CREDIT RATING AGENCIES (CRAs)

Nov. 14, 2018

The Securities and Exchange Board of India (SEBI) has tightened disclosure and review norms for credit rating agencies (CRAs) as these agencies failed to raise timely warnings ahead of the collapse of IL&FS.

Credit ratings:

  • Credit ratings are assigned to debt instruments (not to equity instrument) by a Credit Rating agency (CRA).

  • Rating is denoted by a simple alphanumeric symbol, for e.g. AA+, A-, etc.

  • Rating indicates that whether the issuer company can repay its debt obligation in full and on time.

  • Credit rating serves 2 main purpose:
    1. Borrowing cost: It Influences the borrowing cost of country in international market.

    2. Investment: Credit rating Influences foreign investors decision to invest I.E. by seeing this, the investor decides whether to buy, hold, or sell a debt instrument.



 

Credit rating agencies (CRAs):

  • A credit rating agency is an entity which assesses the ability and willingness of the issuer company for timely payment of interest and principal on a debt instrument.

Credit rating agencies are regulated by SEBI under the SEBI (Credit Rating Agencies) Regulations, 1999.

  • Some of the Global CRAs are: Fitch, Moody, S&P.

  • Some of the Indian CRAs are: Credit Analysis & Research Ltd. (CARE), Credit rating information services of India (CRISIL), Investment and credit rating agencies (ICRA) etc.

News Norms:

  • CRAs should disclose parameters such as liquid investments or cash balances, access to any unutilised credit lines and adequacy of cash flows in a specific section on liquidity.

  • For reviewing rating criteria, SEBI has directed rating agencies, to assess inter-linkages of holding company and subsidiaries, holding company’s liquidity, financial flexibility and support to the subsidiaries.

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