Financial Institutions and Markets

The International Financial Services Centres Authority (IFSCA) in India is responsible for the regulation and development of financial products, financial services, and financial institutions in the International Financial Services Centre (IFSC) in India. Credit rating agencies (CRAs) play a significant role in the financial ecosystem within IFSCs.

Overview

Here is an overview of the status and regulatory framework for credit rating agencies under IFSCA:

1. Role of Credit Rating Agencies: CRAs assess the creditworthiness of issuers of debt instruments and provide ratings that indicate the issuer's ability to repay the debt. These ratings are crucial for investors to make informed decisions.
2. Regulatory Framework: The IFSCA has established a regulatory framework under International Financial Services Centres Authority (Capital Market Intermediaries) Regulations,2021 that aligns with global best practices to ensure that credit rating agencies operate in a transparent, accountable, and reliable manner. This framework is designed to maintain the integrity of the rating process and protect investors.
3. Registration and Regulation: Credit rating agencies operating within the IFSC need to be registered with the IFSCA. The regulatory framework includes provisions related to:
   
   • Minimum eligibility criteria for registration.
   • Norms for the rating process and methodologies.
   • Disclosures and transparency requirements.
   • Corporate governance and compliance standards.
   • Mechanisms for monitoring and enforcement.
4. Global Standards: The IFSCA's regulations for CRAs are influenced by international standards and practices, such as those set by the International Organization of Securities Commissions (IOSCO). This helps ensure that the ratings provided by CRAs in the IFSC are comparable with global benchmarks.
5. Operational Guidelines: The IFSCA provides detailed operational guidelines for CRAs, which include:
   
   • Procedures for rating assignments and monitoring.
   • Code of conduct for rating analysts and other staff.
   • Conflict of interest management.
   • Disclosure norms to enhance transparency.
   • Reporting requirements to the IFSCA.
6. Supervision and Enforcement: The IFSCA monitors the activities of registered CRAs to ensure compliance with regulatory norms. This includes periodic inspections, reviews of rating methodologies, and taking enforcement actions in cases of non-compliance.
7. Integration with Global Markets: The regulatory framework is designed to facilitate integration with global financial markets, allowing CRAs in the IFSC to cater to both domestic and international clients, thereby enhancing the global credibility and competitiveness of the Indian IFSC.

Key Definitions and Client Categories

A "credit rating agency" is defined as any entity engaged in rating securities or financial products. Eligible clients include:

• Non-residents of India
• Non-resident Indians
• Non-individual residents eligible for offshore investment under FEMA
• Individual residents eligible for offshore investment under the Liberalized Remittance Scheme of the RBI

Permissible Activities

1. CRAs must enter written agreements with clients, detailing rights, liabilities, and fees.
2. Clients must disclose past ratings and cooperate for accurate ratings.
3. CRAs must continuously monitor and review ratings and disclose changes publicly.
4. CRAs cannot withdraw ratings while obligations under rated securities are outstanding, except under specified conditions.

Structure and Net Worth Requirements

Entities eligible for registration include companies, LLPs, body corporates, and partnerships. Net worth requirements are:

• Indian units: USD 3 million
• Foreign entities: USD 6 million

Fees and Staff Requirements

• Application Fee: USD 1,000
• Registration Fee: USD 3,500
• Annual Fee: USD 3,500 (from the next financial year after approval)

Each CRA must appoint a Principal Officer with a relevant postgraduate degree and at least five years of experience. Sufficient qualified staff is mandatory.

Code of Conduct

1. Maintain due diligence, care, and independence.
2. Ensure an arm’s length relationship between rating activities and other operations.
3. Disclose rating methodology and avoid unfair competition.
4. Track client changes and respond promptly.
5. Disclose conflicts of interest and prevent misuse of information.

General Capital Market Intermediary Code of Conduct

1. Protect investors' interests and provide professional advice.
2. Maintain high standards of integrity and fairness.
3. Avoid manipulative or deceptive practices.
4. Handle investor inquiries and grievances efficiently.
5. Ensure confidentiality and avoid conflicts of interest.
6. Ensure internal control procedures and operational efficiency.

Tax Benefits

• 100% tax exemption on business profits for 10 out of the first 15 years.
• Reduced Minimum Alternate Tax (MAT) rate of 9% for IFSC units.

Overall, the IFSCA's regulatory approach aims to create a robust and credible rating ecosystem within the IFSC, fostering trust among investors and contributing to the overall development of the financial market in India.