RESEARCH PAPER SUBMITTED IN THE FULFILLMENT OF THE COURSE TITLED

FINANCIAL MARKET REGULATIONS FOR OBTAINING THE DEGREE B.A. LL.B. (HONS)
DURING THE ACADEMIC YEAR 2023 - 2024

SUBMITTED BY: SUBMITTED TO:

MITALI ARYAN DR. NEHA SHUKLA
CUSB2013125070 ASSISTANT PROFESSOR
B.A. L.L.B(HONS) DEPARTMENT OF LAW
8TH SEMESTER SCHOOL OF LAW AND
SESSION: 2020 -2025 GOVERNANCE

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 ACKNOWLEDGEMENT

I would like to express my thanks and gratitude to our faculty of Financial Market
Regulation, Dr. Neha Shukla for providing me the chance to work on this particular
assignment on the topic “Credit Rating Agencies”. I am obliged to thank our faculty in the
respective subject to provide me with the necessary support required while making this
assignment and for mentoring me throughout this assignment. The whole journey of
completing the assignment was quite interesting, I was completely engrossed and dived deeper
to seek more information related to the topic. I would not have been able to complete this
assignment without the help of my friends, colleagues, and my family members, so I would
like to express my gratitude and thank them as well.

Thank you!!

Mitali Aryan
CUSB2013125070
8TH SEMESTER
B.A. LL.B. (Hons.)

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 INTRODUCTION

Companies, financial institutions, public sector enterprises, local bodies and others raise
funds from the domestic as well as international money or capital market by issuing debt
instruments which are rated by the rating agencies. Investors also like to make their
investment decisions based on credit rating of instruments. Credit rating plays a significant
role in all credit as well as investment decisions. Credit signifies status of ability to pay or
reputation about solvency and capacity to pay. Rating is nothing but estimated worth or value
in terms of symbolic grade given to a person’s or organization’s ability to pay back the loans
raised, with the help of financial position of the individual or organization. By combining
credit and rating, these two words, one can find out the meaning of credit rating, which is
concerned with an act of assigning symbolic grade or values by estimating financial position
and thus disclosing solvency which indicates ability or capacity of the issuer about the
repayment of loans raised1.
A credit rating is a quantified assessment of the creditworthiness of a borrower in general
terms or with respect to a particular debt or financial obligation. A credit rating can be
assigned to any entity that seeks to borrow money—an individual, corporation, state or
provincial authority, or sovereign government.
Individual credit is scored from by credit bureaus such as Experian and TransUnion on a 3-
digit numerical scale using a form of Fair Isaac (FICO) credit scoring. Credit assessment and
evaluation for companies and governments is generally done by a credit rating agency such
as Standard & Poor’s (S&P), Moody’s, or Fitch. These rating agencies are paid by the entity
that is seeking a credit rating for itself or for one of its debt issues.2

CONCEPT OF CREDIT RATING:

Credit rating may be defined as an expression, through use of symbols, of opinion about the
quality of credit of the issuer of debt securities with reference to a particular instrument. As
per the SEBI regulations, credit rating is nothing but an opinion regarding securities

1
https://egyankosh.ac.in/ (Last visited on 12th April 2024)
2
Investopedia’s Credit rating Agency: History & Overview; Available on:
https://www.investopedia.com/articles/bonds/09/history-credit-rating-agencies.asp (Last visited on 12th April
2024)

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 expressed in the form of standard symbol or in any other standardized form assigned by a
credit rating agency. The symbol given by rating agency for credit rating indicates a credit
character of that particular security and thus it only facilitates to take a view on credit risk
pertaining to that security3.

However, it does not directly recommend whether to purchase, sale or hold that security.
Thus, rating is a measure of credit risk only and hence it does not communicate anything
about the degree of market risk. Credit rating is considered predominantly in respect of debt
instruments only. In addition to this, lenders like banks and non-banking finance companies
use internally developed credit rating score models in assessing credit worthiness of their
borrowers or depend on even rating agencies to get rating for the same. The companies which
issue debt instruments cannot on their own rate instruments.4

BENEFITS OF CREDIT RATIONING:

The rating of debt instruments offer the benefits to the interested parties such as investors,
issuers and intermediary agencies like brokers etc. These benefits are described as given
below:

BENEFITS TO INVESTORS:

1. Safeguards against Bankruptcy: Credit rating of an instrument given by the credit

rating agency gives an idea to the investors about the degree of financial strength of
the issuer company which enables him to decide about investment. Highly rated
instrument of a company gives an assurance to the investors of safety of their
investment and the interest (or return) on their investments with least risk of
bankruptcy5
2. Recognition of Risk: Credit rating provides investors with rating symbols which
carry information in easily recognizable manner for the benefit of investors to
perceive risk involved in investment. It becomes easier for the investors by looking
at the symbol to understand the worth of the issuer company because the instrument
is rated by scientifically and professionally analyzing the financial position of the
company. In view of this, there is no need for the investors to incur cost for collecting

3
J.C. Varma, Credit Rating, Bharat Publishing House, New Delhi (Latest edition).
4
https://egyankosh.ac.in/ (Last visited on 12th April 2024)
5
Supra note 3

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 credit information and to carry out analysis. The investors without any knowledge of
financial analysis can easily use rating symbols for investment decisions.

3. Credibility of Issuer: Rating symbol assigned to a debt instrument gives an idea

about the credibility of the issuer company. The rating agency is quite independent
of the issuer company and has no business connections or otherwise any relationship
with it or its Board of Directors, etc. Due to absence of business links between the
rating agency and the issuer company the confidence of investors is enhanced in such
rating symbol.
4. Rating Facilitates Quick Investment Decisions: Investor can take quick decisions
about the investment to be made in various instruments with the help of credit rating
assigned to various instruments. In view of this, there is no need for investors to
undertake fundamental analysis of a company based on financial strength of the
company, quality of management, as well as other parameters6
5. No Need to Depend on Investment Advisors or Professionals: For making
investment decisions, investors with no knowledge of investment may have to
seek advice of financial intermediaries such as, the stock brokers, the portfolio
managers, or financial consultants while investing funds in debt instruments.
However, investors need not depend upon the advice of Credit Rating these financial
intermediaries as the rating symbol assigned to a particular instrument suggests the
credit worthiness of the instrument and indicates the degree of risk involved in it.
Thus, investors can make direct investment decisions.
6. Choice of Investment: Several alternative credit - rated instruments are available at
a particular point of time for deploying investible funds. The investors can make
choice of various instruments depending upon their own risk profile and
diversification plan.
7. Benefits of Rating Surveillance: Investors get the benefit of credit rating agency’s
on- going surveillance of the rated instruments of different companies. The Credit
Rating Agency downgrades the rating of any instrument if subsequently the
company’s financial performance is not so good or financial position has suffered
because of happening of internal or external events which necessitates consequent
dissemination of information on its position to the investors.

6
The Institute of Chartered Accountants of India, Credit Rating, New Delhi, 1997.

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To sum up, credit rating of debt instruments helps the investors in managing credit risk in
investment decisions.

BENEFITS OF CREDIT TO ISSUER’S COMPANY:

A company which has obtained credit rating from rating agency for its issue of debt security
enjoys various advantages. Few of these advantages are given below:

1. Lower Cost of Borrowing: A company, whose debt instrument or public deposits

program, is highly rated, will be in a position to reduce the cost of borrowing by
quoting lesser interest rate on fixed deposits or debentures or bonds as the investors
will prefer low rate of interest because of lower credit - risk.
2. Wider Audience for Borrowing: A company having very good rating for its debt
instrument can approach various categories of investors for resource mobilization
using the press media. Investors in different strata of the society could be attracted by
higher rated instruments as the investors understand the degree of certainty about
timely payment of interest and principal on a debt instrument with better rating.
3. Rating as Marketing Tool: Companies with rated instruments improve their own
image and can use credit rating as a marketing tool to create better image in dealing
with its customers, lenders and other creditors. Even consumers feel confident in using
products manufactured by the companies carrying higher rating for their credit
instruments.
4. Self - Discipline by Companies: Rating encourages the companies to come out with
more disclosures about their accounting system, financial reporting and management
pattern, etc. The company gets opportunity and motivation to improve upon its
existing practices to match to the competitive standard and maintain the standard of
rating attained by it or make improvement upon the rating.
5. Reduction of Cost in Public Issues: A company with higher rated instrument is able
to attract the investors and raise the funds with least efforts. Thus, the company whose
debt instrument is highly rated can minimise cost of public issues by controlling
expenses on media coverage, conferences and other marketing expenditures.
6. Motivation for Growth: Rating provides motivation to the company for growth as
the promoters of the company feel confident in their own efforts and are encouraged
to undertake expansion of their existing operations or new projects. With better image

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 created through higher credit rating the company can mobilize funds from the public
and institutional lenders like banks and financial institutions.

BENEFITS TO FINANCIAL INTERMEDIARIES:

Highly credit rated instruments put the brokers at an advantage to make less efforts in studying
the company’s credit position to convince their clients to select a particular investment
proposal. Rated instruments speak themselves about the financial soundness of the company
and the strength of the instrument rated by the credit rating agency. This enables brokers and
other financial intermediaries to save their time, cost, energy and manpower in convincing
their clients about investments in any particular instruments. They utilize their resources in
expanding their clientele and intensifying their business activities.7

LIMITS OF CREDIT RATING

While recognizing the benefits of credit rating, it is necessary to keep in mind certain limitations
of the credit rating. Few of these are explained below:

1) Biased Rating and Misrepresentations

In the absence of quality rating based on objectivity analysis credit rating is a curse for the
capital market. To avoid biased rating or subjectivity in the credit rating process, executives
working with Credit Rating Agency, who are involved in the process of credit rating, should
have no links with the company or the persons interested in the issuer company so that they
can make their report impartial and Credit Rating judicious recommendations for rating
committee. Again, rating committee members should also be impartial and judicious in their
decision making. The companies having lower grade rating do not advertise or use the rating
while raising funds from the public. In such cases, the Credit Rating Agencies should
themselves in the public interest, advertise the rating symbols assigned to such companies
for public information and make the public aware of the poor financial position of such
companies.

2) Static study:
Rating is done on the basis of present and past data of the company and this is only a static

7
Rajdhani college, Credit Rating Agencies;

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study. Disclosure about the company’s health through credit rating is one time exercise and
anything can happen after assignment of rating symbols to the company. Dependence for
future results on the rating, therefore defeats the very purpose of risk - indicativeness of
rating. Subsequent to the allotment of credit rating many changes may take place in economic
environment, political situation, government policy framework, etc. which may directly
affect the working of a company. With such changes, the purpose for which credit rating was
done gets defeated8.

3) Concealment of material information:

The company which has approached for credit rating may not provide all material information
to the credit rating agency. In such cases, credit rating given by the credit rating agency may
not reflect true picture of credit risk.

4) Rating is no guarantee for soundness of the company:

Credit rating is done for a particular instrument to assess the credit risk. And therefore, it
cannot be construed as a rating for the quality of management of the company or its sound
financial position.

5) Down grade:
Once a company has been rated and if it is not able to maintain its satisfactory financial
performance, credit rating agency would review the grade and down grade the rating resulting
into impairing the image of the company. Most of the limitations mentioned above can be
overcome by taking precautions at every stage of credit rating process.

TYPES OF RATING:

1. Bond / Debenture Rating

The ratings provided to every single debenture and bond is known as Bond Rating. These
ratings range from short to medium terms and can peculiarly decide its future and general
subscription. While AAA being the Highest and the Best Quality of Bonds / Debentures to
be subscribed and C and D being the ones with highest amount of risk or are in default
already.

2. Personal Ratings

8
The Institute of Chartered Accountants of India, Credit Rating, New Delhi, 1997.

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 The ratings allotted to an individual on the basis of his or her past financial credit history and
cash flows is known as Personal Rating. Generally, these ratings are allocated in the form of
Scores ranging from 300 to 900. While any score above 750 points is considered to be as good
can get a loan to an individual easily. However, scores within the range of 300 to 700 are
considered to be as risk, lower the score higher the chances of default. In India often, this Score
is used and inter Changed with CIBILI SCORE.

3. Equity Ratings
Rating of equity shares issued by a company is called equity rating. An evaluation of a stock's
expected performance and / or its risk level as judged by a rating agency such as Standard and
Poor's. A stock rating will usually help the investor to find out fair value for the stock, based
on an objective evaluation of the company. The greater the amount by which the fair value
exceeds the market value, the more highly recommended buy for the stock is. Conversely, if
the market value of the stock exceeds the fair value of the stock, then analysts recommend that
the stock to be sold. Most stock rating systems give stocks 1 to 5 stars, with 5 being the best
and highly9.

4. Structured Obligations
A structured obligation is a modified way to raise funds from the market. Organizations which
use this method create a Special Purpose Vehicle or SPV (usually a Trust) and commit their
existing assets or future receivables to it. It then creates special ownership rights called as
Pass Through Certificates or PTCs and sells them to prospective investors. These certificates
can come in various pools or tranches, some being high credit quality while others taking the
lower grade. As a result, they enjoy different return profiles as well. Credit rating agencies
assessed the risk associated with the transaction with the main trust on cash flows emerging
from the asset would be enough to meet committed payments, to the investors in worst case
scenario.10

5. Sovereign Ratings
Is a rating of a country, which is being considered whenever a loan is to be extended, or some
major investment is envisaged in a country? It is a grading of a country's ability to meets
financial obligations. Credit rating agencies provide these ratings and investors use this to
assess the level of risk related with investing in a country. The rating may also include an
evaluation of a country's political risk. For example, India has been given BAA 2 rating by

9
J.C. Varma, Credit Rating, Bharat Publishing House, New Delhi (latest edition).
10
IBID

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 Moody’s as on November 2017. Sovereign rating is the first thing most institutional investors
will look at when deciding to invest money abroad. This rating gives the investor an
immediate understanding of the level of risk associated with investing in the country. A
country with a sovereign rating will therefore get more attention than one without. So, to
attract foreign money, most countries will strive to obtain a sovereign rating and they will
strive even more so to reach investment grade. In most circumstances, a country's sovereign
credit rating of AAA indicates lowest risk.
6. Real Estate Ratings

CRISIL has started assigning rating to the builders and developers with the objective of
helping and guiding prospective real estate buyers. CRISIL thoroughly scrutinizes the sale
deed papers, sanctioned plan; lawyers report government clearance certificates before
assigning rating to the builder or developer. Experience of the builder, number of properties
built by the builder, financial strength, and time taken for completion are some of the factors
taken into consideration by the CRISIL before giving a final rating to the real estate builder
developer.

CREDIT RATING AGENCIES IN INDIA

CRISIL11
Credit Rating Information Services of India Limited incorporated in the year 1987 is India’s
first Credit Rating Agency incorporated with its headquarters at Mumbai Maharashtra.
CRISIL is jointly promoted by ICICI Limited (Industrial Credit and Investment Corporation
of India Limited) and The Unit Trust of India. However, in the year 2005, S and P acquired
a major controlling stake in CRISIL Limited after the public offering which approximately
is close to 58.5% and became its major Shareholder. CRISIL has been always a successfully
run company throughout its past12. It first Commences its operations in January of the Year
1988 with the leadership and guidance of Mr. N Vaghul and the Chairman and Mr. Pradip
Shah as the Managing Director. CRISIL has pioneered in Credit Rating in India for more than
30 Years and is truly an Industry Leader with more than 55,000 rating entities including Large
- Medium and Small enterprises.

11
Monthly Journal on Credit Quality: Rating Scan, Published by CRISIL Ltd., November 2004
12
The Institute of Chartered Accountants of India, Credit Rating, New Delhi, 1997.

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RATING PROCEDURE13
• The company or the entity that wants itself or its instruments to get a credit rating
directly contact CRISIL at its office around the globe.

• Upon receiving the request of the company, CRISIL then forms an Analytical Team
and assigns the same for the evolution of the request.

• Once the Team is formed it then request the company to provide with information inputs
like previous Balance Sheets, P & L Statements, Raw Material Supplier, Sales Details,
etc.

• Once all the information is received then the Team further analysis and scrutinizes it
and arrives at a conclusion and allots a rating to the request.

• After the ratings allotment is decided the Team and CRISIL then communicates the
same to its client

• Most companies think that after this point the rating allocated to them is permanent,
but CRISIL continuously monitors the Company and update its rating from time to
time.
ICRA:
Investment Information and Credit Rating Agency of India Limited incorporated in the year
1991 by leading financial / investment institutions, commercial banks and financial services
companies as an independent and professional investment Information and Credit Rating
Agency14. ICRA Limited was original set up as a joint venture between Moody’s Investors
Services and many Indian Commercial Banks having a stake of 26% with Industrial Finance
Corporation of India and the rest 74% was comprised of Unit Trust of India, Punjab National
Bank Limited, Bank of Baroda Limited etc. Out of the 74% Shares held 28% (as in the year
2001) Shares were held by Moody’s Investor Services, However Moody’s has now gained
and become the Controlling Shareholder of ICRA Limited with a total shareholding of
56.01% in total. ICRA Limited was setup under the leadership of Mr. Parab Kumar
Chaudhary as the Chairman and Mr. Naresh Takkar as the Managing Director at Gurugram.
However, in the year 2014-15 Mr. Parab Kumar Chaudhary retires and resigned from the

13
Rating Criteria: Rating Methodology and Benchmarks, CRISIL Publication volume 1 September 2003
14
Supra note 11

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post of Chairman and was replaced by Mr. Arun Duggal as a Non-Executive Chairman later.

RATING PROCEDURE:
• The company or the entity that wants itself or its instruments to get a Credit Rating
contest ICRA Limited at its offices directly around the globe.
• Upon receive the request ICRA, then forms a Rating Team which would evaluate,
scrutinize, analyses and allot ratings to the request.

• Once a Rating Team is formed it then request the company with required amount and type
of information required to process and allot a Credit Rating.

• ICRA just does not only rely on the information provided by the company itself but also
collects and verifies information from the secondary sources to ensure a just and fair
ratings.

• Upon collection of the information ICRA scan and sets aside all the important information
and request a meeting with the Management, which would help them to get to know
about the future expansion plans, current performance and this allows them a have a
Plant or Office visit which indirectly helps to verify office culture and factuality of the
information provided.

• Once the Rating Team has successfully completed its meeting with the management and
had a plant visit it then sits down for an internal meeting to analyses the collected data
and come up with basic interpretations.

• Once this review meeting has been concluded the Rating Team then moves on to thorough
scrutinization of the data and allocate a Credit Rating to the request.

• Then the allocated ratings are communicated to the requesting company and a letter stating
the same is issued

CARE

Credit Analysis and Research Limited incorporated in the year 1993 by the virtue of Joint
Venture between Industrial Development Bank of India Limited (IDBI BANK) along with
many other financial institutions, investment institution, bank and finance company. CARE
is one of the amongst the top 3 Credit Rating Agencies in India. CARE Ratings commenced

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 operations in April 1993 and in over 25 years, it has established itself as the second-largest
credit rating agency in India. With the rating volume of debt of around Rs. 108.47 lakh crores
(as on March 31, 2018). CARE has also emerged as the leading agency for covering many
rating segments like that for banks, sub sovereigns and IPO gradings. CARE was initially
setup under the Guidance and Leadership of Mr. Rajesh Mokashi as the Chief Executive
Officer and Managing Director with its serving headquarters at Mumbai.

RATING PROCEDURE15
• The company that wants itself or its instruments to have a Credit Rating approaches
and request CARE Ratings at its offices around the globe directly.

• Upon placing the request, the company must submit a standard part of information as
per the procedure of the company.

• Upon receiving such information, the facts and figure are then scrutinized and test for
their validity and parameters.

• Once this is done then CARE Ratings forms an Internal Assessment Team which in
turn decides to undertake and plan a site visit.

• Once such visit is done, the team then arrives on final conclusions and allocate the
rating to the request which in turn is then communicated to the client.

• Upon allocation these ratings are then continuously monitored and updated from time
to time and as per market conditions.

INTERNATIONAL CREDIT RATING AGENCIES

1) Moody’s Investor Services

Moody's traces its history back to two publishing companies established by John Moody, the
inventor of modern bond credit ratings. In 1900, Moody published his first market
assessment, called Moody's Manual of Industrial and Miscellaneous Securities, and
established John Moody & Company16. The publication provided detailed statistics relating
to stocks and bonds of financial institutions, government agencies, manufacturing, mining,

15
J.C. Varma, Credit Rating, Bharat Publishing House, New Delhi (Latest edition).
16
Prasanna Chandra, Financial Management, Tata McGraw Hill, New Delhi (Latest Edition)

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 utilities, and food companies. It experienced early success, selling out its first print run in its
first two months. By 1903, Moody's Manual was a nationally recognized publication. Moody
was forced to sell his business, due to a shortage of capital, when the 1907 financial crisis
fueled several changes in the markets. Moody returned in 1909 with a new publication
focused solely on railroad bonds, Analysis of Railroad Investments, and a new company,
Moody's Analyses Publishing Company. While Moody acknowledged that the concept of
bond ratings “was not entirely original” with him—he credited early bond rating efforts in
Vienna and Berlin as inspiration— he was the first to publish them widely, in an accessible
format. Moody was also the first to charge subscription fees to investors. In 1913 he
expanded the manual's focus to include industrial firms and utilities; the new Moody's
Manual offered ratings of public securities, indicated by a letter-rating system borrowed from
mercantile credit-reporting firms. The following year, Moody incorporated the company as
Moody's Investors Service. Other rating companies followed over the next few years,
including the antecedents of the “Big Three” credit rating agencies: Poor’s in 1916, Standard
Statistics Company in 1922, and the Fitch Publishing Company in 1924. Moody’s expanded
its focus to include ratings or U.S. state and local government bonds in 1919 and, by 1924,
Moody's rated nearly the entire U.S. bond market.

RATING PROCEDURE17
• The rating relationship begins with an introductory meeting or teleconference call.
The purpose of this meeting is to introduce Moody’s and to provide a high - level
description of the ratings process and products.

• The analyst or analysts assigned to an Issuer or Obligation (“Lead Analyst”) begins the
credit analysis by collecting relevant information on the Issuer or obligation from
publicly available sources.

• The Issuer will be asked to provide relevant financial and non-financial information.
The accurate list of information may vary according to the sector and market
information.

• Analysts engage in a discussion with Issuers, or their representatives, about their

ratings, including credit strengths and weaknesses and trends in their industries

• Once information has been gathered, the Lead Analyst will conduct the initial analysis

17
Monthly Journal on Credit Quality: Rating Scan, Published by CRISIL Ltd., November 2004

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 of the Issuer or Obligation by applying the relevant credit rating methodologies,
which may include consideration of both quantitative and qualitative factors

• The Lead Analyst will formulate his or her recommendation for consideration by a
rating committee.

• Once a rating committee reaches a decision and the appropriate external

communications have been drafted regarding a credit rating action, the Lead Analyst
typically contacts the Issuer or its designated representative to inform them of the
committee’s decision.
• Except for those credit ratings which are clearly identified as point-in-time ratings,
once a credit rating has been published, Moody’s will monitor that credit rating, as
deemed appropriate, on an ongoing basis and will modify the credit rating as
necessary in response to changes in our opinion of the creditworthiness18

REGULATION OF CREDIT RATING AGENCIES IN INDIA

The credit rating agencies are regulated by SEBI. The relevant regulations of SEBI
can be examined under the following heads19 :
1) Registration of Credit Rating Agencies
2) Promoter of Credit Rating Agency and Eligibility Criteria

1) Registration of Credit Rating Agencies:

It is mandatory for credit rating agencies to have registration with SEBI and to obtain certificate
of registration form SEBI. The certificate of registration shall be issued by SEBI subject to
following conditions.
a) Credit rating agency would comply with the provisions of the SEBI Act, regulations and
guidelines of SEBI, and instructions issued by SEBI from time to time on credit rating.
b) Where any information or particulars furnished to SEBI by a credit rating agency is found
to be false or misleading or any particular material has undergone change subsequent to its
furnishing at the time of application, it would immediately inform SEBI in writing. The
certificate of registration is valid for three years after which the same will have to be renewed
by SEBI.

18
Supra note 16
19
Supra note 17

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 2) Promoter of Credit Rating Agency and Eligibility Criteria:
Promoter of a Credit Rating Agency A credit rating agency can be promoted by any of the
following organization or combination thereof.
a) Public financial institution as defined in section 4-A of the Companies Act
of 1956,
b) Scheduled bank,
c) Foreign bank operating in India with the RBI approval,
d) Foreign credit rating agency having at least five years of experience in rating securities,
and,
e) Any company incorporated under the Companies Act or body corporate having continuous
minimum net worth of Rs. 100 crores as per its audited annual accounts for the previous five
years prior to filing of the application with SEBI for registration.

ELIGIBILITY CRITERIA:

The credit rating agency:

• is set up and registered as a company.
• has mentioned in its memorandum of Association credit rating activity as one of its
main objects.
• has a minimum net worth of Rs. 5 crores.
• is promoted by those who have professional competence, sound financial position,
and who have acquired reputation of fairness and integrity in business transaction
to the satisfaction of SEBI.
• has adequate staff having professional competence and experience to the
satisfaction of SEBI.
RESTRICTION ON RATING SECURITIES

Securities issued by a promoter or promoters of a credit rating agency:20

A credit rating agency is prohibited from rating securities issued by its promoter(s) who hold
not less than 10 per cent of its shares. If the promoter of a credit rating agency is a lending
institution its chairman or director/s or employees cannot hold a similar position in the credit
rating agency or its rating committee. Securities Issued by Certain Entities.21
The securities of an entity cannot be rated by a credit rating agency if it is:

20
J.C. Varma, Credit Rating, Bharat Publishing House, New Delhi (latest edition).
21
Supra note 16

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 a) borrower of its promoter or
b) a subsidiary of its promoter or

(a) an associate (a person holding at least 1S0 per cent of the share capital) of its promoter
when there are common chairman/directors or employees to credit rating agency and these
entities as well as on the rating committee of rating agency.

CONCLUSION
Credit rating is a technique of rating the borrower’s expected capability and worth or
reputation of solvency and ability and inclination of pay back the principal duty and interest
when the obligation falls due. Credit rating is only a risk evaluation of a credit assignment
and presently the debt instruments rated include debentures, fixed deposits and commercial
papers. It is highly useful to investors, issuers, intermediaries and regulators. A number of
factors contribute to the success of credit rating. The most dominating factor is the reputation
and analytical credibility of the credit rating agency. Credit rating is an interactive process
which involves a number of steps on the basis of assessment on which rating is assigned.
Such rating, which is expressed in symbols, is subject to an upward or downward change.
The recent developments in credit rating have brought in its fold the rating of equity,
structured obligations, utilities, sovereign and municipalities. In India, credit rating business
is regulated by SEBI. Four credit rated agencies recognized by SEBI have been operating in
India.
BIBLIOGRAPHY
• J.C. Varma, Credit Rating, Bharat Publishing House, New Delhi (latest edition).
• Prasanna Chandra, Financial Management, Tata McGraw Hill, New Delhi
(latest edition)
• Monthly Journal on Credit Quality: Rating Scan, Published by CRISIL Ltd.,
November 2004.
• The Institute of Chartered Accountants of India, Credit Rating, New Delhi, 1997.
• Rating Criteria: Rating Methodology and Benchmarks, CRISIL Publication,
Volume 1, September 2003.
• https://egyankosh.ac.in

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