What does Credit Rating Agency mean?
In the past two decades, the value of credit rating has grown significantly among investors and the Indian financial market. Simply put, it can be described as an opinion on a company's credit quality, i.e., debt issuing firm's ability to service the instrument. Based on its financial history, current assets, it establishes a connection between risk and returns. An investor or any other interested party will use the rating to measure the level of risk and compare the rate of return offered with the rate of return predicted.
Credit Rating History is described below:
Credit Rating first emerged in India in the 1940s following the financial crisis in New York in 1937 and the eventual establishment of Standard's & Poor's in 1941. In the 1970s, a number of credit rating firms began operating worldwide. In India, with the establishment of CRISIL, the phenomenon began in 1987. The scope was extended in 1991 and 1993 with reverence for ICRA & CARE. In the private sector, Duffs & Phelps Credit Rating India Private Ltd was established in 1995 as the first credit rating institution.
In respect of credit rating, the following points may be noted:
- An assessment of the willingness and ability of the borrower to repay the graded obligation in accordance with its terms and conditions.
- It is only an opinion, but not a recommendation to purchase, sell or hold the welfare of a borrower.
- These agencies only adjust ratings for major and lasting improvements in the financial and operational performance of a company
- These agencies only rate securities and not issuers.
Agencies for credit rating
One of the intermediaries of the capital market is the Credit Rating Agencies (CRA). It is a corporate body that engages in the stock rating sector offered through a public issue or right issue. We rate the debtors on the basis of their ability to repay the debt in good time. We rate large-scale lenders, whether companies or government bodies, and generally, we only give credit scores to entities and not consumers or individuals. The entities assessed may be in the form of corporations, special purpose agencies, state governments, local government bodies, non-profit organizations, and even nations.
Credit Rating Agency legislation
Under the SEBI (Credit Rating Agencies) Regulations, 1999, it is regulated. It is mandatory to register under SEBI before beginning the credit rating activities. These rules only include non-fixed deposit instruments, foreign exchange, real estate, etc.
What is the registration process is defined with Securities Exchange Board of India (SEBI)?
- The person proposing to start any operation as a credit rating agency shall apply to the Board in the form of an application in Form A as specified by the Regulations, together with a non-refundable fee.
- If supported by an individual belonging to one of the following categories:
- A Public Financial Institution
- A Scheduled Commercial Bank
- A Foreign Bank operating in India with RBI approval, the board shall not find the regulations.A foreign Credit Rating Agency having at least five years’ experience in rating securities and recognized by the laws for the time being in force in the country of its incorporation.
- Before issuing the certificate, the board is satisfied that the applicant will comply with the following standards;
- The applicant must be a company registered under the Companies Act, 2013, with the main purpose of carrying on its Memorandum of Association (MOA) any defined rating operation.
- Five crores minimum net value of rupees. The infrastructure must be adequate which enables it to provide rating services in accordance with the provisions of the Act and Regulations.
- It should be in the interests of investors and the stock market to issue the certificate.
- In accordance with the criteria set out in the regulations, the applicant must be a fit and proper person.
- Other requirements as laid down in the regulations.
If the Board determines that the request is not complete in all respects and does not satisfy the requirements set out in the regulations and directions set out in Form A, the Board shall refuse the request. Until refusing any such appeal, it must be possible to remove the inconsistencies within 30 days of the date of receipt of the correspondence.
The Board may even request that the applicant provide such additional information or explanation as may be deemed necessary by the Board and may also request that the applicant appear in person if appropriate.
After being satisfied in all respects, the Board shall send the applicant an intimation for the same and issue a certificate of registration in Form B as s upon receipt of payment of the necessary fees.
The registration certificate remains valid unless the board suspends or cancels it.
This rating agencies ' review provides valuable information to investors that encourage their decision to continue research and analyze the opportunities and risks associated with these investment securities. An individual who wants to be licensed as a credit rating agency can contact us at our e-mail address.