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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
What does credit rating convey?
Credit rating is an assessment of the probability of default on payment of interest and principal on a debt instrument. It is not a recommendation to buy, sell or hold a debt instrument.
Rating only provides an additional input to the investor and the investor is required to make his own independent and objective analysis before arriving at an investment decision.
How is credit rating done?
Ratings are based on an evaluation of the strengths and weaknesses of the company fundamentals including financials along with an in-depth study of the industry as well as macro-economic, regulatory and political environment.
No. SEBI does not play any role in the assessment made by the rating agency. The rating is intended to be an independent, unbiased and professional opinion of the rating agency.
Is rating a one-time exercise?
To protect the interest of investors, SEBI has made it mandatory that every credit rating agency shall, during the lifetime of the securities rated by it, continuously monitor the rating of such securities and carry out periodic reviews of all published ratings.
Rating is an opinion based on information available at a point in time with the rating agency and expectations made on the basis of such information by the agency.
However, information can change significantly over time causing the rated instruments performance to deviate from the earlier expectations thereby affecting the future repayment abilities and thus, requiring the rating to be altered.
What kind of responsibility or accountability will attach to a rating agency if an investor, who makes his investment decision on the basis of its rating, incurs a loss on the investment?
A credit rating is a professional opinion given after studying all available information at a particular point of time. Nevertheless, such opinions may prove wrong in the context of subsequent events.
There is no contract between an investor and a rating agency and the investor is free to accept or reject the opinion of the agency.
What are the common factors that are taken into account while awarding the credit rating? Each credit rating agency may have its own set of criteria for each component for assigning the ratings.
Some of the common factors that may be taken into consideration for credit
rating are Issue Company’s operational efficiency, level of technological development,
financials, competence and effectiveness of management, past record of debt servicing, etc.
SEBI has, from time to time, taken several steps to strength the process of credit rating. SEBI directives require the credit rating agencies to be transparent and disclose to the public the information which may have a material bearing on the ratings, any sources of conflicts of interest while undertaking the rating exercise, rating methodology, rationale of the ratings,
How can an investor know if a credit rating agency has changed its rating?
The credit rating agencies are required to continuously monitor the ratings assigned by them to a particular instrument. In case of any changes in the ratings so assigned, the agencies are required to disclose the same through press releases and on their respective websites.
Which is the rating agencies registered with SEBI?
1. Credit Analysis & Research Ltd.(CARE)
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