By Shailesh Baheti-BCOM,ACS, (L.L.B) B5 Consulting Private Limited
Meaning of Credit Rating Benefits of Credit Rating to Investors Issuer Companies Financial Intermediaries
Limitations of the Credit Ratings Credit Rating mandatory for what kind of issues or instruments Registration of Credit Rating Agencies Promoters of Credit Rating Agencies
Eligibility Criteria for Registration Restriction of Rating of Securities Credit Rating Agencies Fitch Ratings India Private Limited CRISIL ICRA CARE
Important issues in Credit Ratings Rating Process
MEANING OF CREDIT RATING:
Credit signifies status of ability to pay or reputation about solvency and capacity to pay.
Rating is estimated worth or value in terms of symbolic grade given signifying the ability to pay back the interest or principal of the loans raised. As per the SEBI regulations, credit rating is nothing but an opinion regarding securities expressed in the form of standard symbol or in any other standardized form assigned by a credit rating agency.
Benefits of Credit Rating to Investors
Reasonable Assurance for safety of investments. Recognition of Risk Credibility of Issuer Rating Facilitates Quick Investment Decisions No Need to Depend on Investment Advisors or Professionals Choice of Investment Benefits of Rating Surveillance
Benefits to Issuer Company
Lower Cost of Borrowing Wider Audience for Borrowing Rating as Marketing Tool Reduction of Cost in Public Issues Motivation for Growth Identification of Strength and Weakness of the Issuer Company Liquidity and Marketability of Debt Securities
Benefits to Financial Intermediaries
Highly credit rated instruments does not requires brokers to convince their clients to select a particular investment proposal. High Rated instruments speak themselves about the financial soundness and the strength of the instrument rated by the credit rating agency. The time, cost, energy and manpower saved for convincing clients can be utilized in expanding the clientele and intensifying the business activities.
Biased Rating and Misrepresentations Static study as credit rating is one time exercise and any thing can happen after assignment of rating symbols to the company. Concealment of material information Rating is no guarantee for the quality of management of the company or its sound financial position. Rating is a measure of credit risk only and does not communicate anything about the degree of market risk
In India, credit rating was made mandatory for issuance of the following instrument:
Public issue of debentures and bonds convertible/ redeemable needs credit rating For issuance of commercial paper in India issue must have a rating from a CRA registered with SEBI Non±Banking finance companies (NBFCS) having net owned funds of more than RS.2 core must get their fixed deposit Programs / schemes rated. Unlisted Companies going for IPO requires IPO grading from at least one credit rating agency registered with SEBI
Registration of Credit Rating Agencies
It is mandatory for credit rating agencies to have registration with SEBI and to obtain certificate of registration form SEBI. The certificate of registration is valid for three years after which the same will have to be renewed by SEBI.
Promoter of Credit Rating Agency:
A credit rating agency can be promoted by any of the following organization or combination thereof.
Public financial institution as defined in section 4-A of the Companies Act of 1956,...
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