11 General Obligations of Credit Rating Agencies to Clients

General Obligations of Credit Rating Agencies are as follows:

(1) Code of Conduct:

Every credit rating agency shall abide by the Code of Conduct contained in the Third Schedule.

(2) Agreement with the Client:

Every credit rating agency shall enter into a written agreement with each client whose securities it proposes to rate, and every such agreement shall include the following provisions:

(a) The rights and liabilities of each party in respect of the rating of securities shall be defined;

(b) The fee to be charged by the credit rating agency shall be specified;

(c) The client shall agree to a periodic review of the rating by the credit rating agency during the tenure of the rated instrument;

(d) The client shall agree to co-operate with the credit rating agency in order to enable the latter to arrive at, and maintain, a true and accurate rating of the client’s securities and shall in particular provide to the latter, true, adequate and timely information for the purpose.

(e) The credit rating agency shall disclose to the client the rating assigned to the securities of the latter through regular methods of dissemination, irrespective of whether the rating is or is not accepted by the client;

(f) The client shall agree to disclose, in the offer document—

(i) The rating assigned to the client’s listed securities by any credit rating agency during the last three years, and

(ii) Any rating given in respect of the client’s securities by any other credit rating agency, which has not been accepted by the client.

(g) The client shall agree to obtain a rating from at least two different rating agencies for any issue of debt securities whose size is equal to or exceeds Rs. 100 crores.

(3) Monitoring of Ratings:

(a) Every credit rating agency shall, during the lifetime of securities rated by it continuously monitor the rating of such securities.

(b) Every credit rating agency shall disseminate information regarding newly assigned ratings, and changes in earlier rating promptly through press releases and websites, and, in the case of securities issued by listed companies, such information shall also be provided simultaneously to the concerned regional stock exchange and to all the stock exchanges where the said securities are listed.

(4) Disclosure of Rating Definitions and Rationale:

(a) Every credit rating agency shall make public the definitions of the concerned rating, along with the symbol and, shall also state that the ratings do not constitute recommendations to buy, hold or sell any securities.

(b) Every credit rating agency shall make available to the general public information relating to the rationale of the ratings, which shall cover an analysis of the various factors justifying a favourable assessment, as well as factors constituting a risk.

(5) Maintenance of Books of Accounts, Records, etc:

Every credit rating agency shall keep and maintain, for a minimum period of five years, the following books of accounts, records and documents:

(a) Copy of its balance sheet, as on the end of each accounting period;

(b) A copy of its profit and loss account for each accounting period;

(c) A copy of the auditor’s report on its accounts for each accounting period.

(d) A copy of the agreement entered into, with each client;

(e) Information supplied by each of the clients;

(f) Correspondence with each client;

(g) Ratings assigned to various securities including upgradation and down gradation (if any) of the ratings so assigned.

(h) Rating notes considered by the rating committee;

(i) Record of decisions of the rating committee;

(j) Particulars of fees charged for rating and such other records as the Board may specify from time to time.

(6) Confidentiality:

Every credit rating agency shall treat, as confidential, information supplied to it by the client and no credit rating agency shall disclose the same to any other person, except where such disclosure is required or permitted by any law for the time being in force.

(7) Rating Process:

(a) Every credit rating agency shall specify the rating process; and file a copy of the same with the Board for record.

(b) Every credit rating agency shall, in all cases, follow a proper rating process.

(c) Every credit rating agency shall have professional rating committees, comprising members who are adequately qualified and knowledgeable to assign a rating.

(d) All rating decisions, including the decisions regarding changes in rating, shall be taken by the Rating Committee.

(8) Every credit rating agency shall be staffed by analysts qualified to carry out a rating assignment.

(9) Every credit rating agency shall inform the Board about new rating instruments or symbols introduced by it.

(10) No credit rating agency shall rate a security issued by its promoter.

(11) No credit rating agency shall, rate a security issued by an entity, which is:

(a) A borrower of its promoter; or

(b) A subsidiary of its promoter; or

(c) An associate of its promoter that is there are common Chairman, Directors or employees between credit rating agency and these entities.

Submitted by : Dr. Udai, Category : Knowledge