CRA Guidelines June 2010

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Securities and Exchange Board of India

CIRCULAR
CIR/MIRSD/CRA/6/2010 May 3, 2010
All Credit Rating Agencies Registered with SEBI
Dear Sirs,
Sub: Guidelines for Credit Rating Agencies
Recent events in global financial system have underlined the pivotal role that credit
ratings play. Effective use of credit ratings by the users is crucially dependent upon
quality and quantity of disclosures made by the Credit Rating Agencies (CRAs). There
have been widespread consultations on the issue both globally and within India and
several documents have been prepared. In the wake of the above and in order to impart
higher credibility to the processes and procedures associated with the credit rating, it has
been decided, in consultation with the CRAs, to prescribe the following transparency and
disclosure norms for them:
1. Rating Process
A CRA shall keep the following records in support of each credit rating and review /
surveillance thereof:
1.1 The important factors underlying the credit rating and sensitivity of such credit
rating to changes in these factors,
1.2 Summary of discussions with the issuer, its management, auditors and
bankers which have a bearing on the credit rating,
1.3 Decisions of the rating committee(s), including voting details and notes of
dissent, if any, by any member of the rating committee, and
1.4 If a quantitative model is a substantial component of the credit rating process,

the rationale for any material difference between the credit rating implied by
the model and the credit rating actually assigned.
1.5 These records should be maintained till five years after maturity of
instruments and be made available to auditors and regulatory bodies when
sought by them.
2. Default Studies
Default studies are central to evaluating the performance of a credit rating agency
and whether its ratings can predict default over a period of time. In order to promote
transparency and to enable the market to best judge the performance of the ratings,
the CRA, should publish information about the historical default rates of CRA rating
categories and whether the default rates of these categories have changed over
time, so that the public can understand the historical performance of each category
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and if and how rating categories have changed, and be able to draw quality
comparisons among ratings given by different CRAs.
2.1 The default rates shall be calculated in the following manner:
2.1.1 One Year Default Rate is the weighted average of default rates of all
possible 1 year static pools in the 5-year period.
2.1.2 Cumulative Default Rate: The cumulative default rate (CDR)

represents the likelihood of an entity that was rated at the beginning
of any multi-year period defaulting at any time during the multi-year
period. Three-year cumulative default rate shall be computed as:
Three-year CDR for rating category X = No. of issuers which

defaulted over the three-year period / No. of issuers outstanding at
the beginning of the three-year period
2.2 For the above purposes, the following terms shall have the meaning as under
:
2.2.1 Static Pool : Non-defaulted ratings that were outstanding at the
beginning of any period
2.2.2 Default : Non-payment of interest or principal amount in full on the

pre-agreed date. A CRA shall recognize default at the first instance of
delay in servicing of interest or principal on the rated debt instrument.
2.2.3 Default Rate: The number of defaults among rated entities in the
static pool as a percentage of the total number of entities in the static
pool.
2.2.4 Averaging : All averaging across static pools for default rate
computations must be based on the weighted average method where
the weights are the number of ratings in each static period
3. Dealing with Conflict of interest

3.1 A CRA shall formulate the policies and internal codes for dealing with the conflict
of interests.
3.2 A CRA shall ensure:
3.2.1 that its analysts do not participate in any kind of marketing and
business development including negotiations of fees with the issuer
whose securities are being rated,
3.2.2 that the employees’ involved in the credit rating process and their
dependants do not have ownership of the shares of the issuer.
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3.2.3 prompt review of the credit ratings of the securities as and when any
of its employees joins the respective issuer.
4. Obligations in respect of Rating of Structured Finance Products
4.1 A CRA may undertake rating of structured finance products, namely,

instruments / pay-outs resulting from securitization transactions. In such cases,
apart from following all the applicable requirements in case of non-structured
ratings, the following additional requirements shall also be complied with:
a. A CRA or its subsidiaries shall not provide consultancy or advisory

services regarding the design of the structured finance instrument.
b. The rating symbols shall clearly indicate that the ratings are for structured
finance products.
5. Unsolicited Credit Ratings
5.1 In case of unsolicited credit ratings, i.e. the credit ratings not arising out of the
agreement between a CRA and the issuer, credit rating symbol shall be
accompanied by the word “UNSOLICITED” in the same font size.
5.2 A CRA shall monitor and disclose credit rating during the life of the rated
securities, as if it were a solicited rating.
6. Disclosures
A CRA shall make all the disclosures stipulated below on their websites. In case of
listed securities, the CRA shall also make disclosures to the stock exchanges as
specified in the SEBI (Credit Ratings) Regulations, 1999. For ratings assigned and
their periodic reviews, the CRA shall issue press releases which shall also be kept
on their websites. Where a specific format has been prescribed, the disclosures
shall be made in that format.
6.1 Rating Procedure

A CRA shall formulate and disclose its policies, methodology and procedures in
detail regarding solicited and unsolicited credit ratings
6.2 Credit Rating History and Defaults –

A CRA shall disclose in the formats specified below
6.2.1 Details of new credit ratings assigned during last six-months
(Annexure I),
6.2.2 Movement of credit rating of all outstanding securities during the last
six-months:
(a) Movement of each credit rating(Annexure II),
(b) Movement of each credit rating from investment grade to non-
investment grade and vice versa (Annexure III) and
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(c) Movement of each credit rating that has moved by more than one
notch (Annexure IV).
6.2.3 The history of credit rating of all outstanding securities (Annexure V),
6.2.4 On annual basis, the list of defaults separately for each

rating category (e.g. AAA, AA, A, BBB, BB, B, C){ (Annexure VI)}. This shall
include the initial credit rating assigned by the CRA, month and year of initial
rating, month and year of default, last credit rating assigned by the CRA
before the issuer defaulted, comments of CRAs, if any.
6.2.5 On annual basis, the average one-year and three-year cumulative

default rates (based on weighted average), for the last 5 years,
separately for each following category:
(i) each credit rating category (e.g. AAA, AA, A, BBB, BB, B, C),
separately (Annexure VII),;
(ii) structured instruments and non-structured instruments, separately
(Annexure VII),
6.3 Income
6.3.1 A CRA shall disclose the general nature of its compensation
arrangements with the issuers.
6.3.2 A CRA shall disclose, in case of accepted ratings, its conflict of
interest, if any, including the details of relationship – commercial or
otherwise – between the issuer whose securities are being rated / any
of its associate of such issuer and the CRA or its subsidiaries.
6.3.3 A CRA shall disclose annually
6.3.3.1 its total receipt from rating services and non-rating services,
6.3.3.2 issuer wise percentage share of non-rating income of the
CRA and its subsidiary to the total revenue of the CRA and its
subsidiary from that issuer, and
6.3.3.3 names of the rated issuers who along with their associates
contribute 10% or more of total revenue of the CRA and its
subsidiaries.
6.4 Structured Finance Products

6.4.1 While publishing the ratings of structured finance products and their
movements, a CRA apart from following all the applicable requirements in
case of non-structured ratings shall also disclose the track record of the
originator and details of nature of underlying assets while assigning the credit
rating. The track record shall include a brief description of the financials of the
originator, rating migrations to speculative categories and defaults.
6.4.2 A CRA shall also disclose at least once in every six months, the
performance of the rated pool, i.e., collection efficiency, delinquencies. A CRA
shall also provide a detailed description of the underlying pools including
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ageing, Credit enhancements such as liquidity supports, first and second loss
guarantee provided shall also be disclosed.
6.5 Unsolicited Credit Ratings

6.5.1 While publishing unsolicited ratings and their movements, a CRA apart
from following all the applicable requirements in case of solicited ratings
shall make the following disclosures:
a. the extent of participation by the issuer, its management,

bankers and auditors in the credit rating process.
b. the information used and its source in arriving at and reviewing
the credit rating.
6.5.2 A CRA shall disclose annually

(i) all the unsolicited ratings carried out in the last three
financial years (Annexure VIII);
(ii) names of issuers, out of those mentioned in (i) above, which
were given solicited rating in the last financial year
(Annexure VIII).
6.6 Shareholding - A CRA shall disclose its shareholding pattern as

prescribed by stock exchanges for a listed company under clause 35 of
Listing Agreement.
6.7 Compliance Status of IOSCO Code of Conduct - A CRA shall

disclose the compliance status of each provision of IOSCO code of conduct.
7. Implementation Schedule and Reporting
The CRAs shall take necessary steps to implement this circular immediately and
ensure its full compliance at the latest by June 30, 2010.
The half-yearly disclosures stipulated above shall be made by the CRAs within 15
days from the end of the half-year (March / September). The yearly disclosures
stipulated above shall be made by the CRAs within 30 days from the end of the
financial year.
However for the financial year 2009-2010 only, the half yearly and yearly
disclosures stipulated above shall be made by the CRAs by June 30, 2010.
8. Additional Disclosures
A CRA can make additional disclosures other than those stipulated above with the
prior approval of its Board.
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The CRAs shall communicate to SEBI, the status of the implementation of the provisions
of this circular by July 15, 2010. They shall also place the compliance status of this
circular before their Boards.
This circular is issued in exercise of the powers conferred by Section 11 (1) of Securities
and Exchange Board of India Act, 1992 read with the provisions of regulations 15, 16, 18,
19(1), 20, 24 and Code of Conduct of SEBI (Credit Rating Agencies) Regulations, 1999 to
protect the interest of investors in securities and to promote the development of, and to
regulate, the securities market.
Yours faithfully,
Prasanta Mahapatra
Deputy General Manager
Tel. No: 022-26449313
Email id : [email protected]
Encl: as above
Page 6 of 15
ANNEXURE I
Details of new credit ratings assigned during last six-months
New Ratings assigned between Apr-Sep / Oct - Mar

Sl. Name of the Issuer Instrument Issue size (Rs. Millions) Rating
No.
1
2
3
4
5
6
Page 7 of 15
ANNEXURE II
Movement* of each credit rating
Rating Movements between Apr-Sep / Oct - Mar

Sl. Name of the Rating prior to Rating Post
No. Issuer Revision Revision
1
2
3
4
* will cover only rating changes. Reaffirmations shall be excluded
Page 8 of 15
ANNEXURE III
Movement of each credit rating from investment grade to non-investment grade

and vice versa
Rating Movement from Investment Grade and Non-invetsment Grade

between Apr-Sep / Oct - Mar
From Investment Grade to Non-investment Grade
Sl. No. Name of the Issuer Rating prior to Revision Rating Post Revision
1
2
3
4
From Speculative Grade to Investment Grade
Sl. No. Name of the Issuer Rating prior to Revision Rating Post Revision
1
2
3
4
Page 9 of 15
ANNEXURE IV
Movement of each credit rating that has moved by more than one notch
Rating Movement by more than one-notch between Apr-Sep / Oct -

Mar
Sl. Name of the Rating prior to Rating Post Notch
No. Issuer Revision Revision Difference
1
2
3
4
Page 10 of 15
ANNEXURE V
History of credit rating of all outstanding securities
Table 2.3 : History of credit rating of all outstanding securities

Sl. Name Initial Date Rating Date of Rating Date of Rating Date of …..
No. of the Rating of after 1st 1st after 2nd 2nd after 3rd 3rd
Issuer Initial Revision Revision Revision Revision Revision Revision

Rating
1
2
3
4
Page 11 of 15
ANNEXURE VI
List of defaults separately for each rating category
Category-wise List of Defaults in a Financial Year – Long Term Scale

Sl. Name of the Initial Date of Rating prior to Date of Default
No. Issuer Rating Initial Rating Default Recognition
AAA or equivalent
1
2
3
AA or equivalent
1
2
3
1
A or equivalent
1
2
3
BBB or equivalent
1
2
3
BB or equivalent
1
2
3
B or equivalent
1
2
3
C or equivalent
1
2
3
Page 12 of 15
Category-wise List of Defaults in a Financial Year - Short Term Scale

Sl. Name of the Initial Date of Rating prior to Date of Default
No. Issuer Rating Initial Rating Default Recognition
P1 / A1 / PR1 / F1 or equivalent
1
2
3
1
2
3
1
1
2
3
Page 13 of 15
ANNEXURE VII
Structured instruments
Average Default Rates for the last 5- Financial Year Period- Structured
Instruments
Rating Category 1-Year Default Rate 3-year Cumulative Default
Rate
AAA or equivalent
AA or equivalent
A or equivalent
BBB or equivalent
BB or equivalent
B or equivalent
C or equivalent
Non-Structured instruments
Average Default Rates for the last 5- Financial Year Period - Non-Structured
Instruments
Rating Category 1-Year Default Rate 3-year Cumulative Default
Rate
AAA or equivalent
AA or equivalent
A or equivalent
BBB or equivalent
BB or equivalent
B or equivalent
C or equivalent
Page 14 of 15
ANNEXURE VIII
Unsolicited Credit Rating*
Sl No Name of the Issuer Rating Assigned

Financial Year 1 Financial Year 2 Financial Year 3
1
2
3
4
* If in a particular financial year, a rating has subsequently been changed, then that shall
also be disclosed
Solicited Credit Ratings assigned to those issuers mentioned in the table above in
the last financial year**
Sl No Name of the Issuer Rating Assigned
** Any subsequent revision of the rating in the same year shall also be disclosed
Page 15 of 15

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¼ããÀ¦ããè¾ã ¹ãÆãä¦ã¼ãîãä¦ã ‚ããõÀ ãäÌããä¶ã½ã¾ã ºããñ¡Ã

Securities and Exchange Board of India

All Credit Rating Agencies Registered with SEBI

Sub: Guidelines for Credit Rating Agencies

1.4 If a quantitative model is a substantial component of the credit rating process,

2.1 The default rates shall be calculated in the following manner:

2.1.2 Cumulative Default Rate: The cumulative default rate (CDR)

Three-year CDR for rating category X = No. of issuers which

2.2.2 Default : Non-payment of interest or principal amount in full on the

3. Dealing with Conflict of interest

3.2 A CRA shall ensure:

4. Obligations in respect of Rating of Structured Finance Products

4.1 A CRA may undertake rating of structured finance products, namely,

a. A CRA or its subsidiaries shall not provide consultancy or advisory

5. Unsolicited Credit Ratings

6.1 Rating Procedure

6.2 Credit Rating History and Defaults –

6.2.4 On annual basis, the list of defaults separately for each

6.2.5 On annual basis, the average one-year and three-year cumulative

6.4 Structured Finance Products

6.5 Unsolicited Credit Ratings

a. the extent of participation by the issuer, its management,

6.5.2 A CRA shall disclose annually

6.6 Shareholding - A CRA shall disclose its shareholding pattern as

6.7 Compliance Status of IOSCO Code of Conduct - A CRA shall

7. Implementation Schedule and Reporting

Details of new credit ratings assigned during last six-months

New Ratings assigned between Apr-Sep / Oct - Mar

Movement* of each credit rating

Rating Movements between Apr-Sep / Oct - Mar

* will cover only rating changes. Reaffirmations shall be excluded

Movement of each credit rating from investment grade to non-investment grade

Rating Movement from Investment Grade and Non-invetsment Grade

Rating Movement by more than one-notch between Apr-Sep / Oct -

History of credit rating of all outstanding securities

Table 2.3 : History of credit rating of all outstanding securities

Issuer Initial Revision Revision Revision Revision Revision Revision

List of defaults separately for each rating category

Category-wise List of Defaults in a Financial Year – Long Term Scale

Category-wise List of Defaults in a Financial Year - Short Term Scale

Unsolicited Credit Rating*

Sl No Name of the Issuer Rating Assigned

Sl No Name of the Issuer Rating Assigned

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