shall send an Action Taken Report to SEBI within next two months. 4.9 TRANSPARENCY AND DISCLOSURE NORMS In order to impart high credibility to the rating processes and procedures, a fair degree of transparency and disclosure is required. As a high degree of quantitative and qualitative disclosures are very important for users of credit rating, so SEBI has given certain new guidelines regarding transparency and disclosure by the rating agencies. These guidelines are issued in exercise of the powers conferred by Section 11 (1) of Securities and Exchange Board of India

92

Act, 1992 read with the provisions of regulations 15, 16, 18, 19(1), 20, 24 and Code of Conduct of SEBI (Credit Rating Agencies) Regulations, 1999. These include transparency and disclosure regarding the following 1.

Rating Process and Procedure: A credit rating agency shall

formulate and disclose its policies, methodology and procedure in detail regarding credit ratings; and it shall keep the records in support of each credit rating, its review and surveillance for the period of five years after the maturity of the instruments. All these records shall be made available to the auditors and regulatory bodies as and when required by them. These include:  Important factors underlying credit rating and their significance.  Important points of discussions with all stakeholders including the issuer, its management, and auditors and bankers.  Decisions of rating committee including voting details and notes of dissent.  The rationale for differences in ratings arisen due to application of quantitative model and the rating actually assigned. 2.

Historical Default Studies: Default studies are a quantitative

measure of credit rating agencies‟ performance and act as objective report cards of their track records. The credit rating agencies will have to publish information regarding default rates so that the investors can understand historical performance of each category and they may be able to compare the ratings given by different credit rating agencies. Various disclosures required to be given by credit rating agencies include:  Details of new credit ratings assigned during the last six months.  Movement of credit rating of all outstanding securities during the last six months.  The history of credit rating of all outstanding securities.  Annual list of default separately for each rating category (AAA, AA, A, BBB, BB, B, C).

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 Annual list of average first year and third year cumulative default rates for the last five years separately for each rating category. 3. Dealing with Conflict of Interest: In order to mitigate the conflict of interest, the credit rating agencies should standardize the best practices viz. analysts not participating in marketing and business developmental activities including negotiations of fees with the issuer whose securities are being rated. Further, the credit rating agencies should ensure that the employees‟ involved in the credit rating process do not hold any shares of the issuer. 4. Disclosure of Income and Shareholding Patterns of Credit ating Agencies: A credit rating agency shall annually disclose its total receipt from rating services and non-rating services, as well as issuerwise percentage share of non-rating income of the credit rating agency and its subsidiary to the total revenue of the credit rating agency. Further a credit rating agency should disclose their shareholding and ownership patterns (as prescribed by the stock exchanges for a listed company under clause 35 of the listing agreement) which will enhance investors‟ confidence in credit rating agencies. 5. Obligations towards Rating of Structured Finance Products: A credit rating agency may rate a Structured Finance Product and the rating symbols shall clearly indicate that the ratings are for Structured Finance Products. But the credit rating agency and its subsidiary shall not provide any type of advisory or consultancy services regarding the design of Structured Finance Instruments. While publishing the ratings of structured finance products and their movements, a credit rating agency shall also disclose the track record of the originator and details of nature of underlying assets while assigning the credit rating. 6. Unsolicited Credit Rating: In the case of unsolicited credit ratings, i.e. the credit ratings not arising out of the agreement between a credit rating agency and the issuer, credit rating symbol shall be accompanied by the word “UNSOLICITED” in the same font size.

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Further, the credit rating agency shall disclose the extent of participation by different stakeholders in the credit rating process as well as the information used and its source in arriving at and reviewing the credit rating. A credit rating agency shall disclose annually all the unsolicited ratings carried out in the last three financial years. 7. Compliance Status of IOSCO Code of Conduct: A credit rating agency shall disclose the compliance status of each provision of International Organization of Securities Commission (IOSCO) code of conduct. 8. Additional

Disclosures:

A

credit

rating

agency

can

make

additional disclosures other than those stipulated above with the prior approval of its Board. Thus, a credit rating agency shall make all the stipulated disclosures on their websites. For ratings assigned and their periodic reviews, the credit rating agency shall issue press releases which shall also be kept on their websites. In the case of listed securities, the credit rating agency shall also make disclosures to the stock exchanges as specified in the SEBI (Credit Ratings) Regulations, 1999 and where a specific format has been prescribed, the disclosures shall be made in that format. The study of regulatory environment regarding credit rating reflect that the SEBI regulations for credit rating agencies has been designed to protect the interest of investors in securities through widespread investor access to ratings, through a clearly articulated rating dissemination process, and to promote the development of, and to regulate the securities market. Further, the SEBI regulations ensure that the credible players enter this business (through stringent entry norms and eligibility criteria) and credit rating agencies operate in a manner that enables them to issue objective and fair opinions.

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