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TMI BlogMaster Circular for Credit Rating AgenciesX X X X Extracts X X X X X X X X Extracts X X X X ..... d. III. This Master Circular is a compilation of the existing circulars as on July 03, 2023, with consequent changes. The stipulations contained in these circulars have been detailed chapter-wise in this master circular. Accordingly, the list of existing circulars for CRAs which have been superseded by this master Circular is placed at Annexure A. IV. Notwithstanding such rescission,- a. anything done or any action taken or purported to have been done or taken under the rescinded circulars, prior to such rescission, shall be deemed to have been done or taken under the corresponding provisions of this Master Circular; b. any application made to the Board under the rescinded circulars, prior to such rescission, and pending before it shall be deemed to have been made under the corresponding provisions of these regulations; V. This circular is issued in exercise of the powers conferred by Section 11 (1) of Securities and Exchange Board of India Act, 1992 read with the provisions of Regulation 20 of Securities and Exchange Board of India (Credit Rating Agencies) Regulations, 1999 , to protect the interest of investors in securities and to promote the development of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t liabilities / obligations of the applicant, if any. 2.2.3. Whether any investor complaint is pending? If yes, steps taken and confirmation that the acquirer shall resolve the same. 2.2.4. Details of litigation, if any. 2.2.5. That all the fees due to SEBI have been paid. 2.2.6. That there will not be any change in the Board of Directors of incumbent, till the time prior approval is granted. 2.2.7. That the incumbent shall inform all its existing investors / clients in order to enable them to take informed decision regarding their continuance or otherwise with the entity with new management. 2.3. The prior approval granted by SEBI shall be valid for a period of 180 days from the date of communication. 3. Transfer of business by SEBI registered intermediaries to other legal entity 3.1. SEBI has been receiving registration applications pursuant to transfer of business (SEBI regulated business activity) from one legal entity which is a SEBI registered Intermediary (transferor) to other legal entity (transferee). In this regard, following is clarified: 3.1.1. The transferee shall obtain fresh registration from SEBI in the same capacity before the transfer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .1.4. facilitate an orderly migration of assignments as desired by clients to other CRA(s) holding a certificate of registration under SEBI (Credit Rating Agencies) Regulations, 1999 ( CRA Regulations ); 4.1.1.5. continue to comply with the provisions of the CRA Regulations and circulars thereunder, till the time the CRA holds the certificate of registration; 4.1.1.6. continue to co-operate with SEBI with regard to sharing of information when requested and payment of fees as required under CRA Regulations ; 4.1.1.7. take such other action including providing any records or documents within the time period and in the manner, as may be required under the CRA Regulations or as may be directed by SEBI. 4.2. The CRA, on and from the date of acceptance of the Request, or when it is commencing the winding up process, shall: 4.2.1. return the certificate of registration so cancelled to SEBI; 4.2.2. not represent itself to be a holder of certificate for carrying out the activity for which such certificate had been granted; 4.2.3. suspend undertaking activity for which such certificate had been granted; 4.2.4. until it is wound up, continue to co-operate with SEBI on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e date of acceptance of surrender by SEBI, whichever is earlier. 4.7. In case of suspension of certificate of registration, the credit ratings assigned by the CRA, whose certificate of registration is suspended, shall not be valid during the period of suspension. 4.8. Upon cancellation or surrender or suspension of certificate of registration of a CRA, the concerned CRA s services cannot be used by listed entities or issuers for compliance with requirements of various SEBI regulations which require credit ratings from a CRA registered with SEBI. 4.9. Listed entities or issuers who have obtained credit rating from a CRA whose registration is cancelled or suspended or surrendered, desirous of obtaining credit rating for regulatory purposes, shall obtain credit rating(s) from another SEBI- registered CRA(s) holding a valid certificate of registration under CRA Regulations . 4.10. In order to facilitate the migration of credit ratings as mentioned above, the para 12.1 to 12.5 of master circular issued under SEBI (Credit Rating Agencies) Regulations, 1999 shall not be applicable, for the concerned CRA, from the date of Order of cancellation/suspension of certificate of r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .2. Alignment of Rating Scales Used by CRAs 5.2.1. CRAs, in terms of Regulation 9(f) of SEBI (Credit Rating Agencies) Regulations, 1999, undertake ratings of various financial instruments under the guidelines of different financial sector regulators or authorities. 5.2.2. In order to standardise the usage of rating scales, CRAs are advised to align their rating scales with the rating scales prescribed under the guidelines of respective financial sector regulator or authority in terms of Regulation 9(f) of SEBI (Credit Rating Agencies) Regulations, 1999. 5.3. Issuer Rating/ Corporate Credit Rating 5.3.1. Issuer Rating/Corporate Credit Rating indicates the degree of safety of the issuer or the rated entity with regard to timely servicing of all its debt obligations. 5.3.2. Pursuant to the consultation with the CRAs, standardized symbols and their definitions have been devised for Issuer Rating/ Corporate Credit Rating. The new symbols and definitions as given in Annexure 8 shall henceforth be used for the new ratings/ reviews by the CRAs for Issuer Rating/ Corporate Credit Rating. 5.4. Structured finance products: A CRA may undertake rating of structured f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cies and procedures related to the rating process. 6.2. The contents of the Operations Manual/ Internal governing document, as well as any changes to the same, shall be communicated to employees promptly, and training of employees on the same shall be conducted at regular intervals. 6.3. The following shall be specified in the Operations Manual/ Internal governing document of CRAs: 6.3.1. Basic Minimum information required for conducting the Rating Exercise 6.3.2. External entities (bankers, auditors etc.) that need to be contacted 6.3.3. Mode of seeking information from external entities. CRAs should endeavour to obtain such information/confirmation in writing. 6.3.4. Policy regarding internal approvals and timelines at each step of the Rating Exercise. 6.3.5. Policy regarding monitoring and review of ratings, including the timelines within which such review is to be completed. 7. Rating Criteria 7.1. Each CRA shall frame detailed rating criteria, include the same in its Operations Manual/ Internal governing document and disclose the same on its website. 7.2. Periodicity of review shall be disclosed on the CRA's website. While disclosing the rev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion/ process/ policy, to enable the investors to discern the changes made to the same. 8.4. A CRA shall keep the following records in support of each credit rating and review/surveillance thereof: 8.4.1. The important factors underlying the credit rating and sensitivity of such credit rating to changes in these factors, 8.4.2. Summary of discussions with the issuer, its management, auditors and bankers which have a bearing on the credit rating, 8.4.3. Decisions of the rating committee(s), including voting details and notes of dissent, if any, by any member of the rating committee, and 8.4.4. If a quantitative model is a substantial component of the credit rating process, the rationale for any material difference between the credit rating implied by the model and the credit rating actually assigned. 8.4.5. These records should be maintained till five years after maturity of securities and be made available to auditors and regulatory bodies when sought by them. 8.5. During the rating process, CRAs shall record minutes of the meeting with issuer management and incorporate it in the rating committee note. 8.6. CRAs shall meet the audit committee of the rated ent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s upon the occurrence of or announcement/ news of material events including, but not restricted to, the following: 9.2.1.1. Quarterly/ Half-yearly/ Annual results 9.2.1.2. Merger/ Demerger/ Amalgamation/ Acquisition 9.2.1.3. Corporate debt restructuring, reference to NCLT and winding-up petition filed by any party /creditors. 9.2.1.4. Significant decline in share prices/bond prices of the issuer or group companies which is not linked to overall market movement 9.2.1.5. Significant increase in debt level or cost of debt of the issuer company 9.2.1.6. Losses, sharp revenue de-growth etc. based on publicly disclosed financial statements, which are not in line with CRA s earlier estimates 9.2.1.7. Granting, withdrawal, surrender, cancellation or suspension of key licenses or regulatory approvals. 9.2.1.8. Disruption/ commencement/ postponement of operations of any unit or division of the listed entity. 9.2.1.9. Any attachment or prohibitory orders against the Issuer 9.2.1.10. Any rating action taken by an International Rating Agency with respect to rating assigned to the Issuer/ Instruments issued by the Issuer. 9.2.1.11. sharp deviations in bond spread ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve 10.1.3.3. Negative 10.1.4. Rating Outlooks may not be assigned for: 10.1.4.1. Short term ratings 10.1.4.2. Ratings in the C and D categories 10.1.4.3. Ratings on watch 10.1.4.4. Ratings of securitization transactions backed by pool of loans, as CRAs are already mandated to disclose at least once in every six months the performance of the rated pool. 10.1.4.5. Credit quality ratings of mutual fund schemes, provided surveillance of the fund s holdings is carried out by the CRAs on a monthly basis. 10.1.5. Rating Watch: Rating watch indicates a CRA s view on the expected direction of the rating movement in the short term. The CRA shall use following Standard descriptors to when an issuer / security is placed on Rating Watch : 10.1.5.1. Rating Watch with Positive Implications 10.1.5.2. Rating Watch with Developing Implications 10.1.5.3. Rating Watch with Negative Implications 10.1.6. Press Release related to review of rating shall also carry the rating transition/ history of all securities of that issuer, rated by the CRA in the past 3 years, irrespective of whether the security is currently outstanding or not. 10.1.7. While CR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ful to the end users, it has been decided to mandate disclosure of liquidity indicators using standardized terminology. Accordingly, CRAs shall disclose the liquidity indictors using one of the following indicators and give an explanation thereon: 10.3.1. Superior / Strong 10.3.2. Adequate 10.3.3. Stretched 10.3.4. Poor An indicative description for these liquidity indicators is provided at Annexure 14. 10.4. Structured Finance Products: While publishing the ratings of structured finance products and their movements, a CRA apart from following all the applicable requirements in case of non-structured ratings shall also disclose the track record of the originator and details of nature of underlying assets while assigning the credit rating. The track record shall include a brief description of the financials of the originator, rating migrations to speculative categories and defaults. 11. Policy in respect of non-co-operation by the issuer 11.1. In case of non-cooperation by the issuer (such as not providing information required for rating, non-payment of fees for conducting surveillance), in line with the existing Regulations, the CRA shall continu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with a vast majority of INC issuers being unlisted and small entities. In this regard, to provide enhanced transparency and information regarding non-cooperative issuers to various stakeholders, market participants and investors, the following is being prescribed: 11.6.1. A CRA shall disclose two lists of issuers who are non-cooperative with the CRA, separately for: 11.6.1.1. Securities that are listed, or proposed to be listed, on a recognized stock exchange, and 11.6.1.2. Other ratings 11.6.2. The aforementioned lists shall be disclosed in the following format: S. No. Name of Non-cooperative issuer Date of categorization of issuer as non-cooperative Link to the webpage hosting the issuer s press releases 11.6.3. The above disclosure shall be updated on a daily basis. 11.7. Information to be disclosed through Press Release: The rating action(s) in such cases shall be promptly disclosed through press release(s), which shall mention, at least, the following: 11.7.1. Date of Press Release 11.7.2. Details of security 11.7.3. Rating Action and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany (AMC) in case of mutual funds; 12.2. Press Release for Withdrawal of Rating of a rated security : At the time of withdrawal of any credit rating of securities that are listed, or proposed to be listed, on a recognized stock exchange, and other credit ratings that are required under various SEBI Regulations or circulars thereunder, the CRA shall assign a rating to such security and issue a press release as per the format prescribed in the Annexure 13. However, in cases where there are no outstanding obligations under the security rated by the CRA or the company whose security is rated is wound up or merged or amalgamated with another company, CRA shall not assign any rating. Further, the Press Release shall also mention the reason(s) for withdrawal. 12.3. Withdrawal in case of Single Ratings outstanding on rated security: In terms of Regulation 16(3) of SEBI (Credit Rating Agencies) Regulations, 1999, a CRA may withdraw a rating, subject to the CRA having: 12.3.1. rated the security continuously for 5 years or 50 per cent of the tenure of the security, whichever is higher. 12.3.2. received an undertaking from the Issuer that a rating is available on that secur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng letter, press release / rating rationale, etc. 13.1.2. Standardized Term: A rating shall be considered as provisional, and not final, when it is contingent upon occurrence following steps or execution of following documents, as applicable: 13.1.2.1. execution of letter of comfort, corporate guarantee, or other orms of explicit third-party support; 13.1.2.2. execution of documents such as debenture trust deed/ debenture trustee agreement, legal agreements/ opinions, representations and warranties, final term sheet; 13.1.2.3. assignment of loan pools or finalisation of cash flow escrow arrangements; 13.1.2.4. setting up of debt service reserve account; 13.1.2.5. opening of escrow account; or 13.1.2.6. For a proposed Real Estate Investment Trust (REIT) or Infrastructure Investment Trust (InvIT), pending formation of a trust - only after receipt of SEBI Registration. However, the process of obtaining rating may commence at the stage of the sponsor filing with SEBI for the registration of the Trust, subject to declaration from the sponsor to this effect being submitted to the CRA. In no case shall a rating, including provisional rating, be assigned by a CRA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... REIT/ InvIT, the proposed capital structure, etc. b. the rating rationale should disclose that the CRA has taken an undertaking from the sponsor stating that the key assumptions (relating to the assets, capital structure, etc.) are in consonance with the details filed by the sponsor with SEBI. c. In case of change in provisional rating due to change in aforesaid key assumptions, the press release shall state that the rating by the CRA is based on a declaration from the issuer that similar changes have been made in the filing with SEBI. 13.1.5. Unaccepted provisional rating : In case the provisional rating assigned is not accepted by the issuer (or sponsor, in case of REITs/InvITs), then in the non-accepted ratings published by CRAs on their website the following supplementary disclosures shall be provided: 13.1.5.1. the details of the steps taken for assigning the provisional rating. For instance, in case of REITs/ InvITs, such disclosure shall contain the broad details of the assets to be housed under the Trust, the proposed capital structure, etc. 13.1.5.2. the rating referred to in para 13.1.4.6 viz. rating that would have been assigned in absence of the said s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r has a lower probability of default on a continuous basis, compared with the rated issuer, till the time such ratings are outstanding. 14.6. The CRAs shall devise a model to assess the adequacy of credit enhancement structure under various scenarios including stress scenarios. Such assessment shall also be disclosed in the press release regarding the rating action. 14.7. Monitoring : Monitoring of provisions at para 14 shall be done in terms of the half-yearly internal audit for CRAs, mandated under Regulation 22 of the SEBI (Credit Rating Agencies) Regulations, 1999 and this master circular issued thereunder. 15. Post Default Curing Period 15.1. After a default is cured and the payments regularized, a CRA shall generally upgrade the rating from default to non-investment grade after a period of 90 days based on the satisfactory performance by the company during this period. CRAs may deviate from the said period of 90 days on a case to case basis, subject to the CRAs framing a detailed policy in this regard. The said policy shall also be placed on CRA s website. Cases of deviations from stipulated 90 days, if any, shall be placed before the Ratings Sub- Commit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /appeal of the rating(s) provided to its security/ies shall be reviewed by a rating committee of the CRA that shall consist of majority of members that are different from those in the Rating Committee of the CRA that assigned the earlier rating, and at least one-third of members are independent. ( Independent would mean people not having any pecuniary relationship with the CRA or any of its employees). 18. Rating Agreement between the Issuer and the CRA 18.1. Rating Agreement to be signed between Issuer and CRA prior to commencement of rating exercise: 18.1.1. Regulation 14 of SEBI (Credit Rating Agencies) Regulations, 1999 requires CRAs to enter into a written agreement with each client whose securities it proposes to rate. 18.1.2. In this regard, it has come to the notice that in some instances, CRAs have provided indicative ratings to Issuers without entering into a written agreement with such Issuers and have thereafter not disclosed such ratings on their websites. 18.1.3. CRAs are advised to refrain from giving Indicative Ratings without having a written agreement in place. In case such Indicative Ratings are provided by the CRA, it shall be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p 10 investors 18.2.2.3. The client (Issuer/ borrower) undertakes to provide the CRA a No Default Statement on a monthly basis wherein the Issuer shall explicitly confirm that it has not delayed on any payment of interest/ principal in the previous month. Such statement shall be provided to the CRA on the first working day of the next month. 19. Governance Norms of CRAs 19.1. One third of the board of a CRA shall comprise of independent directors, if the board is chaired by a non-executive director. In case the board of the CRA is chaired by an executive director, half of the board shall comprise of independent directors. 19.2. The board of a CRA shall constitute the following committees: 19.2.1. Ratings Sub-Committee 19.2.2. Nomination and Remuneration Committee 19.3. The Chief Ratings Officer (CRO) shall directly report to the Ratings Sub- Committee of the board of the CRA. 19.4. The Nomination and Remuneration Committee shall be chaired by an independent director. 20. Accountability of Rating Analysts of CRAs 20.1. Roles and responsibilities of the rating analysts of CRAs shall be clearly la ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... estment/ trading in securities (except schemes of Mutual Funds) done by CRAs or their Access Persons as defined hereunder, the following guidelines, framed in consultation with CRAs are laid down: 21.4.3.1. CRAs shall adopt adequate systems, procedures and policies to ensure that they address conflict of interest while making their own investments in securities. 21.4.3.2. The CRAs, their employees and Access Persons shall not take undue advantage of any price sensitive information that they may have about any company. 21.4.3.3. Access Persons to seek prior approval for transactions (a) An Access Person shall apply to the Compliance Officer for prior approval of transactions for purchase or sale of securities of the companies which have been rated by the CRA or whose securities/instruments/facilities have been rated by the CRA. (b) The Compliance Officer of the CRA shall apply to the Chief Executive of the CRA for such prior approval. (c) The CEO/Compliance Officer shall ensure that there is no conflict of interest while considering the request for prior approval. (d) Such approvals, if granted, shall be valid for 7 working ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mation received. 24. Securities and Exchange Board of India (Credit Rating Agencies) (Second Amendment) Regulations, 2018: Vide Gazette Notification No. SEBI/LAD-NRO/GN/2018/36 dated September 11, 2018, in respect of Securities and Exchange Board of India (Credit Rating Agencies) (Second Amendment) Regulations, 2018, as laid down under Regulation 9(f) of SEBI (Credit Rating Agencies) (Second Amendment) Regulations, 2018, a CRA may undertake the rating of financial instruments under the respective guidelines of the financial sector regulators/ authorities as specified in Annexure 18 . CRAs may also undertake research activities, incidental to rating, such as research for Economy, Industries and Companies. 24A. Guidelines on the listed securities/instruments/products falling under the purview of other financial sector regulator/s or authority/ies Certain instruments/products/securities are regulated by other financial sector regulator/s or authority/ies and could be listed or unlisted. The issuers of such instruments/products/securities and any person connected therewith (such as CRAs) shall abide by the rules/regulations/directions/guidelines app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... levels: 25.2.6.1. For AAA: a. Zero for 1-year and 2-year default rate. b. Zero for 3-year default rate, with a tolerance level of 1%. 25.2.6.2. For AA: a. Zero for 1-year default rate. b. Zero for 2-year default rate with a tolerance level of 2%. 25.2.6.3. For A: a. Zero for 1-year default rate with a tolerance level of 3%. 25.2.7. For ratings on non-structured instruments, various instruments of an issuer with equal seniority level and having same rating shall not be included separately for default rate calculation. However, various instruments of an issuer having different seniority levels shall be included as separate instances, subject to a cap of three instances across all rating categories put together. 25.2.8. For ratings on structured instruments, various instruments, issued by a trust, with the same degree of seniority and hence having same rating shall not be included separately for default rate calculation. However, various instruments, issued by a trust, having different seniority levels shall be included as separate instances. Further, in order to avoid under-estimation of default rates in case of signif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .5. On half yearly basis, the list of defaults separately for each rating category (e.g. AAA, AA, A, BBB, BB, B, C) {(Annexure 24)}. 26.3.2. Structured Finance Products : A CRA shall disclose at least once in every six months, the performance of the rated pool, i.e., collection efficiency, delinquencies. A CRA shall also provide a detailed description of the underlying pools including ageing, Credit enhancements such as liquidity supports, first and second loss guarantee provided shall also be disclosed. 26.3.3. Disclosure of performance of CRAs on Stock Exchange and Depository website 26.3.3.1. Each CRA shall furnish data on sharp rating actions in investment grade rating category, as per the format specified in Annexure 25, to Stock Exchanges and Depositories for disclosure on website on half-yearly basis, within 15 days from the end of the half-year ( 31st March/ 30th September). 26.3.3.2. Methodology for Computation of Sharp Rating Action: In order to standardize the methodology of computation and disclosure of a sharp rating action , it is clarified that CRAs shall compare two consecutive rating actions. Therefore, a CRA shall disclose a sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. 26.4.1.3. Based on approach mentioned at para 26.4.1.2, CRA shall disclose, on an annual basis, the average one-year, two-year and three-year cumulative default rates (based on weighted average) each for: a. Last 10-financial years period (Long-run average default rates) b. 24, 36 and 48 most recent cohorts, respectively (Short-run average default rates) 26.4.1.4. The format of the above disclosures is specified at Annexure 26. The above disclosures shall be made on a consolidated basis for all financial instruments rated by a CRA. 26.4.1.5. For the above purposes, the following terms shall have the meaning as under: a. Static Pool: Non-defaulted ratings that were outstanding at the beginning of any period. b. Default: Non-payment of interest or principal amount in full on the pre-agreed date. A CRA shall recognize default at the first instance of delay in servicing of interest or principal on the rated debt instrument. c. Default Rate: The number of defaults among rated entities in the static pool as a percentage of the total number of entities in the static pool. d. Averaging: All averaging across static pools for de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n or ratings of non-cooperative issuers during the financial year. Ratings downgraded to D shall be treated as default for the rest of the financial year. Ratings which are upgraded from D shall be considered as new rating for the relevant subsequent static pools. b. Transition Rate: The number of movements/ transitions from each rating category to another, as at the end of the financial year, as a percentage of the total number of ratings in the static pool. c. Averaging: All averaging across static pools for transition rate computations must be based on the weighted average method where the weights are the number of issuers in each static period. 26.4.3. Disclosure of Average Rating Transition Rates for Long-Term Credit Ratings of securities 26.4.3.1. Para 26.4.2 of master circular mandates CRAs to disclose a rating transition matrix, where the static pool has been defined to exclude ratings that have been withdrawn or ratings of non-cooperative issuers during the financial year. 26.4.3.2. Given the increased non-cooperative issuers in the CRAs rated universe, excluding such INC ratings might not depict a true picture of stability of credit rat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess Releases and Rating Reports, including those ratings which have been withdrawn, shall be available on the CRA's website. 27.2. Reporting and disclosure with regard to monitoring of repayment schedules 27.2.1. In case no confirmation of servicing of debt obligation by the Issuer is received by the CRA from the Debenture Trustee within 1 day post the due date, the CRA shall immediately follow up with the Issuer for confirmation of payment. In case no response is received from the Issuer within 2 days of such communication, the CRA shall issue a Press Release as enlisted at para Chapter II9.1.3. and disseminate the same on its website and to all stock exchanges where the security is listed. 27.2.2. The CRA shall also make a reference to SEBI regarding such suppression of information by the issuer/ non-cooperation of Issuer with CRA. Failure to make such reference shall be considered as aiding and abetting the Issuer in suppression of material information by the CRA which would be in contravention of Clause 12 of Code of Conduct of CRAs and may result in violation of the provisions of section 12A of the Securities and Exchange Board of India Act, 1992 and SEBI (P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Exchange Board of India (Credit Rating Agencies) Regulations, 1999, the CRA, while covering the analysis of the various factors justifying the assessment in press release, shall also disclose the factors constituting a risk. 27.4.2. Accordingly, it is further clarified that if the issuer does not share information sought by the CRA within 7 days of seeking such information from the Issuer, even after repeated reminders (within these 7 days) from the CRA, the CRA shall take appropriate rating action depending upon the severity of information risk of the issuer. 27.4.3. The Press Release in such cases shall mention the efforts made by the CRA in seeking such information and limitations regarding such information availability. 27.5. Disclosures in case of rating not accepted by an issuer 27.5.1. Each CRA shall disclose on its website details of all ratings assigned by them, irrespective of whether the rating is accepted by the issuer or not, even in case of non-public issues. 27.5.2. All non- accepted ratings shall be disclosed on the CRA s website for a period of 12 months from the date of such rating being disclosed as a non-accepted rating on the CRA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Companies Act, 2013 or the corresponding provision of any other law for the time being in force; 28.1.2. Change in Director, including managing director/ whole-time director; 28.1.3. Change in shareholding not resulting in change in control. 28.1.4. If there is no change during the relevant half year, it shall be indicated in the report. 29. Other Continuous Disclosures: 29.1. Rating Procedure: A CRA shall formulate and disclose its policies, methodology and procedures in detail regarding solicited and unsolicited credit ratings. 29.2. Income: 29.2.1. A CRA shall disclose the general nature of its compensation arrangements with the issuers. 29.2.2. A CRA shall disclose, in case of accepted ratings, its conflict of interest, if any, including the details of relationship commercial or otherwise between the issuer whose securities are being rated / any of its associate of such issuer and the CRA or its subsidiaries. 29.3. Unsolicited credit ratings : While publishing unsolicited ratings and their movements, a CRA apart from following all the applicable requirements in case of solicited ratings shall make the following ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed, deficiencies observed, and consideration of response of the management on the deficiencies. 31.1.5. The 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. 31.1.6. The report shall comment on the adequacy of systems adopted by the CRA for compliance with the requirements of regulations and guidelines issued by SEBI and investor grievance redressal. 32. Requirements related to Internal Audit of CRAs: 32.1. Eligibility of Auditors for conducting the Internal Audit of the CRA: 32.1.1. The audit firm shall have a minimum experience of three years in the financial sector. 32.1.2. The internal auditor of a CRA shall declare that: 32.1.2.1. The firm has not been employed by other CRAs for any other services (such as statutory audit, taxation, consultancy/ retainership etc.) in the past two years, and 32.1.2.2. The partners/ firm do not have any association with any other CRA. 32.1.3. The audit team must be c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... if any, arising due to composition of the rating committee and participation in the rating committee meetings. 32.3.12. The audit shall also cover adherence to the prescribed methodology for calculation of transition rates and default rates, 32.3.13. Compliance by CRA with the provisions of all the Circulars shall be verified during half-yearly Internal Audit. 32.4. Action on the Internal Audit Report: 32.4.1. The CRA shall receive the report of the internal audit within two months from the end of the half-year. 32.4.2. Upon receipt of the internal audit report, the Compliance Officer of the CRA shall provide detailed comments on each of the observations therein and place the same before the Board of the CRA. 32.4.3. The final action taken report, including the comments/ recommendations made by Compliance Officer and the Board of the CRA as well as the corrective steps taken by the CRA, shall be submitted to SEBI within 2 months from the date of receipt of the internal audit report or 1 month from the date of Board Meeting of the CRA, whichever is later, in the following format: Sr. No. Observations of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 266 7575. 35. Guidelines on Outsourcing of Activities by CRAs 35.1. Outsourcing may be defined as the use of one or more than one third party either within or outside the group - by a registered CRA to perform the activities associated with services which the CRA offers. 35.2. The principles for outsourcing by CRAs have been framed (Annexure 29). These principles shall be followed by all CRAs registered with SEBI. 35.3. The SEBI registered CRAs desirous of outsourcing their activities shall not, however, outsource their core business activities and compliance functions. 35.4. The SEBI registered CRAs shall be responsible for reporting of any suspicious transactions / reports to FIU or any other competent authority in respect of activities carried out by the third parties. 36. General Guidelines for dealing with Conflicts of Interest of CRAs and their Associated Persons in Securities Market: 36.1. CRAs are presently governed by the provisions for avoidance of conflict of interest as mandated in the SEBI (Credit Rating Agencies) Regulations,1999 read with relevant circulars issued from time to time by SEBI. O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hile dealing in securities on behalf of others 36.4.10. not in any way contribute to manipulate the demand for or supply of securities in the market or to influence prices of securities; 36.4.11. not have an incentive structure that encourages sale of products not suiting the risk profile of their clients; 36.4.12. not share information received from clients or pertaining to them, obtained as a result of their dealings, for their personal interest; 36.5. The Board of CRAs shall put in place systems for implementation of these guidelines and provide necessary guidance enabling identification, elimination or management of conflict of interest situations. The Boards shall review the compliance of this circular periodically. 36.6. These guidelines shall be in addition to the provisions, if any, contained in respective regulations/ circulars issued by the Board from time to time regarding dealing with conflict of interest, in respect of such entities 37 Standardization of industry classification- Applicability to CRAs 37.1. The Market Data Advisory Committee (MDAC), a standing committee constituted by SEBI, comprising of representatives ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o ensure the independence of its credit rating process in view of the above arrangement with the non-rating entity. 38.2.1.3. Guidance to employees on sharing of information or resources, if any, between the CRA and the non-rating entity in order to mitigate any potential or actual conflict of interest. 38.2.2. A CRA shall disclose on its website, details of any common director or Chief Executive Officer or Managing Director between the CRA and the non-rating entity. Such disclosure shall be updated by the CRA on the first working day of each month. The disclosure should include a reference to the date it was last updated by the CRA, along with a reference or hyperlink to archives of previous such disclosures. 38.2.3. Credit rating scales (i.e., symbols and definitions) prescribed by this SEBI circular issued under the SEBI (Credit Rating Agencies) Regulations, 1999, shall not be used by any non-rating entities of the CRA. 38.2.4. The websites of SEBI-registered CRAs and their non-rating entities shall be separate. ACRA s website may contain hyperlinks to the separate websites of the non-rating entities 38.2.5. Applicability: CRAs shall report on thei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation as Credit Rating Agency (Please enclose a clipping of the said public notice); we have notified the Depositories and all the stock exchanges where our client companies are listed about the surrender of our registration. 4. *We hereby request SEBI to dispense with the procedure laid down in Regulation 16(1) of the SEBI (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002 while processing our request for surrender of certificate of registration. Thanking you, Yours faithfully, Name: (Whole time/Managing Director/Principal Officer) * Please strike off, if not applicable. Annexure 2 Rating Symbols and Definitions for Long Term Securities Long term securities: The securities with original maturity exceeding one year Rating symbols should have CRA s first name as prefix AAA - Securities with this rating are considered to have the highest degree of safety regarding timely servicing of financial obligations. Such securities carry lowest credit risk. AA - Securities with this rating are considered to have high degree of safety regarding timely ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The modifier reflects the comparative standing within the category. Annexure 4 Rating Symbols and Definitions for Long Term Structured Finance Instruments Long term structured finance instruments: The instruments with original maturity exceeding one yeazr Rating symbols should have CRA s first name as prefix AAA (SO) - Instruments with this rating are considered to have the highest degree of safety regarding timely servicing of financial obligations. Such instruments carry lowest credit risk. AA (SO) - Instruments with this rating are considered to have high degree of safety regarding timely servicing of financial obligations. Such instruments carry very low credit risk. A (SO) - Instruments with this rating are considered to have adequate degree of safety regarding timely servicing of financial obligations. Such instruments carry low credit risk BBB (SO) - Instruments with this rating are considered to have moderate degree of safety regarding timely servicing of financial obligations. Such instruments carry moderate credit risk. BB(SO) - Instruments with this rating are considered to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Schemes with this rating are considered to have the highest degree of safety regarding timely receipt of payments from the investments that they have made. AAmfs Schemes with this rating are considered to have the high degree of safety regarding timely receipt of payments from the investments that they have made. Amfs Schemes with this rating are considered to have the adequate degree of safety regarding timely receipt of payments from the investments that they have made. BBBmfs - Schemes with this rating are considered to have the moderate degree of safety regarding timely receipt of payments from the investments that they have made. BBmfs - Schemes with this rating are considered to have moderate risk of default regarding timely receipt of payments from the investments that they have made. Bmfs - Schemes with this rating are considered to have high risk of default regarding timely receipt of timely receipt of payments from the investments that they have made. Cmfs - Schemes with this rating are considered to have very high risk of default regarding timely receipt of timely receipt of payments from the investments tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . B - Issuers with this rating are considered to have high risk of default regarding timely servicing of debt obligations. C - Issuers with this rating are considered to have very high risk of default regarding timely servicing of debt obligations. D - Issuers with this rating are in default or are expected to be in default soon. Modifiers { + (plus) / - (minus)} can be used with the rating symbols for the categories AA to C. The modifiers reflect the comparative standing within the category. Annexure 9 Rating Symbols and Definitions for Long Term Credit Enhanced Securities Long term Credit Enhancement securities: The securities with original maturity exceeding one year Rating symbols should have CRA s first name as prefix. AAA (CE) - Securities with this rating are considered to have the highest degree of safety regarding timely servicing of financial obligations. Such securities carry lowest credit risk. AA (CE) - Securities with this rating are considered to have high degree of safety regarding timely servicing of financial obligations. Such securities carry very low credit risk. A (CE) - Secu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... modifier reflects the comparative standing within the category. Annexure 11 Instrument-wise definition of default Financial Instrument Rating Scale Definition of Default Debentures/Bonds Long Term A delay of 1 day even of 1 rupee (of principal or interest) from the scheduled repayment date. Commercial Paper Short term Other Scenarios When rated instrument is rescheduled: Non-servicing of the debt (principal as well as interest) as per the existing repayment terms in anticipation of a favourable response from the creditor of accepting their restructuring application/ proposal shall be considered as a default. Rescheduling of the debt instrument by the lenders prior to the due date of payment will not be treated as default, unless the same is done to avoid default or bankruptcy. Annexure 12 Standard Template for No Default Statement (Minimum Information be sought) To Dear Sir/ Madam, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Thanking You, Yours faithfully, Annexure 13 Standard Template for Press Release (Minimum Information be disclosed) Name of the Company Date of Press Release Details of security/ies Name of the security Date of issuance Coupon rate Maturity Date Size of the issue Rating assigned, along with Rating Outlook Rating action (assigned/ upgraded/ downgraded) for the security. Detailed Rationale justifying the Rating Action/ rating assigned. List of key rating drivers for the Rating Action i.e. factors justifying favourable assessment (strengths) and factors constituting risk (weakness). Detailed description of key rating drivers highlighted above. Analytical approach (wherever applicable) taken by the CRA to assign the rating. Liquidity Hyperlink/ reference to the applicable Criteria for rating the security. About the Company: Factual details of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rent ratio. 3. Liquidity: Stretched - Liquidity is marked by tightly matched accruals to repayment obligations, highly utilized bank limits and modest cash balance. 4. Liquidity: Poor - Poor liquidity marked by lower accruals when compared to repayment obligations, fully utilized bank limits and modest cash balance. This could constrain the ability of the company to repay is debt obligations on a timely basis. Annexure 15 Type of Securities / Support Consideration(s) for CE-suffix: 1. Guaranteed bond; Shortfall undertaking backed bond or other such third-party credit enhancement 2. Covered bonds which have to be serviced primarily by the issuer (i.e., primary recourse to issuer), with secondary recourse to the cash flows from the pool of loans housed in a trust 3. Partially guaranteed bond 4. Commercial Mortgage-Backed Securities (CMBS)-like structures 5. Standby Letter of Credit (SBLC) backed securities 6. Debt backed by pledge of shares or other assets 7. Guaranteed Pooled bond issuance (PBI), not through a trust 8. Obligor/Co-obligor structures or Cross-default guarantee structures 9. Debt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... letion of the DRR/invocation of guarantee which could affect the payment of debenture obligations. This information shall be shared annually. (iii) Details of redemption of the issue. (iv) Any default committed including the default in payment of interest or redemption of debentures or delay in creation of security. (v) Any change or restructuring of the terms of the issue. (vi) Periodic reports from lead banks about the progress of the project for which funds have been raised through debentures and certificate from issuer's auditors in respect of utilization of funds. (vii) Details of grievances filed by debenture-holders and action taken to resolve them. (viii) Non-cooperation by the issuer with respect to furnishing required reports/ certificates/ information. Information pertaining to points iii. to viii. above shall be shared as and when available. ANNEXURE 18 Financial sector regulators/ authorities 1. Securities and Exchange Board of India 2. Reserve Bank of India 3. Insurance Regulatory and Development Authority of India 4. Pension Fund Regulatory and Development Authority 5. Ministry ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h D Annexure 20 Details of new credit ratings assigned during last six-months New Ratings assigned between Apr Sep/ Oct Mar S. No Na me of the Issu er Sector etc.) Securities Type etc.) Issue Size (INR million s) Listing Status (Listed/ Propose d to be listed ) Wheth er the issuer requested for a review /appeal of rating ? Whether review/appea l of the rating was granted by CRA. Rating assign ed prior to reques t for review /appea l by the issuer Final Rating Assign ed Annexure 21 Movement* of Each Credit Rating Upgrades Rating Upgrades between Apr Sep/ Oct Mar S. No. Name of the issuer Sector Security Type etc.) Listing Status (Listed / Proposed to be listed) Rating prior to revision Rating post ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er Sector Type of security) Outstanding Issue Size (INR millions) Listing Status (Listed /Proposed to be listed) Initial Rating Date of Initial Rating (1) (2) (3) (4) (5) (6) (7) (8) History of Credit Rating of all Outstanding Securities Rating after 1st Revision Date of 1st Revision Rating after 2nd Revision Date of 2nd Revision Rating after 3rd Re vision Date of 3rd Re vision Current Outstanding Rating (9) (10) (11) (12) (13) (14) (15) (16) Annexure 24 List of Defaults Separately for Each Rating Category (on ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Type Issue Size (INR millions) Listing Status (Listed/ Proposed to be listed) Rating prior to Default Trigger Event Date of trigger of event/ receiving intimation Date of Default Recognition Rating prior to default A1 category 1 2 Rating prior to default A2 category 1 2 Rating prior to default A3 category 1 2 Rating prior to default A4 category 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A1 A2 A3 A4 Annexure 27 Average one-year transition rates for long-term ratings for the last 5-Financial Year Period Rating Category AA A AA A BB B BB B C D AAA AA A BBB BB B C Note: The left-hand column identifies ratings outstanding at the beginning of the year. Each row provides information on the migration pattern of those r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gramme to address the outsourced activities and the relationship with the third party. 2.1 The CRA shall make an assessment of outsourcing risk which depends on several factors, including the scope and materiality of the outsourced activity, etc. The factors that could help in considering materiality in a risk management programme include- a) The impact of failure of a third party to adequately perform the activity on the financial, reputational and operational performance of the CRA and on the investors / clients; b) Ability of the CRA to cope up with the work, in case of non- performance or failure by a third party by having suitable back-up arrangements; c) Regulatory status of the third party, including its fitness and probity status; d) Situations involving conflict of interest between the CRA and the third party and the measures put in place by the CRA to address such potential conflicts, etc. 2.2 While there shall not be any prohibition on a group entity / associate of the CRA to act as the third party, systems shall be put in place to have an arm s length distance between the CRA and the third party in terms of infrastructure, manpower, decision-making, re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... important that the CRA exercises due care, skill, and diligence in the selection of the third party to ensure that the third party has the ability and capacity to undertake the provision of the service effectively. 4.2 The due diligence undertaken by an CRA shall include assessment of: (a) third party s resources and capabilities, including financial soundness, to perform the outsourcing work within the timelines fixed; (b) compatibility of the practices and systems of the third party with the CRA s requirements and objectives; (c) market feedback of the prospective third party s business reputation and track record of their services rendered in the past; (d) level of concentration of the outsourced arrangements with a single third party; and (e) the environment of the foreign country where the third party is located. 5. Outsourcing relationships shall be governed by written contracts / agreements / terms and conditions (as deemed appropriate) {hereinafter referred to as contract } that clearly describe all material aspects of the outsourcing arrangement, including the rights, responsibilities and expectations of the parties to the contract, cli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provisions and agreement covenants and jurisdictional covenants that provide for adjudication of disputes between the parties under the laws of a specific jurisdiction; (l) neither prevents nor impedes the CRA from meeting its respective regulatory obligations, nor the regulator from exercising its regulatory powers; and (m) provides for the CRA and /or the regulator or the persons authorized by it to have the ability to inspect, access all books, records and information relevant to the outsourced activity with the third party. 6. The CRA and its third parties shall establish and maintain contingency plans, including a plan for disaster recovery and periodic testing of backup facilities. 6.1 Specific contingency plans shall be separately developed for each outsourcing arrangement, as is done in individual business lines. 6.2 CRA shall take appropriate steps to assess and address the potential consequence of a business disruption or other problems at the third party level. Notably, it shall consider contingency plans at the third party; co-ordination of contingency plans at both the CRA and the third party; and contingency plans of the CRA in the event of non-p ..... X X X X Extracts X X X X X X X X Extracts X X X X
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