Investing in debt instruments? Learn how agencies give them credit ratings as Sebi releases master circular

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credit rating. Higher the rating, the safer the instrument and conversely, the lower the rating, the riskier the investment. However, one may wonder what are the criteria based on which these agencies such as CRISIL and ICRA rate the financial products.

Each agency may have different criteria to judge the instrument’s credibility. What if one agency is more liberal, while the other is more stringent in its evaluation criteria? In order to reconcile these differences, rating agencies are supposed to reveal the framework based on which they judge their credit ratings. From time to time, capital markets regulator Securities and Exchange Board of India (Sebi) has released circulars to make a set of rules which govern these criteria.

And while taking another step in this direction, Sebi has now released a master circular on credit rating agencies. This is aimed to enable the industry and other users to have access to all the applicable circulars/ directions at one place. Th master circular is the combination of all circulars released till date.

ALSO READ | Adani Ports & SEZ attains India's first AAA ratings in private infrastructure space Each credit rating agency is told to frame detailed rating criteria including the same in its operations manual/ internal governing document and disclose the same on its website. Periodicity will be disclosed on the website of credit rating agencies. While disclosing the criteria on their website, agencies will also provide a reference to the original criteria to enable investors to discern the change made to the same.