The importance and level of acceptance for credit rating agencies have increased widely over the years among investors of the Indian financial market especially in the last twenty years. To put it simply, opinions of the credit rating agencies do have a significant impact on the investor’s mind compared to what was its impact two decades back. The world is growing fast and with the advent of new methods of analysis brought by powerful software, credit rating agencies are able to derive reliable data to research and give ratings.
Credit rating is generally defined as an opinion of the expert of the agency on the credit quality of a firm or the ability of a debt issuing firm to serve the instrument. Thus, credit rating agencies give a simple link between returns and risk by doing some calculations based on the company’s financial history, liabilities, and current assets. Any investors can then use this assessment of the company to make his/her decision to invest in the company by comparing the offered return to risk levels.
Regulation and Structure of Credit rating Agencies
Credit agencies are regulated under the framework released by SEBI under its Credit Rating Regulations of 1999. As per these regulations, any new agency willing to start the activities of credit rating agencies in India must get itself registered with the SEBI. Although the SEBI’s regulations only cover the rating of securities and not the foreign exchange, fixed deposits, real estates, etc.
These agencies act as one of the market intermediaries involved in the business of rating securities offered by way of right issues or public issues. These entities rate the debtors on their ability to pay the debt on time. The large-scale borrowers (Government Organisations or big corporate houses) are rated by these agencies and thus they do not rate any individuals. The assessed entities by credit rating agencies include companies, state governments, special purpose entities, local Government bodies, countries, and non-profit bodies.
Documents Required For Credit Rating Agency Registration
- The Incorporation Certificate of the applicant agency.
- Details of the directors/administration related to the company and documents regarding their professional profile.
- Information regarding the contact information about the applicant.
- Proofs showing a minimum net worth of Rs. 5 crores.
- Other sorts of business information associated with the company.
- Infrastructure certificates or documents stating adequacy of infrastructure to run the activities of the Credit Rating Agency.
- Memorandum of Association (MOU) and Articles of Association (AOU) of the Entity stating its objectives.
- Any other relevant document as asked during document verification
Procedure for Credit Rating Agency Registration
1. Public financial organization.
2. Any Foreign Bank Operating in India with RBI approval.
3. Scheduled full-service bank.
Eligibility Criteria to Get Credit Rating Registration
- The applicant must be a corporation registered under the Companies Act, 2013 to carry any specified rating activity in its Memorandum of Association (MOA).
- The minimum net worth of rupees five crores
- The infrastructure must be adequate which enables it to supply rating services as per the provisions of the Act and Regulations.
- The applicant must be a fit and proper person as per the standards laid down within the regulations.
FAQs
What is a credit rating agency (CRA)?
A credit rating agency is a company that assesses the creditworthiness of entities and assigns them credit ratings, indicating their ability to meet financial obligations.
Why is registration necessary for a credit rating agency?
Registration is necessary to ensure that CRAs adhere to regulatory standards, maintain integrity, and provide accurate and reliable credit assessments to the market.
Who regulates the registration of credit rating agencies?
In many jurisdictions, including India and the United States, the registration and regulation of credit rating agencies are overseen by the financial regulatory authorities such as the Securities and Exchange Board of India (SEBI) and the Securities and Exchange Commission (SEC) respectively.
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