THE GAZETTE OF INDIA
EXTRAORDINARY
PART-II – SECTION 3 – SUB-SECTION (ii)
PUBLISHED BY AUTHORITY
MUMBAI, JULY 7, 1999
SECURITIES AND EXCHANGE BOARD OF INDIA
NOTIFICATION

SECURITIES AND EXCHANGE BOARD OF INDIA
(CREDIT RATING AGENCIES) REGULATIONS, 1999

S.O. 547(E) – In exercise of the powers conferred by section 30 read with section 11 of the Securities and Exchange Board of India Act, 1992 (15 of 1992), the Securities and Exchange Board of India hereby makes the following regulations, namely:-

CHAPTER I
PRELIMINARY

Short title and commencement

1. (1) These regulations may be called the Securities and Exchange Board of India (Credit Rating Agencies) Regulations, 1999.

(2) They shall come into force on the date of their publication in the Official Gazette. Definitions

2 (1) In these regulations, unless the context otherwise requires, –

(a) “Act” means the Securities and Exchange Board of India Act, 1992 (15 of 1992);

(b) “associate”, in relation to a credit rating agency, includes a person –

(i)   who, directly or indirectly, by himself, or in combination with relatives, owns or controls shares carrying not less than ten percent of the voting rights of the credit rating agency, or

(ii)  in respect of whom the credit rating agency, directly or indirectly, by itself, or in combination with other persons, owns or controls shares carrying not less than ten percent of the voting rights, or

(iii)   majority of the directors of which, own or control shares carrying not less than ten percent of the voting rights of the credit rating agency, or

(iv)  whose director, officer or employee is also a director, officer or employee of the credit rating agency;

(c) “Board” means the Board as defined in clause (a) of sub-section (1) of section 2 of the Act;

(d)   “body corporate” means a body corporate as defined in clause (7) of section 2 of the Companies Act, 1956 (1 of 1956);

(e)   “certificate” means a certificate of registration granted or renewed by the Board under these regulations;

(f)  “client” means any person whose securities are rated by a credit rating agency;

(g)   “company” means a company incorporated under the Companies Act, 1956 (1 of 1956);

(h)   “credit rating agency” means a body corporate which is engaged in, or proposes to be engaged in, the business of rating of securities offered by way of public or rights issue;

(i)   “economic offence” means an offence to which the Economic Offences (Inapplicability of Limitation) Act, 1974 (12 of 1974), is applicable for the time being;

1(j) ***

(k)  “form” means any of the forms specified in the First Schedule:

(l)   “fraud” has the same meaning as is assigned to it by section 17 of the Indian Contract Act, 1872 (9 of 1872);

(m)    “group companies” means group companies as defined in the Monopolies and Restrictive Trade Practices Act, 1969 (54 of 1969);

(n)   “inspecting officer” means any one or more persons appointed by the Board under reregulation 29:

1 Omitted by the SEBI (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002, w.e.f. 27.9.2002.

Prior to its omission it read as “enquiry officer” means any officer of the Board, or any other person, who is authorised by the Board under regulation 38”

(o) “issuer” means a person whose securities are proposed to be rated by a credit rating agency;

(p) “net-worth” means the aggregate value of the paid up equity capital and free reserves (excluding reserves created out of revaluation), reduced by the aggregate value of accumulated losses and deferred expenditure not written off, including miscellaneous expenses not written of;

(q) “rating” means an opinion regarding securities, expressed in the form of standard symbols or in any other standardised manner, assigned by a credit rating agency and used by the issuer of such securities, to comply with a requirement specified by these regulations;

(r) “rating committee” means a committee constituted by a credit rating agency to assign rating to a security;

(s)  “regulation” means a regulation forming part of these regulations;

(t) “relative” means a relative as defined in section 6 of the Companies Act, 1956 (1 of 1956);

(u)  “schedule” means any of the schedules appended to these regulations; and

(v)  “securities” has the meaning assigned to it in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956.

(2) Words and expressions used and not defined in these regulations, but defined in the Act, shall have the meanings respectively assigned to them in the Act.

CHAPTER II
REGISTRATION OF CREDIT RATING AGENCIES

Application for grant of certificate

3. (1) Any person proposing to commence any activity as a credit rating agency on or after the date of commencement of these regulations shall make an application to the Board for the grant of a certificate of registration for the purpose.

(2)  Any person, who was immediately before the said date carrying on any activity as a credit rating agency, shall make an application to the Board for the grant of a certificate within a period of three months from such date:

Provided that the Board may, where it is of the opinion that it is necessary to do so, for reasons to be recorded in writing, extend the said period upto a maximum of six months form such date.

(3)  An application for the grant of a certificate under sub-regulation(1) or sub-regulation(2) shall be made to the Board in Form A of the First Schedule and shall be accompanied by a non–refundable application fee, as specified in Form A of the second Schedule, to be paid in the manner specified in Part B thereof.

(4) Any person referred to in sub-regulation (2) who fails to make an application for the grant of a certificate within the period specified in that sub-regulation shall cease to carry on rating activity.

Promoter of credit rating agency

4. The Board shall not consider an application under regulation (3) unless the applicant is promoted by a person belonging to any of the following categories, namely:

(a)  a public financial institution, as defined in section 4 A of the Companies Act, 1956 (1 of 1956);

(b) a scheduled commercial bank included for the time being in the second schedule to the Reserve Bank of India Act, 1934 (2 of 1934);

(c)  a foreign bank operating in India with the approval of the Reserve Bank of India;

(d) a foreign credit rating agency recognised by or under any law for the time being in force in the country of its incorporation, having at least five years experience in rating securities;

(e) any company or a body corporate, having continuous net worth of minimum rupees one hundred crores as per its audited annual accounts for the previous five years prior to filing of the application with the Board for the grant of certificate under these regulations.

Eligibility criteria

5. The Board shall not consider an application for the grant of a certificate under regulation 3, unless the applicant satisfies the following conditions, namely:

(a)  the applicant is set up and registered as a company under the Companies Act, 1956;

(b) the applicant has, in its Memorandum of Association, specified rating activity as one of its main objects;

(c)  the applicant has a minimum net worth of rupees five crores.

Provided that a credit rating agency existing at the commencement of these regulations, with a net worth of less than rupees five crores, shall be deemed to have satisfied this condition, if it increases its net worth to the said minimum within a period of three years of such commencement.

(d)  the applicant has adequate infrastructure, to enable it to provide rating services in accordance with the provisions of the Act and these regulations;

(e)  the applicant and the promoters of the applicant, referred to in regulation 4 have professional competence, financial soundness and general reputation of fairness and integrity in business transactions, to the satisfaction of the Board;

(f) neither the applicant, nor its promoter, nor any director of the applicant or its promoter, is involved in any legal proceeding connected with the securities market, which may have an adverse impact on the interests of the investors;

(g) neither the applicant, nor its promoters, nor any director, of its promoter has at any time in the past been convicted of any offence involving moral turpitude or any economic offence;

(h)  the applicant has, in its employment, persons having adequate professional and other relevant experience to the satisfaction of the Board;

(i) neither the applicant, nor any person directly or indirectly connected with the applicant has in the past been –

(i) refused by the Board a certificate under these regulations or

(ii)  subjected to any proceedings for a contravention of the Act or of any rules or regulations made under the Act.

Explanation: For the purpose of this clause, the expression “directly or indirectly connected person” means any person who is an associate, subsidiary, inter-connected or group company of the applicant or a company under the same management as the applicant.

(j) the applicant, in all other respects, is a fit and proper person for the grant of a certificate;

(k) grant of certificate to the applicant is in the interest of investors and the securities market.

1Applicability of Securities and Exchange Board of India (Criteria for Fit and Proper Person) Regulations, 2004.

5A. The provisions of the Securities and Exchange Board of India (Criteria for Fit and Proper Person) Regulations, 2004 shall, as far as may be, apply to all applicants or the credit rating agencies under these regulations.

Application to conform to the requirements

6. Any application for a certificate, which is not complete in all respects or does not conform to the requirement of regulation 5 or instructions specified in Form A shall be rejected by the Board:

Provided that, before rejecting any such application, the applicant shall be given an opportunity to remove, within thirty days of the date of receipt of relevant communication, from the Board such objections as may be indicated by the Board.

Provided further, that the Board may, on sufficient reason being shown, extend the time for removal of objections by such further time, not exceeding thirty days, as the Board may consider fit to enable the applicant to remove such objections.

Furnishing of information, clarification and personal representation

7. (1) The Board may require the applicant to furnish such further information or clarification as the Board may consider necessary, for the purpose of processing of the application.

(2) The Board, if it so desires, may ask the applicant or its authorised representative to appear before the Board, for personal representation in connection with the grant of a certificate.

Grant of Certificate

8. (1) The Board, on being satisfied that the applicant is eligible for the grant of a certificate of registration, shall grant a certificate in Form ‘B’.

(2) The grant of certificate of registration shall be subject to the payment of the registration fee specified in Part A of the Second Schedule, , in the manner prescribed in Part B thereof.

Conditions of certificate and validity period

9. (1) The certificate granted under regulation 8 shall be, subject to the following conditions, namely:

(a) the credit rating agency shall comply with the provisions of the Act, the regulations made there under and the guidelines, directives, circulars and instructions issued by the Board from time to time on the subject of credit rating.

(b) (1) where any information or particulars furnished to the Board by a credit rating agency:

(i) is found to be false or misleading in any material particular ; or

(ii) has undergone change subsequently to its furnishing at the time of the application for a certificate;

the credit rating agency shall forthwith inform the Board in writing.

(2) the period of validity of certificate of registration shall be three years. Renewal of certificate

10. (1) A credit rating agency, if it desires renewal of the certificate granted to it, shall make to the Board an application for the renewal of the certificate of registration.

1(1A) An application for renewal of certificate of registration made under sub-regulation

(1) shall be accompanied by a non refundable application fee as specified in the Second Schedule.

(2) Such application shall be made not less than three months before expiry of the period of validity of the certificate, specified in sub-regulation(2) of regulation 9..

(3) The application for renewal made under sub-regulation (1)- –

(a) shall be accompanied by a renewal fee as specified in the second schedule and

(b) as far as may be, shall be dealt with in the same manner as if it were an application for the grant of a fresh certificate under regulation 3.

Procedure where certificate is not granted

11. (1) If, after considering an application made under regulation 3 or regulation 10 as the case may be, the Board is of the opinion that a certificate should not be granted or renewed, as the case may be, it may, after giving the applicant a reasonable opportunity of being heard, reject the application.

(2) The decision of the Board, not to grant or not to renew the certificate under sub-regulation

(1) shall be communicated by the Board to the applicant within a period of thirty days of such decision, stating the grounds of the decision.

(3) Any applicant aggrieved by the decision of the Board rejecting his application under sub-regulation (1) may, within a period of thirty days from the date of receipt by him of the communication referred to in sub-regulation (2) apply to the Board in writing for re­consideration of such decision.

(4) Where an application for re-consideration is made under sub-regulation (3) the Board shall consider the application and communicate to the applicant its decision in writing, as soon as may be.

Effect of refusal to grant certificate

12. (1) An applicant referred to in sub-regulation (1) of regulation 11 whose application for the grant of a certificate has been rejected under regulation 11, shall not undertake any rating activity.

(2) An applicant referred to in sub-regulation (2) of regulation 3, whose application for the grant of a certificate has been rejected by the Board under regulation 11, shall, on and from the date of the receipt of the communication under sub-regulation (2) of regulation 11, cease to carry on any rating activity.

(3)  If the Board is satisfied that it is in the interest of the investors, it may permit the credit rating agency referred to under sub-regulation (1) or (2) to complete the rating assignments already entered into by it, during the pendency of the application or period of validity of the certificate.

(4)  The Board may, in order to protect the interests of investors, issue directions with regard to the transfer of records, documents or reports relating to the activities of a credit rating agency, whose application for the grant or renewal of a certificate has been rejected.

(5) The Board may, in order to protect the interests of investors, appoint any person to take charge of the records, documents or reports relating to the rating activities of a credit rating agency referred to in sub-regulation (4) and for this purpose also determine the terms and conditions of such appointment.

CHAPTER III
GENERAL OBLIGATIONS OF CREDIT RATING AGENCIES

Code of Conduct

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

Agreement with the client

14. 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, namely:-

(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 clients 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, rupees one hundred crores.

Monitoring of ratings

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

(2) 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.

Procedure for review of rating

16. (1) Every credit rating agency shall carry out periodic reviews of all published ratings during the lifetime of the securities.

(2)  If the client does not co-operate with the credit rating agency so as to enable the credit rating agency to comply with its obligations under regulation 15 of this regulation, the credit rating agency shall carry out the review on the basis of the best available information.

Provided that if owing to such lack of co-operation, a rating has been based on the best available information, the credit rating agency shall disclose to the investors the fact that the rating is so based.

(3)  A credit rating agency shall not withdraw a rating so long as the obligations under the security rated by it are outstanding, except where the company whose security is rated is wound up or merged or amalgamated with another company.

Internal procedures to be framed

17. Every credit rating agency shall frame appropriate procedures and systems for monitoring the trading of securities by its employees in the securities of its clients, in order to prevent contravention of –

(a)  the Securities and Exchange Board of India (Insider Trading) Regulations, 1992;

(b) the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to the Securities Market) Regulations, 1995; and

(c) other laws relevant to trading of securities.

Disclosure of Rating Definitions and Rationale

18. (1) Every credit rating agency –

(a)  shall make public the definitions of the concerned rating, along with the symbol and,

(b) shall also state that the ratings do not constitute recommendations to buy, hold or sell any securities

(2) 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.

Submission of information to the Board

19. (1) Where any information is called for by the Board from a credit rating agency for the purposes of these regulations, including any report relating to its activities, the credit rating agency shall furnish such information to the Board –

(a)  within a period specified by the Board or

(b) if no such period is specified, then within a reasonable time.

(2) Every credit rating agency shall, at the close of each accounting period, furnish to the Board copies of its balance sheet and profit and loss account.

Compliance with circulars etc., issued by the Board

20. Every credit rating agency shall comply with such guidelines, directives, circulars and instructions as may be issued by the Board from time to time, on the subject of credit rating.

120A. Appointment of Compliance Officer

(1.)    Every credit rating agency shall appoint a compliance officer who shall be responsible for monitoring the compliance of the Act, rules and regulations, notifications, guidelines, instructions etc issued by the Board or the Central Government.

(2.)  The compliance officer shall immediately and independently report to the Board any non­compliance observed by him.]

Maintenance of Books of Accounts records, etc.

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

(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; (i) letter assigning rating;

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

(2) Every credit rating agency shall intimate to the Board the place where the books of account, records and documents required to be maintained under these regulations are being maintained.

Steps on auditor’s report

22.  Every credit rating agency shall, within two month’s from the date of the auditor’s report, take steps to rectify the deficiencies if any, made out in the auditor’s report, insofar as they relate to the activity of rating of securities.

Confidentiality

23.  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 under or any law for the time being in force.

Rating process

24. (1) Every credit rating agency shall –

(a)  specify the rating process;

(b)  file a copy of the same with the Board for record; and file with the Board any modifications or additions made therein from time to time.

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

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

(4)  All rating decisions, including the decisions regarding changes in rating, shall be taken by the rating committee.

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

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

Every credit rating agency, shall, while rating a security, exercise due diligence in order to

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