Capital markets regulator SEBI came out with fresh norms pertaining to cancellation, suspension and surrender of registration certificate of a Credit Rating Agency (CRA).

 

Background

  • The Securities and Exchange Board of India (SEBI) had recently cancelled the license of Brickwork Ratings India and ordered it to wind down operations within six months. Brickwork was granted registration by SEBI in the year 2008. It is one of the seven SEBI-registered credit rating agencies operating in the country.
  • SEBI had cited failure of Brickwork to exercise proper skill, care and diligence while discharging its duties as a credit rating agency.
  • SEBI also barred the rating agency from taking any new clients or fresh mandates.
  • This is for the first time that SEBI has cancelled the license of a credit rating agency (CRA).

 

Key guidelines

  • If any listed entity/issuer had obtained credit rating from a CRA whose registration is cancelled or suspended or surrendered then that entity will have to obtain credit rating from another registered CRA holding a valid registration certificate.
  • After submitting a request for surrender of registration certificate to SEBI, the concerned CRA will have to disclose prominently on its website about such a request and communicate the same to its clients within 15 days.
  • In case of surrender of certificate, the credit ratings assigned by the CRA will be valid till such time the client withdraws the assignment or migrates to another CRA.

 

What is a Credit Rating Agency?

  • A credit rating agency is a company that assesses the financial strength of sovereign companies and government entities, especially their ability to meet principal and interest payments on their debts.
  • The rating assigned to a given debt shows an agency’s level of confidence that the borrower will honour its debt obligations as agreed.
  • Each agency uses unique letter-based scores to indicate if a debt has a low or high default risk and the financial stability of its issuer.
  • At the request of the country, a credit rating agency evaluates its economic and political environment to assign it a rating.
  • Credit Rating Agencies in India β€” In India, there are six credit rating agencies registered under Securities and Exchange Board of India (SEBI) namely – CRISIL, ICRA, CARE, SMERA, Fitch India and Brickwork Ratings. With the suspension of licence of Brickwork, now there are 5 CRAs in India.

 

About SEBI –

  • The regulator of Indian stock market, set up under the Security and Exchange Board of India Act, 1992 (as a non-statutory body set on 12 April, 1988 through a government resolution in an effort to give the Indian stock market an organised structure) with its head office in Mumbai.
  • The Board of SEBI comprises nine members excluding the chairmanβ€”one member each from the Ministries of Finance and Law, one member from the RBI and two other members appointed by the central government. It has four full-time members (including the chairman).
  • Functions of SEBI – Main functions/powers of the Board as per the SEBI Act, 1992 are –
      • Registering and stock exchanges, merchant banks, mutual funds, underwriters, registrars to the issues, brokers, sub-brokers, transfer agents and others.
      • Levying various fees and other charges (as 1 percent of the issue amount of every company issuing shares are kept by it as a caution money in the concerned stock exchange where the company is enlisted).
      • Promoting investor education.
      • Inspection and audit of stock exchanges and various intermediaries.
      • Performing other concerned functions as may be prescribed from time to time.