2015 (3) TMI 159 - HC - Indian Laws

Need of a New Policy to regulate the manner of Credit Rating Agencies to assign rating to the borrowers - Direct impact on the ability of the borrowing company to raise loans - Securities and Exchange Board of India (Credit Rating Agencies) Regulations, 1999 exists - Held that - It is submitted that the general superintendence and regulation of credit rating agencies are carried out by SEBI under Securities and Exchange Board of India (Credit Rating Agencies) Regulations, 1999. The regulations issued by SEBI cover various aspects viz., registration of rating agencies, fit and proper criteria for rating agencies, rating process and methodology and its records, transparency and disclosures avoidance of conflict of interest, code of conduct, etc. The Reserve Bank accredits CRAs for the limited purpose of Bank Loan Ratings to enable banks to use their ratings for capital adequacy purposes under Basel III Capital Adequacy Framework. Also there is an annual review of accreditation of these Credit Rating Agencies by the RBI itself as a measure of check and balance. It is further pointed out that there has to be a play insofar as the exact methodology adopted by any Credit Rating Agency is concerned and that six such agencies were accredited by the RBI. A borrower has the option, in fact, to approach any one or more than one of the agencies for obtaining its credit rating. The aforesaid, thus, shows that it is not as if the matter has been left unattended, but has received the attention of the RBI, which has accredited the agencies and has made the Regulations applicable ipso facto, since that task had already been carried out under the Regulations of how a rating has to be arrived at.Thus, what is good for securities has also been found good for the loans to be availed from banks and financial institutions. It is trite to say that it is not the function of this Court to get into the economic policy and regulation framework and once the matter has received the attention of the concerned authorities, who have made applicable certain regulations to the matter in issue, nothing more is required. We are, thus, of the view that no directions are required to be passed in the present petition, which stands closed.

Summary

Issues:
Regulation of Credit Rating Agencies' ratings affecting borrowing ability.

Analysis:
The petitioner, engaged in iron and steel business, raised concerns about the need for a policy regulating Credit Rating Agencies' ratings impacting borrowing capabilities. Initially, a plea to declare Section 10 of the Credit Information Companies (Regulation) Act, 2005 void was withdrawn. The petitioner argued that the RBI sought to transfer regulatory responsibility to SEBI, with no existing regulations. SEBI's counter-affidavit stated that regulating Credit Rating Agencies assigning ratings to borrowers did not fall under its jurisdiction. However, the RBI contended that it accredits agencies for bank loan ratings, emphasizing the importance of capital adequacy under Basel III standards. The RBI accredits agencies for this purpose and conducts annual reviews for continued accreditation.

The RBI clarified that it accredits Credit Rating Agencies for bank loan ratings to ensure capital adequacy under Basel III standards. The RBI's guidelines are not issued under the Credit Information Companies (Regulations) Act, 2005. The RBI accredits agencies for the limited purpose of bank loan ratings to facilitate capital adequacy under Basel III. Banks are advised to have their credit risk assessment frameworks and may require external ratings at their discretion. SEBI regulates Credit Rating Agencies under its regulations, covering registration, criteria, processes, transparency, and conflict of interest.

The judgment highlighted the RBI's accreditation of agencies for bank loan ratings under Basel III standards, emphasizing the importance of stable financial systems. The RBI conducts annual reviews to assess agencies' eligibility for continued accreditation. The court noted that borrowers can approach multiple accredited agencies for credit ratings. The matter was deemed attended to by the RBI's accreditation and application of existing regulations, aligning the rating process for securities and loans. The court concluded that as the concerned authorities had addressed the issue and implemented regulations, no further directions were necessary, closing the petition without costs.