Sunday, January 16, 2011

Instruments of credit rating in India

As per guidelines issued by Government /SEBI credit rating is mandatory for the following instruments:

1.      Debt Instruments
Any public/rights issue of debt instruments (whether fully convertible debentures or partly convertible debentures or non-convertible debentures) shall have to be compulsorily rated by the approved credit rating agency irrespective of their maturity/conversion period. Moreover, according to directive issued by SEBI on March 19, 1999 for all public and right issues of debt securities of issue size greater than or equal to Rs. 100 crores, two credit ratings from different credit rating agencies was mandatory.
However, in order to facilitate development of a vibrant primary market for corporate bonds in India, certain provisions of the SEBI (Disclosure and Investor Protection) Guidelines, 2000 were amended in December 2007. The amendments were:
i. Requirement of Credit Rating: For public/ rights issues of debt instruments, SEBI (Disclosure and Investor Protection) Guidelines, 2000 presently stipulate credit rating to be obtained from not less than two credit rating agencies. With a view to reduce the cost of issuance of debt instruments, it has now been decided that credit rating from one credit rating agency would be sufficient.
ii. Below Investment Grade debt instruments: SEBI (Disclosure and Investor Protection) Guidelines, 2000 currently require that the debt instruments issued through a public/rights issue shall be of at least investment grade. In a disclosure-based regime, it should be left to the investor to decide whether or not to invest in a non-investment grade debt instrument. Given this, and in order to develop market for debt instruments, it has been decided to allow issuance of bonds, which are below investment grade to the public to suit the risk/return appetite of investors.
2.      Commercial Paper
Commercial paper can be issued in India, inter-alia, if the programme has a rating not below ‘A2’ from ICRA or ‘P2’ from CRISIL (or its equivalence from other rating agencies).
3.      Collective Investment Schemes
According to SEBI (Collective Investment Schemes) Regulations, 1999, no scheme shall be launched by the Collective Investment Management Company without obtaining rating from a credit rating agency.
4.      Acceptance of Public Deposits by Non-Banking financial companies
According to Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 1998 issued by Reserve Bank of India on January 31, 1998
(i)     No non-banking financial company having net owned fund of 25 lakh of rupees and above shall accept public deposit unless it has obtained minimum investment grade or other specified credit rating for fixed deposits form anyone of the approved credit rating agencies at least once a year and a copy of the rating is sent to the Reserve Bank of India along with return on prudential norms.
(ii)    In the event of upgrading or downgrading of credit rating of any non-banking financial company to any level from the level previously held by the non-banking financial company, it shall within 15 working days of its being so rated inform in writing of such upgrading/downgrading to the Reserve Bank of India
The names of approved credit rating agencies and the minimum credit rating shall be as follows: -
Name of the Agency                                    Minimum Investment Grade
       Rating
      CRISIL                                                                          FA-
      ICRA                                                                            MA-
CARE                                                                           CARE BBB-
FITCH INDIA                                                                  tA(ind)-
                                                                                   
5.   LPG/Kerosene Dealers/Firms
The Ministry of Petroleum and Natural Gas recommended a mandatory evaluation of all private companies selling LPG and/or Kerosene. According to the order, one cannot commence operations in the LPG business without getting a rating and the existing players had to secure the rating before the end of September 1995. Rating certifications have to be taken from CRISIL/CARE/ICRA. The objective is to help the consumers to identify the genuine companies before applying for a connection. The companies would be graded numerically into four grades. Good (1), Satisfactory (2), Low risk (3) and High risk (4). The rating certificate has to be renewed every year.
It is mandatory for every parallel marketer to disclose the company’s rating in every advertisement and promotion campaign. Any company violating the rules of the order is liable for punishment – fine or imprisonment – under the Essential Commodities Act.
6.   IPO Grading
According to SEBI guidelines, it has been made mandatory for all IPOs to obtain grading. The grading shall be done by credit rating agencies, registered with SEBI under the SEBI (Credit Rating Agencies) Regulations, 1999. It shall be mandatory to obtain grading from at least one credit rating agency. The issues shall be required to disclose all the grades obtained by its IPO in the prospectus, abridged prospectus, issue advertisements and all other places where the issuer is advertising for the IPO.
7.  Securitised Debt Instruments
SEBI has notified SEBI (Public Offer and Listing of Securitised Debt Instruments) Regulations, 2008 on May 26, 2008 for issuance of securitised debt instruments. The special purpose distinct entity i.e. issuer of securitised debt instruments shall be in the form of a trust; the trustees thereof will require registration from SEBI. According to these Regulations:
No special purpose distinct entity shall offer securitised debt instruments to the public unless credit rating is obtained from not less than two registered credit rating agencies. All credit ratings obtained by a special purpose distinct entity on the securitised debt instruments shall be disclosed in the offer document, including unaccepted credit ratings.
8.   Bank Loan Rating    
Bank loan ratings indicate the degree of risk with regard to timely payment of interest and principal on the facility being rated. On April 27, 2007, The Reserve Bank of India (RBI) issued new guidelines on capital adequacy for banks based on Basel II framework. These guidelines require banks to link the minimum size of their capital to the credit risk in their portfolios. To determine credit risk in their loan portfolios, banks will need to use credit ratings assigned by approved External Credit Assessment Institutions (ECAIs) such as recognized credit rating agencies.

No comments:

Post a Comment

:: Up ::