SEBI Circular No: CIR/MIRSD/CRA/6/2010 (03-May-10) Guidelines for Credit Rating Agencies

All Credit Rating Agencies Registered with SEBI

Dear Sirs,

Recent events in global financial system have underlined the pivotal role that credit ratings play. Effective use of credit ratings by the users is crucially dependent upon quality and quantity of disclosures made by the Credit Rating Agencies (CRAs). There have been widespread consultations on the issue both globally and within India and several documents have been prepared. In the wake of the above and in order to impart higher credibility to the processes and procedures associated with the credit rating, it has been decided, in consultation with the CRAs, to prescribe the following transparency and disclosure norms for them:

1. Rating Process

A CRA shall keep the following records in support of each credit rating and review / surveillance thereof:

1.1 The important factors underlying the credit rating and sensitivity of such credit rating to changes in these factors,

1.2 Summary of discussions with the issuer, its management, auditors and bankers which have a bearing on the credit rating,

1.3 Decisions of the rating committee(s), including voting details and notes of dissent, if any, by any member of the rating committee, and

1.4 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.

1.5 These records should be maintained till five years after maturity of instruments and be made available to auditors and regulatory bodies when sought by them.

2. Default Studies

Default studies are central to evaluating the performance of a credit rating agency and whether its ratings can predict default over a period of time. In order to promote transparency and to enable the market to best judge the performance of the ratings, the CRA, should publish information about the historical default rates of CRA rating categories and whether the default rates of these categories have changed over time, so that the public can understand the historical performance of each category and if and how rating categories have changed, and be able to draw quality comparisons among ratings given by different CRAs.

2.1 The default rates shall be calculated in the following manner:

2.1.1 One Year Default Rate is the weighted average of default rates of all possible 1 year static pools in the 5-year period.

2.1.2 Cumulative Default Rate: The cumulative default rate (CDR) represents the likelihood of an entity that was rated at the beginning of any multi-year period defaulting at any time during the multi-year period. Three-year cumulative default rate shall be computed as:

Three-year CDR for rating category X = No. of issuers which defaulted over the three-year period / No. of issuers outstanding at the beginning of the three-year period

2.2 For the above purposes, the following terms shall have the meaning as under

2.2.1 Static Pool: Non-defaulted ratings that were outstanding at the beginning of any period

2.2.2 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.

2.2.3 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.

2.2.4 Averaging: All averaging across static pools for default rate computations must be based on the weighted average method where the weights are the number of ratings in each static period

3. Dealing with Conflict of interest

3.1 A CRA shall formulate the policies and internal codes for dealing with the conflict of interests.

3.2 A CRA shall ensure:

3.2.1 that its analysts do not participate in any kind of marketing and business development including negotiations of fees with the issuer whose securities are being rated,

3.2.2 that the employees' involved in the credit rating process and their dependants do not have ownership of the shares of the issuer.

3.2.3 prompt review of the credit ratings of the securities as and when any of its employees joins the respective issuer.

4. Obligations in respect of Rating of Structured Finance Products

4.1 A CRA may undertake rating of structured finance products, namely, instruments / pay-outs resulting from securitization transactions. In such cases, apart from following all the applicable requirements in case of non-structured ratings, the following additional requirements shall also be complied with:

a. A CRA or its subsidiaries shall not provide consultancy or advisory services regarding the design of the structured finance instrument.

b. The rating symbols shall clearly indicate that the ratings are for structured finance products.

5. Unsolicited Credit Ratings

5.1 In case of unsolicited credit ratings, i.e. the credit ratings not arising out of the agreement between a CRA and the issuer, credit rating symbol shall be accompanied by the word "UNSOLICITED" in the same font size.

5.2 A CRA shall monitor and disclose credit rating during the life of the rated securities, as if it were a solicited rating.

6. Disclosures

A CRA shall make all the disclosures stipulated below on their websites. In case of listed securities, the CRA shall also make disclosures to the stock exchanges as specified in the SEBI (Credit Ratings) Regulations, 1999. For ratings assigned and their periodic reviews, the CRA shall issue press releases which shall also be kept on their websites. Where a specific format has been prescribed, the disclosures shall be made in that format.

6.1 Rating Procedure

A CRA shall formulate and disclose its policies, methodology and procedures in detail regarding solicited and unsolicited credit ratings

6.2 Credit Rating History and Defaults -

A CRA shall disclose in the formats specified below

6.2.1 Details of new credit ratings assigned during last six-months (Annexure I),

6.2.2 Movement of credit rating of all outstanding securities during the last six-months:

(a) Movement of each credit rating (Annexure II),

(b) Movement of each credit rating from investment grade to non-investment grade and vice versa (Annexure III) and

6.2.3 The history of credit rating of all outstanding securities (Annexure V),

6.2.4 On annual basis, the list of defaults separately for each rating category (e.g. AAA, AA, A, BBB, BB, B, C){ (Annexure VI)}. This shall include the initial credit rating assigned by the CRA, month and year of initial rating, month and year of default, last credit rating assigned by the CRA before the issuer defaulted, comments of CRAs, if any.

6.2.5 On annual basis, the average one-year and three-year cumulative default rates (based on weighted average), for the last 5 years, separately for each following category:

(i) each credit rating category (e.g. AAA, AA, A, BBB, BB, B, C), separately (Annexure VII),;

(ii) structured instruments and non-structured instruments, separately (Annexure VII),

6.3 Income

6.3.1 A CRA shall disclose the general nature of its compensation arrangements with the issuers.

6.3.2 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.

6.3.3 A CRA shall disclose annually

6.3.3.1 its total receipt from rating services and non-rating services,

6.3.3.2 issuer wise percentage share of non-rating income of the CRA and its subsidiary to the total revenue of the CRA and its subsidiary from that issuer, and

6.3.3.3 names of the rated issuers who along with their associates contribute 10% or more of total revenue of the CRA and its subsidiaries.

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