Master Circular for Credit Rating Agencies

Page 1 of 19 MASTER CIRCULAR IFSCA-PLNP/40/2024-Capital Markets October 01, 2024 To, All Credit Rating Agencies in the IFSC All Recognised Stock Exchanges in the IFSC Madam/Sir, Sub: Master Circular for Credit Rating Agencies 1. The IFSCA (Capital Market Intermediaries) Regulations, 2021 (“CMI Regulations”) provide the regulatory framework for credit rating agencies registered with International Financial Services Centres Authority (“the Authority”) providing requirements inter alia relating to registration, general obligations and responsibilities, specific obligations and responsibilities, inspection etc. 2. Regulation 73(5) of the CMI Regulations provide that - “The circulars and guidelines issued by SEBI in relation to the regulations specifically covered under sub-regulation (2) and applicable to a capital market intermediary in an IFSC, shall be deemed to have been issued under these regulations unless and until they are superseded or modified by the Authority”. 3. Subsequently, the Authority has issued following circulars relating to Credit Rating Agencies: a) Circular titled “Credit Rating Agencies in the IFSC” dated July 25, 2024 clarifying requirements relating to providing services by SEBI-registered credit rating agencies in the IFSC. b) Circular titled “Valuation of Assets of Schemes under IFSCA (Fund Management) Regulations 2022 by Credit Rating Agencies at IFSC” permitting CRAs registered with the Authority to undertake valuation of assets of the schemes under the IFSCA (Fund Management) Regulations, 2022. Page 2 of 19 c) Circular titled “Enabling Credit Rating Agencies to undertake additional activities relating to ESG Ratings and Data Products Providers” enabling CRAs registered with Authority to also undertake services relating to ERDPPs in accordance with the requirements laid down in this circular. 4. It has been decided that the master circular placed at Annexure - 1 is being issued superseding all the circulars and guidelines issued by SEBI (prior to October 01, 2020) in respect of credit rating agencies registered with the Authority in accordance with the provisions of regulation 73(5) of the CMI Regulations. Further, the master circular is a compilation of the circulars mentioned at paragraph 3 above. 5. This master circular is being issued in exercise of powers conferred by Sections 12 and 13 of the International Financial Services Centres Authority Act, 2019 and regulation 72 of the IFSCA (Capital Market Intermediaries) Regulations, 2021. A copy of this circular is available on the website of the International Financial Services Centres Authority at www.ifsca.gov.in. Yours faithfully, Arjun Prasad General Manager arjun.pd@ifsca.gov.in Page 3 of 19 Annexure-1 Master Circular for Credit Rating Agencies Table of Contents Contents CHAPTER – 1: REGISTRATION PROCESS ......................................................................................... 5 SWIT System ..................................................................................................................................... 5 Payment of Fees ............................................................................................................................... 5 SEBI-registered Credit Rating Agencies...................................................................................... 5 CHAPTER - 2: PERMISSIBLE ACTIVITIES ......................................................................................... 6 Permissible Activities ..................................................................................................................... 6 CHAPTER - 3: GOVERNANCE .............................................................................................................. 7 Composition of Board of Directors .............................................................................................. 7 Code of Conduct ............................................................................................................................... 7 CHAPTER - 4: CREDIT RATING ACTIVITIES .................................................................................... 8 Operations Manual ......................................................................................................................... 8 Rating Criteria ................................................................................................................................. 8 Rating Process ................................................................................................................................. 8 Sovereign Ratings............................................................................................................................ 9 Rating Scales .................................................................................................................................... 9 Monitoring and Review of Ratings ............................................................................................... 9 Dissemination of Ratings ............................................................................................................. 10 Withdrawal of rating .................................................................................................................... 10 Rating Committee .......................................................................................................................... 11 Request by Issuers for review/appeal of ratings provided by CRAs .................................. 11 Rating Analysts .............................................................................................................................. 11 Confidentiality ............................................................................................................................... 11 Independence and Avoidance of Conflicts of Interest ........................................................... 11 Prohibition on Trading ................................................................................................................ 12 Periodic Disclosures ..................................................................................................................... 13 Continuous Disclosures ............................................................................................................... 13 Guidelines/Policies ....................................................................................................................... 13 CHAPTER - 5: ESG RATINGS AND DATA PRODUCTS PROVIDERS ............................................. 14 Introduction ................................................................................................................................... 14 Permitted Services ........................................................................................................................ 14 Code of Conduct ............................................................................................................................. 15 Page 4 of 19 ESG Ratings Process ...................................................................................................................... 16 Annual Audit .................................................................................................................................. 16 Segregation ..................................................................................................................................... 16 Continuous Disclosures ............................................................................................................... 16 Power to call for information ..................................................................................................... 16 Maintenance of books of account, records and other documents ....................................... 17 CHAPTER - 6: VALUATION SERVICES ............................................................................................. 18 Valuation Services under IFSCA (Fund Management) Regulations, 2022 ......................... 18 CHAPTER - 7: REPORTING ............................................................................................................... 19 Reporting ........................................................................................................................................ 19 Page 5 of 19 CHAPTER – 1: REGISTRATION PROCESS SWIT System 1. IFSCA has operationalised Single Window IT System (SWIT System), which can be accessed at https://swit.ifsca.gov.in/, for intermediaries, inter-alia for CRAs, to submit all the registration applications online. IFSCA’s SWIT System includes online application for registration, processing of application, grant of final registration, etc., link for SWIT system is also available on IFSCA website – www.ifsca.gov.in. 2. An entity desirous of seeking registration as Credit Rating Agency with the Authority shall file an application through the SWIT System. Payment of Fees 3. The CRA registered with the Authority shall pay fees in accordance with the circulars issued by the Authority on “Fee structure for the entities undertaking or intending to undertake permissible activities in IFSC” dated May 17, 2023, February 06, 2024 and March 01, 2024 and as may be amended from time to time. SEBI-registered Credit Rating Agencies 4. Securities and Exchange Board of India, vide circular dated July 19, 2024 on “Enabling Credit Rating Agencies to undertake rating activities under IFSCA” permitted credit rating agencies registered with SEBI to undertake rating activities in the IFSC in accordance with regulation 9(f) of the SEBI (Credit Rating Agencies) Regulations, 1999 (“SEBI CRA Regulations”) and para 25 of the Master Circular for CRAs dated May 16, 2024. The Explanation provided under regulation 9(f) of the SEBI CRA Regulations provides that - “…the ratings undertaken by a credit rating agency under the respective guidelines of a financial sector regulator or authority shall be under the purview of the respective financial sector regulator or authority”. 5. Accordingly, a credit rating agency registered with SEBI, desirous of providing rating services in the IFSC, shall apply for registration with IFSCA in accordance with the requirements provided under the IFSCA (Capital Market Intermediaries) Regulations, 2021 (“CMI Regulations”), as amended from time to time. The activities of the CRAs operating in the IFSC shall be subject to the requirements in the IFSCA Act, 2019, CMI Regulations and other applicable regulations and circulars notified by IFSCA from time to time. The application shall be filed through the SWIT System. Page 6 of 19 CHAPTER - 2: PERMISSIBLE ACTIVITIES Permissible Activities 6. The CRA registered with the Authority (“the CRA”) under the CMI Regulations are permitted to carry out the following activities: a) Credit Ratings Explanation 1: Credit ratings can be of any financial product or financial instrument in the IFSC or any Foreign Jurisdiction1 based on global scale (foreign currency or local currency) ratings. Explanation 2: Credit ratings shall include private ratings. b) Sovereign Ratings c) ESG Ratings and Data Products Providers d) Valuation Services e) Research f) Rating Assessment / Evaluation Services g) Monitoring Agency h) Rating related advisory i) any other activities as permitted by the Authority Provided that the CRA shall undertake the activities in accordance with the norms and requirements specified by the Authority from time to time. 1 As defined in the IFSCA (Capital Market Intermediaries) Regulations 2021 Page 7 of 19 CHAPTER - 3: GOVERNANCE Composition of Board of Directors 7. The composition of the Board of Directors of the CRA shall be as follows: a) The board shall have at least 1/3rd of total strength as independent directors. b) The board shall comprise of not less than 3 directors. c) The majority of members of the board of directors shall have sufficient expertise in financial services. Provided that a CRA registered in the form of branch shall also comply with the governance requirements specified by the home regulator. Code of Conduct 8. The CRA shall establish a board approved Code of Conduct based on Schedule III of the International Financial Services Centres Authority (Capital Market Intermediaries) Regulations, 2021 and the IOSCO Report on Code of Conduct Fundamentals for Credit Rating Agencies, March 2015. 9. The CRA shall ensure that the Code of Conduct is publicly and prominently disclosed on its website: