A credit rating is, in form, only an opinion on the relative ability of an issuer to service its debt obligations. Yet because that opinion travels with the security into the hands of thousands of investors, Indian law treats the rater as a securities-market intermediary rather than as a mere commentator. The SEBI (Credit Rating Agencies) Regulations, 1999 — notified on 7 July 1999 under Section 30 read with Section 11 of the SEBI Act, 1992 — convert the business of rating into a licensed activity hedged by entry barriers, a statutory code of conduct, continuous-monitoring duties and an enforcement regime that has since produced crore-rupee penalties. This chapter unpacks the architecture of the 1999 Regulations for the judiciary and CLAT-PG aspirant, anchoring each proposition in the bare text and in SEBI's enforcement practice.
Statutory source and the registration imperative
The Regulations are subordinate legislation framed under Section 30 of the SEBI Act, 1992, the general rule-making power, read with Section 11, which charges the Board with protecting investors and regulating the securities market. The operative compulsion, however, flows from Section 12(1) of the SEBI Act: no person may act as an intermediary associated with the securities market — a category that expressly includes a credit rating agency — except under, and in accordance with, a certificate of registration granted by the Board. The 1999 Regulations supply the conditions of that certificate.
Regulation 2(h) defines a credit rating agency as a body corporate engaged in, or proposing to engage in, the business of rating of securities offered by way of public or rights issue. Two features of this definition are exam-critical. First, the subject of a rating is a security, not a borrower at large; the regulatory net is cast around instruments that reach public investors. Second, the agency must be a body corporate, which dovetails with the eligibility filter discussed below. The framework sits alongside the broader licensing scheme later consolidated in the SEBI (Intermediaries) Regulations, 2008, which supplies the common procedure for inspection, action and the fit-and-proper test across intermediaries. For the place of CRAs within the wider intermediary universe, see the SEBI Intermediaries hub.
Application for registration: Form A and the fee
Registration begins under Regulation 3, which requires any person proposing to commence activity as a credit rating agency to apply to the Board in Form A of the First Schedule, accompanied by the prescribed non-refundable application fee under the Second Schedule. The Board may, under Regulation 6, require the applicant to furnish further information or clarification regarding matters relevant to the rating activity, and may ask the applicant's principal officer to appear before it for personal representation.
This front-loaded scrutiny reflects the gatekeeping philosophy that runs through every SEBI intermediary code: the licence is a privilege contingent on demonstrated capacity, not a formality. The same Form-A-then-evaluation pattern recurs, with subject-specific variations, in the SEBI (Merchant Bankers) Regulations, 1992 and the SEBI (Stock Brokers) Regulations, 1992. An incomplete application, or one not conforming to Form A, may be rejected after the applicant is given a reasonable opportunity to remove the defects.
Promoter eligibility under Regulation 4
Unusually among intermediary regimes, the 1999 Regulations regulate not merely the applicant but the promoter behind it. Regulation 4 provides that the Board shall not consider an application unless the applicant is promoted by one of five specified categories of institution, each chosen for its financial heft and reputational stake. The promoter must be (a) a public financial institution within the meaning of Section 4A of the Companies Act, 1956 (now Section 2(72) of the Companies Act, 2013); (b) a scheduled commercial bank included in the Second Schedule to the Reserve Bank of India Act, 1934; (c) a foreign bank operating in India with the approval of the Reserve Bank of India; (d) a foreign credit rating agency recognised under the law of its country of incorporation, having at least five years' experience in rating securities; or (e) any company or body corporate having a continuous net worth of not less than rupees one hundred crores as per its audited annual accounts for the previous five years prior to filing the application.
The design intent is structural. By confining promotership to deep-pocketed, accountable institutions, SEBI sought to insulate the rating function from fly-by-night sponsors who might monetise ratings without bearing reputational consequences. The hundred-crore continuous-net-worth route in clause (e) is the most litigated entry point for non-institutional promoters and must be read alongside the agency's own net-worth requirement discussed next.
Eligibility criteria for the agency: Regulation 5
Regulation 5 sets out the conditions the applicant company itself must satisfy. The Board considers whether the applicant is set up and registered as a company under the Companies Act; whether it has, in its memorandum of association, specified rating activity as one of its main objects; and whether it has a minimum net worth of rupees five crores. A credit rating agency in existence at the commencement of the Regulations with a net worth below five crores was deemed compliant if it raised its net worth to that minimum within three years of commencement — a transitional concession that has since spent its force.
Beyond capital, Regulation 5 imports a qualitative test. The applicant must have adequate infrastructure to enable it to provide rating services, and the applicant, its directors and its promoters must be persons of professional competence, financial soundness and general reputation of fairness and integrity in business transactions — in substance, the fit and proper person standard that the Intermediaries Regulations, 2008 later universalised. The applicant must also not have been refused a certificate by the Board previously, and the grant must otherwise be in the interest of investors. Net worth here is defined in the conventional SEBI manner: the aggregate of paid-up capital and free reserves, reduced by accumulated losses and deferred expenditure not written off.
Grant of certificate, Form B and conditions
Where the Board is satisfied that the applicant is eligible, it grants a certificate of registration in Form B on payment of the registration fee. The certificate is not perpetual at the Board's indulgence alone: it remains valid until suspended or cancelled, subject to the registrant continuing to satisfy the conditions of registration and paying the prescribed periodic fees.
The conditions of the certificate are central to the discipline of the regime. The agency must abide by the Regulations and the Act; it must inform the Board of any material change in the information already furnished; and any change in control of the agency requires prior approval of the Board. A distinctive lock-in applies to the promoter: the promoter of the credit rating agency must hold a minimum of twenty-six per cent of the shares of the agency for a minimum period of three years from the date of grant of the certificate. This shareholding floor operationalises the Regulation 4 philosophy — the institution that vouched for the agency at entry must keep meaningful skin in the game while the agency builds its track record.
The Code of Conduct: Regulation 13 and the Third Schedule
The behavioural spine of the regime is Regulation 13, which mandates that every credit rating agency shall abide by the Code of Conduct contained in the Third Schedule. The Code is not aspirational boilerplate; breach of it founds enforcement action. It requires the agency to make all efforts to protect the interests of investors; to observe high standards of integrity, dignity and fairness in the conduct of its business; to fulfil its obligations in a prompt, ethical and professional manner; and to maintain an arm's-length relationship between its credit rating activity and any other business.
The Code also targets conflicts of interest squarely. The agency must avoid conflict of interest of the rating committee members in the rating of any particular security, and must disclose to the Board and to investors any conflict that may undermine the fairness or objectivity of a rating. It must not indulge in unfair competition, nor make untrue or misleading statements about the services of competitors. Critically, the agency must not generally and indiscriminately offer or accept gifts, and must ensure 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. These conflict-management duties echo the integrity standards in the Stock Brokers' Code of Conduct, demonstrating SEBI's uniform expectation of intermediary probity.
The mandatory agreement with the client
Before rating any security, the agency must enter into a written agreement with each client whose securities it proposes to rate. The Regulations prescribe the minimum content of this agreement. It must require the client to cooperate with the agency to enable it to arrive at, and maintain, a true and accurate rating; it must specify the periodic review of the rating during the lifetime of the rated security; it must oblige the agency to disclose the rating to the public through dissemination on receipt of a request from the client; and it must require the client to disclose, in its offer document, the rating assigned by the agency during the preceding three years for any of the client's listed securities, and whether the security has been rated by more than one agency.
The agreement clauses are not bargained-away conveniences. They are statutory floors: a CRA cannot contract out of continuous monitoring or of disclosure obligations even if a sophisticated issuer-client would prefer secrecy. This is why the agreement, though a private contract, is treated as a vehicle for public-interest duties — a theme that recurs when courts examine whether a CRA can disclaim liability by contract.
Continuous monitoring and periodic review
A rating is not a one-off act but a continuing representation, and the Regulations enforce this. Every credit rating agency must, 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. It must promptly disseminate any revision in a rating — upgrade or downgrade — through press releases and on its website, and must furnish the same to the stock exchanges where the security is listed.
The procedure for review is reinforced by a non-cooperation rule: where the client does not cooperate with the agency so as to enable it to comply with its monitoring obligations, the agency may carry out the review on the basis of the best available information, and may disclose to the investors the fact that the issuer did not cooperate, together with the rating reached on that basis. The continuous-monitoring duty is the single provision most relevant to enforcement. SEBI's repeated charge against agencies in default cases is precisely that they failed to downgrade in time despite knowledge of deteriorating issuer financials — converting a forward-looking duty into a measure of negligence.
Internal procedures, disclosure of methodology and confidentiality
The Regulations require every agency to frame appropriate procedures for ensuring that confidential information about the rating of securities is not used by its directors, officers and employees, and to abide by the provisions of the SEBI (Prohibition of Insider Trading) Regulations and the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations. The rationale is obvious: an analyst who learns of an impending downgrade holds price-sensitive information, and the rating function would be corrupted if that knowledge could be traded upon.
On transparency, the agency must make public the definitions of the concerned rating, along with the symbol, and must state that the ratings do not constitute recommendations to buy, hold or sell any security. It must also disclose its rating methodology to clients, the public and the Board, and must ensure that ratings are arrived at by a rating committee rather than by an individual analyst. Confidentiality cuts the other way too: the agency must treat as confidential the information supplied by the client and must not disclose it except where disclosure is required under law or under the agreement.
Restriction on rating securities of promoters and connected entities
The most pointed conflict-of-interest prohibition in the Regulations forbids an agency from rating securities issued by entities to which it is structurally tied. A credit rating agency shall not rate a security issued by its promoter. Where the promoter is a lending institution, its chairman, director or employee must not be a chairman, director or employee of the agency or its rating committee. Nor may the agency rate a security issued by any borrower, subsidiary or associate of its promoter if there are common chairman, directors or employees between the agency and these entities, or by an entity that is a borrower of its promoter or a subsidiary or associate of such borrower, in the specified circumstances.
These prohibitions exist because the value of a rating lies entirely in its independence; a rating of one's own promoter's paper is worth nothing to the market and is dangerous if relied upon. The provision was sharpened by later amendments and complemented by the 2023 introduction of Chapter IV-A on ESG Rating Providers, which extended a registration-and-conduct regime to environmental, social and governance raters while exempting them from the Chapters dealing specifically with credit rating mechanics. The independence logic here parallels the segregation duties imposed on multi-service intermediaries under the Merchant Bankers Regulations.
Compliance officer, books of account and records
Every credit rating agency must appoint a compliance officer responsible for monitoring compliance with the Act, rules, regulations, notifications, guidelines and instructions issued by the Board, and for independently reporting to the Board any non-compliance observed. This officer functions as the internal sentinel and is a fixture across the SEBI intermediary codes.
On record-keeping, the agency must keep and maintain, for a minimum period of five years, books of account, copies of the rating agreements, copies of the rating notes and the supporting documents, and a record of the decisions of the rating committees. It must furnish to the Board a copy of its audited balance sheet and profit-and-loss account within the prescribed period after the close of each accounting period, and must intimate to the Board the place where these records are kept. Where an auditor's report or the Board's own inspection reveals deficiencies, the agency is obliged to take steps to rectify them within the time stipulated. These maintenance obligations mirror the capital-and-records discipline imposed on brokers under the Stock Brokers' capital adequacy norms.
Inspection, investigation and liability for action
The Board's supervisory teeth lie in its inspection power. SEBI may appoint one or more persons as inspecting officers to undertake the inspection or investigation of the books of account, records and documents of any credit rating agency, for purposes including ensuring that the books are maintained as required, that the provisions of the Act and Regulations are complied with, and that complaints from investors or other persons are investigated. The agency, its directors and employees are bound to cooperate, produce records and furnish statements.
On the basis of an inspection or otherwise, a CRA that contravenes the Act, the rules or the Regulations, or fails to furnish information, or furnishes false information, is liable to action. After the consolidation effected by the SEBI (Intermediaries) Regulations, 2008, the procedure for suspension or cancellation of registration, and the menu of administrative actions including warning and prohibition, is largely governed by that common code rather than by a self-contained chapter in the 1999 Regulations. Monetary penalties for failures by an intermediary are levied under Chapter VI-A of the SEBI Act, principally Section 15HB (residuary penalty) and the adjudication machinery of Section 15-I.
Enforcement in practice: the IL&FS rating failures
The abstract duties of the 1999 Regulations acquired concrete bite in the wake of the IL&FS collapse of 2018, where instruments rated investment-grade — indeed AAA in places — defaulted within a short span. In December 2019, SEBI's adjudicating officer imposed penalties of rupees twenty-five lakh each on ICRA, CARE Ratings and India Ratings & Research in connection with their rating of IL&FS non-convertible debentures, finding that the default had occurred due to what the order described as lethargic indifference, needless procrastination and laxity on the part of the agencies, which had failed to downgrade the ratings in time despite knowledge of the deteriorating financials of the issuer.
On review, in September 2020 SEBI enhanced the penalty to rupees one crore each on ICRA and CARE, on the footing that the original adjudication had failed to give due weight to the magnitude of investor loss — a parameter SEBI is statutorily directed to consider under Section 15J of the SEBI Act. The IL&FS orders are the leading domestic illustration of how the continuous-monitoring duty translates into liability: the gravamen was not that the agencies formed a wrong opinion ex ante, but that they failed in the ongoing surveillance the Regulations require.
Civil liability, defamation and the 'opinion' defence
A recurring jurisprudential question is whether a rating, framed as an opinion, can attract civil or defamatory liability. In Edelweiss Financial Services Ltd v. Moody's Investors Service the issuer-side concern surfaced from the opposite direction: Edelweiss instituted a defamation action before the Bombay High Court alleging that a Moody's report comparing the asset quality and liquidity of non-banking financial companies was inaccurate and published with the intent to damage its reputation — illustrating that rating output is not immune from challenge merely because it is styled as analysis.
Indian regulatory thinking treats the rater's statutory obligations as overriding any contractual disclaimer: a CRA cannot, by inserting an exculpatory clause in its client agreement, excuse itself from the conduct standards the Regulations impose for the protection of investors at large, who are not parties to that contract. Competition-law challenges have fared less well: the Competition Commission of India dismissed a complaint alleging collusive bidding, bid-rigging and predatory pricing against CRISIL, India Ratings, CARE and ICRA, declining to find a contravention of the Competition Act on the material before it. The net position for the aspirant is that a rating enjoys no blanket immunity as 'mere opinion'; liability is calibrated to whether the agency discharged its statutory duties of diligence, monitoring and disclosure.
Evolution and contemporary relevance
The 1999 Regulations have been amended repeatedly to keep pace with market failures and new asset classes. Post-IL&FS reforms tightened disclosure of rating rationales, mandated probability-of-default benchmarking, required disclosure of liquidity indicators and 'rating sensitivities', and addressed the problem of issuers withdrawing ratings to escape downgrades. The 2023 amendment inserting Chapter IV-A on ESG Rating Providers marked the most significant structural expansion, bringing sustainability raters within a registration-and-conduct framework analogous to that for credit raters.
For examinations, the durable themes are these: the CRA is an intermediary licensed under Section 12 of the SEBI Act; entry is controlled through promoter eligibility (Regulation 4), a five-crore net-worth floor and the fit-and-proper test (Regulation 5), and a twenty-six per cent promoter lock-in; conduct is governed by the Third Schedule Code, the mandatory client agreement, continuous monitoring, methodology disclosure and the prohibition on rating promoter-connected securities; and enforcement runs through inspection, the consolidated action procedure of the Intermediaries Regulations, 2008 and monetary penalties under Chapter VI-A of the SEBI Act. The IL&FS penalties anchor the proposition that, in Indian law, a credit rating is a regulated representation carrying real accountability, not a costless opinion.
Frequently asked questions
Under what statutory power were the SEBI Credit Rating Agencies Regulations, 1999 made, and what compels registration?
They were notified on 7 July 1999 under Section 30 read with Section 11 of the SEBI Act, 1992. The compulsion to register flows from Section 12(1) of the Act, under which no intermediary associated with the securities market — including a credit rating agency — may operate except under a certificate of registration granted by the Board in accordance with the Regulations.
Who may promote a credit rating agency under Regulation 4?
Only five categories: a public financial institution; a scheduled commercial bank; a foreign bank operating in India with RBI approval; a foreign credit rating agency recognised in its home country with at least five years' rating experience; or any company or body corporate with a continuous net worth of not less than rupees one hundred crores per its audited accounts for the previous five years. The aim is to confine sponsorship to financially substantial, accountable institutions.
What is the minimum net worth and the promoter shareholding lock-in for a CRA?
Under Regulation 5 the agency must have a minimum net worth of rupees five crores, must be a company with rating as a main object, and must satisfy the fit-and-proper and infrastructure tests. As a condition of the certificate, the promoter must hold at least twenty-six per cent of the agency's shares for a minimum of three years from the date the certificate is granted.
Can a credit rating agency rate securities issued by its own promoter?
No. The Regulations expressly prohibit an agency from rating a security issued by its promoter, and restrict rating of securities of borrowers, subsidiaries or associates of the promoter where there are common chairman, directors or employees. The prohibition protects the independence that gives a rating its only value to the market.
What does the continuous-monitoring duty require, and why does it matter for liability?
An agency must, throughout the lifetime of a rated security, continuously monitor the rating, conduct periodic reviews and promptly disseminate any upgrade or downgrade through press releases, its website and the stock exchanges. It matters because SEBI's enforcement against agencies — notably in the IL&FS matter — has turned on the failure to downgrade in time despite knowledge of deteriorating issuer finances, making the duty the practical measure of negligence.
What enforcement action followed the IL&FS rating failures?
In December 2019 SEBI's adjudicating officer imposed penalties of rupees twenty-five lakh each on ICRA, CARE Ratings and India Ratings for lapses in rating IL&FS non-convertible debentures, citing lethargic indifference and failure to downgrade in time. On review in September 2020, SEBI enhanced the penalty to rupees one crore each on ICRA and CARE, finding the original order had under-weighted the magnitude of investor loss under Section 15J of the SEBI Act.