UPSC Prelims 2022 Q63: Credit Rating Agencies, ICRA, Brickwork
Consider the following statements:
1. In India, credit rating agencies are regulated by Reserve Bank of India.
2. The rating agency popularly known as ICRA is a public limited company.
3. Brickwork Ratings is an Indian credit rating agency.
Which of the statements given above are correct?
- 1 and 2 only
- 2 and 3 only
- 1 and 3 only
- 1, 2 and 3
Answer: (b) 2 and 3 only
Statement-wise explanation
- 1: incorrect — SEBI regulates credit rating agencies in India, not the RBI. It does this under the SEBI (Credit Rating Agencies) Regulations, 1999, made under the SEBI Act, 1992. A rating agency must register with SEBI before it can operate. The RBI's role is narrower. It accepts ratings from some of these agencies when banks work out how much capital they must hold under the Basel rules. That link with banks is why many candidates wrongly pick the RBI.
- 2: correct — ICRA was incorporated on 16 January 1991 as 'Investment Information and Credit Rating Agency of India Limited'. It is now called ICRA Limited. It is a public limited company and has been listed on the BSE and NSE since 2007. Moody's group holds a majority stake in it. 'Public limited company' is about legal form: the company can offer shares to the public. It does not mean the government owns it.
- 3: correct — Brickwork Ratings India Private Limited is an Indian credit rating agency based in Bengaluru. It appears on SEBI's list of registered credit rating agencies, alongside CRISIL, ICRA, CARE, Fitch Ratings India and SMERA. When the 2022 exam was held, it held a valid SEBI registration.
How to eliminate
This question comes down to one fact: which body regulates credit rating agencies in India. The answer is SEBI, under the SEBI (Credit Rating Agencies) Regulations, 1999. Once you know that statement 1 is wrong, every option that includes statement 1 drops out. Only one option, statements 2 and 3, is left, so you do not need to know anything about ICRA or Brickwork. The usual trap is to think of the RBI because ratings affect bank loans. Remember the split: rating agencies issue ratings on securities such as bonds and commercial paper, and the securities market regulator registers and supervises them. A second trap is in statement 2. 'Public limited company' describes the company's legal form. It does not mean the company is in the public sector.
Know more
What a credit rating agency (CRA) does. A CRA gives its opinion on how likely a borrower is to repay a debt instrument, such as a bond, debenture or commercial paper, in full and on time. Ratings run from AAA (highest safety) down to D (default).
Who regulates what
| Body | Role with CRAs |
|---|---|
| SEBI | Registers and regulates CRAs under the SEBI (CRA) Regulations, 1999. Sets a code of conduct, disclosure rules and rules on conflicts of interest. Can cancel a registration. |
| RBI | Accepts ratings from some CRAs (called External Credit Assessment Institutions, or ECAIs) when banks calculate capital under Basel norms. It does not license CRAs. |
Indian CRAs on SEBI's registered list: CRISIL, ICRA, CARE, Fitch Ratings India, Brickwork Ratings and SMERA. Some of these have been renamed since, and new agencies have been registered later.
Key facts to remember
- ICRA Limited: set up in 1991, listed on BSE and NSE since 2007, Moody's group holds a majority stake.
- Brickwork Ratings: based in Bengaluru. On 6 October 2022, a few months after this exam, SEBI cancelled its registration for lapses in disclosure and record-keeping. This was the first time SEBI cancelled a CRA's registration. In June 2023 the Securities Appellate Tribunal set the order aside, and SEBI then issued fresh directions in September 2023.
- Sovereign ratings of India come from global agencies such as S&P, Moody's and Fitch. Indian CRAs rate companies and their debt instruments.
Related terms not to confuse: credit information companies such as CIBIL keep credit scores for individual borrowers. The RBI regulates those companies. SEBI regulates CRAs.
NCERT Concepts to Revise
- Credit rating: All three statements are about agencies that issue credit ratings, so start with what a rating measures.
- Securities and Exchange Board of India: Statement 1 depends on which financial regulator has the legal mandate over rating agencies.
- Regulatory body: Helps you tell apart a statutory regulator that licenses an industry from a body that only uses that industry's output.