Credit Rating Companies Regulation, 2016

# GOVERNMENT OF PAKISTAN
## SECURITIES AND EXCHANGE COMMISSION OF PAKISTAN

**Islamabad, the 5<sup>th</sup> August, 2016.**

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## NOTIFICATION

S. R. O. **729** (I)/2016. - In exercise of powers conferred by sub-section (4) of section 169 read with sections 68, 69, 75, 79, 80, 84 and 151 of the Securities Act, 2015, (Act No III of 2015), the Securities and Exchange Commission of Pakistan is pleased to make the following credit rating companies regulations, 2016, the same having been previously published vide Notification No. 1145(I)(2015), dated the November 17, 2015, and placed on the website of the Commission as required by sub-section (4) of the said section namely:—

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## CHAPTER I

### Preliminary

**1. Short title and commencement**- (1) These Regulations shall be called the Credit Rating Companies Regulations, 2016.

(2) They shall come into force with immediate effect.

**2. Definitions**.- (1) In these regulations, unless there is anything repugnant in the subject or context, —

(a) “Act” means the Securities Act, 2015 (Act No. III of 2015);

(b) “credit rating” means a process of evaluating credit worthiness of a person which expresses its ability or willingness to meet financial obligations in full and on time;

(c) “credit rating company” means a public company licensed as a credit rating company by the Commission under section 69 of the Act;

(d) “external member” means any person who has been appointed by credit rating company as member of its rating committee and has no direct or indirect association with the credit rating company or any of its directors and sponsors;

(e) “equity” means total assets minus total liabilities excluding surplus on revaluation of fixed assets;

(g) “substantial shareholder” in relation to a credit rating company, means a

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person who has an interest in shares of a company;

(i) the nominal value of which is equal to or more than ten per cent of the issued share capital of the company; or

(ii) which enables the person to exercise or control the exercise of ten per cent or more of the voting power at a general meeting of the company;

(h) “promoter or sponsor” means a person who has made an application to the Commission to form a credit rating company under these regulations and has contributed initial capital in the proposed company or a person who replaces him; and

(i) “rating” means an opinion regarding securities or a person expressed in the form of standard symbols or in any other standardized manner, assigned by a credit rating company and includes credit rating.

(2) Words and expressions used but not defined in these regulations shall have the same meaning as assigned to them in the Act, the Companies Ordinance, 1984 (XLVII of 1984), the Securities and Exchange Commission of Pakistan Act, 1997 (XLII of 1997) or Central Depositories Act, 1997 (XIX of 1997).

CHAPTER II

LICENSING REQUIREMENTS

3. Prohibitions. (1) No person shall act as or perform the functions of a credit rating company unless such person is licensed by the Commission under these regulations and the credit rating company licensed under these regulations shall not carry out any other regulated activities as defined in section 65 of the Act:

Provided that a credit rating company already registered under the Credit Rating Companies Rules, 1995 shall be required to obtain license under the Act within three months of coming into force of these regulation subject to payment of renewal fee as prescribed under these regulations: However during the said three months, existing credit rating company shall be deemed to be licensed as a credit rating company under these regulations.

Provided further that credit rating company registered under the Credit Rating Companies Rules, 1995 shall comply with all the requirements of these regulations within a period of one year from the date of coming into force of these regulations.

4. Eligibility criteria.- Any person may apply to the Commission for grant of license to act as credit rating company under these regulations, if such person fulfills the following conditions:

(a) has obtained permission of Commission under regulation (5);

(b) is public company incorporated under the Companies Ordinance, 1984 (XLVII of 1984);

(c) meets the financial resources requirement provided under these regulations;

(d) its promoters or sponsors, proposed directors, chief executive and chairman of the board of directors fulfil the Fit and Proper criteria as specified in Annexure C;

(e) its promoters or sponsors, substantial shareholders and directors have deposited their shares with Central Depository Company of Pakistan Ltd in an account marked as blocked and such shares shall not be sold or transferred without prior written approval of the Commission:

Provided that the directors holding qualifying shares, maximum up to 2% of total share capital shall be exempt from this requirement;

(f) its promoters or sponsors or substantial shareholders and directors have given an undertaking that they shall not enter into any agreement for sale or transfer of their shares in any manner without prior approval of the Commission;

(g) it has entered into a joint venture or technical collaboration arrangement with an internationally recognized credit rating institution:

Provided that the joint venture or technical collaboration arrangement should include comprehensive review of rating policies, procedures and methodologies of the company at least once every three years:

Provided further that the Commission may allow the company to terminate its joint venture or technical collaboration agreement with the international credit rating institution after the completion of five years of such collaboration if it deems that technical expertise have been transferred and retained by the domestic credit rating company;

Explanation.- For the purpose of the clause (g), the internationally recognized credit rating institutions mean foreign credit rating agencies specified by the Commission from time to time as internationally recognized credit rating institutions.

5. Permission to form a credit rating company.- (1) A person desirous of forming a credit rating company shall make an application to the Commission as set out in Form I along-with the documents specified in Annexure and receipt evidencing payment of non-refundable processing fee as specified in Schedule I.

(2) The Commission, while considering the application for permission under sub-regulation (1), may require the applicant to furnish such further information or clarification regarding its activities and businesses as it deems appropriate.

(3) The Commission, if it is satisfied that the person seeking permission to form the credit rating company has fulfilled the criteria in terms of these regulation may permit by an order in writing to establish a credit rating company.

(4) The permission granted under sub-regulation (3) shall be valid for a period of six months unless extended for a maximum period of further three months under special circumstances, on the application of the promoters made before the expiry of initial six months. During the validity of this permission, the promoters or sponsors shall get the credit rating company incorporated and submit an application to the Commission for grant of licence, after fulfilling all the conditions specified in these regulations

6. Conditions for grant of License.- (1) Subject to compliance with the provisions of the Act, the company shall apply to the Commission for grant of licence as a credit rating company in Form II along with documents specified in Annexure along with non-refundable fee as prescribed in Schedule I.

(2) The Commission shall, after making necessary inquiries and after obtaining such further information, as it may consider necessary, and if it is satisfied that each of its promoters or sponsors, directors, chief executive and chairman of the board of directors fulfils the terms and conditions mentioned in the Fit and Proper criteria given in Annexure-C, grant licence as per Form-A subject to compliance of all of following conditions-

(a) the company appoints its chief executive who does not hold such office in any other company;

(b) the company is not part of a group of companies already holding a licence, under these regulations, for credit rating company;

(c) that its sponsors shall have at all times representation of at least twenty per cent on the board of directors of the company;

(d) the company has put in place or has the capacity to put in place necessary infrastructure including but not limited to adequate office space, equipment and human resource with sufficient education, experience and expertise to perform the functions of a credit rating company;

(e) the company shall furnish evidence to the satisfaction of the Commission that the personnel employed by it as senior management officer possess sufficient educational qualifications and professional experience to undertake the credit rating business:

Provided that a new company shall furnish the evidence within 90 days of grant of licence;

(f) the company, its promoters or sponsors, its substantial shareholders, its chief executive and its directors shall furnish separate undertakings to the Commission that they shall comply in letter and spirit with the requirements of the Act, these regulations and the directions issued by the Commission:

Provided that the Commission, while considering the application for issuance of licence, may require the Company to furnish such further information or clarification regarding its activities and businesses as it deems appropriate:

Provided further that the Company shall, if so required, appear before the Commission for a representation through an officer duly authorized for this purpose in writing by the board of directors of the Company:

Provided further that while deciding to grant licence to a credit rating company, the Commission may seek additional information from other Government agencies/regulatory bodies including obtaining latest CIB Reports from the State Bank of Pakistan of the person and of the companies, firms, sole proprietorship etc. where the person was a chief executive, director (as a major shareholder, sponsor), partner or owner etc;

(g) all persons subject to fit and proper criteria shall submit an affidavit to the Commission affirming under the oath that the person and the companies, firms, sole proprietorship etc. where the person is a chief executive, director (other than nominee director), substantial shareholder, owner or partner etc. has no overdue payment of any financial institution; and

(h) the company shall comply with the conditions as set out in these regulations or any direction given by the Commission;

(3) The Commission may also conduct a pre-licence assessment or a visit of the premises of the applicant to verify the genuineness of information submitted and to ensure that it has deployed necessary infrastructure to carry out its functions as a credit rating company in a satisfactory and compliant manner.

(4) The licence shall remain valid for a period of one year unless it is restricted, suspended or cancelled earlier by the Commission.

(5) Without prejudice to the conditions prescribed under sub regulation (2) above, the Commission may, while granting licence, impose such additional conditions, as it may deem necessary.

7. Renewal of licence.- (1) A credit rating company shall, one month prior to the date of expiry of its licence, apply to the Commission in Annexure A for renewal of its licence along with all the documents as specified in Annexure B and evidence of payment of non-refundable renewal fee of such amount as prescribed in Schedule I.

(2) A credit rating company shall submit the following information along with the application for renewal of its licence,- (a) any change regarding the status of the applicant, its promoters or sponsors, directors or any change in controlling interest in the sponsors; and (b) an undertaking on a stamp paper specifying that the credit rating company, its directors, promoters or sponsors, chief executive and senior management officers are in compliance with all the requirements for renewal of licence.

(3) The Commission upon being satisfied that the applicant continues to meet the requirements for licencing, shall renew the licence for one year and issue a certificate of renewal of licence to the applicant as prescribed in Form B.

(4) Where the application for renewal of licence is made within the provided time but has not been decided by the Commission, the licence of the credit rating company shall continue to be valid until the application for renewal is decided by the Commission.

(5) While renewing the licence of a credit rating company the Commission may, in addition to the criteria laid down for grant of licence, also take into account the past performance of the credit rating company.

8. Procedure where licence is not granted or renewed.— (1) The Commission, after giving a reasonable opportunity of hearing to the applicant, may refuse to grant or renew a licence if in the opinion of the Commission such applicant does not fulfill the requirements prescribed under the Act and these regulations and where the Commission after taking into account the facts, is of the view that it is not in the public interest or in the interest of the capital market to grant or renew a license.

(2) The decision of refusal to grant a licence or refusal of renewal of license shall be communicated to the applicant stating therein the grounds on which the application has been rejected.

(3) A credit rating company whose application for renewal of licence is refused by the Commission under sub-regulation (1) shall, from the date of receipt of the decision of the Commission, not act as credit rating company and shall not accept any new rating assignment.

(4) The Commission may allow a credit rating company whose application for renewal of license is refused to continue to complete the rating of all the pending assignments if it considers that doing so is in the interest of the capital market in particular

and the public in general.

9. Disciplinary proceedings.- (1) The Commission may take disciplinary action, including suspension or cancellation of license, against the credit rating company in accordance with the provisions of the Act.

(2) The credit rating company may voluntarily apply to the Commission for cancellation of its licence at least three months prior to the date of expiry of its licence.

(3) The Commission may cancel the license of a credit rating company subject to provision of the Act or where the company has amended its Memorandum and Articles of Association to act as a credit rating company.

(4) The Commission may, upon being satisfied that the credit rating company has completed all the formalities for closure of business, accept the application made under sub-regulation (2) and cancel the licence of such credit rating company.

(5) Upon cancellation of license, name of the credit rating company shall be excluded from the register of the regulated persons maintained by the Commission under section 72 of the Act.

CHAPTER III

RESTRICTIONS, DUTIES AND OBLIGATIONS OF CREDIT RATING COMPANIES

10. Restrictions on Credit Rating Companies.- (1) Shareholding requirement,-

(a) No person other than the following shall, directly or indirectly, acquire or hold shares of a credit rating company:

(i) a financial institution as defined under clause (15A) of sub-section (1) of section 2 of the Companies Ordinance, 1984 (XLVII of 1984);

(ii) an insurance company;

(iii) a licensed securities exchange;

(iv) a company licensed by the Commission to provide depository, clearing or settlement services in the securities market;

(v) a foreign credit rating agency recognized by or under any law for the time being in force in the country of its incorporation;

(vi) an institution as may be notified by the Commission from time to time; or

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(vii) an individual meeting fit and proper criteria as specified in these regulations.

(b) Shareholding in a credit rating company shall be subject to the following limits:

(i) a single shareholder, directly or indirectly, shall not hold more twenty percent shares in a credit rating company;

(ii) individuals collectively, directly or indirectly, shall not hold more than 25% shareholding in a credit rating company;

(iii) foreign credit rating agency may hold up to 100% shares in credit rating company:

Provided that the shareholders of existing credit rating company shall have to immediately comply with the requirements mentioned in sub clause (a) and (b) above if they wish to dispose-off their shareholding.

(2) The credit rating company shall not provide rating services to a company where any of its director is holding a directorship or is a substantial shareholder or is in any way interested in such company subject to rating:

Provided that the directors of the credit rating company, prior to the every meeting of board of directors, shall give an undertaking that they have no conflict of interest with any of the rating mandate being carried out by the company.

Provided further that this restriction shall not apply to a director of a credit rating company nominated as a director of an entity by the Federal Government or a Provincial Government or an institution which is directly or indirectly owned or controlled by the Federal Government or a Provincial Government.

(3) A credit rating company must not accept a rating assignment where a person directly or indirectly, holding more than 10% of share capital of the credit rating company also holds directly or indirectly 10% or more of the share capital of the entity which is subject to rating or of the entity which issued the instrument subject to rating by the credit rating company.

(4) A credit rating company shall not change its shareholding without prior written approval of the Commission.

(5) No director, officer or employee of the credit rating company shall communicate the information, acquired by him for use for rating purposes, to any other person except where required under law to do so.

(6) A proposed director, chairman or chief executive of the credit rating company shall not assume the charge of office until its appointment has been approved by

the Commission in writing. The application for seeking approval of the Commission shall be submitted by the credit rating company along with the requisite information required under the Fit and Proper Criteria along-with the undertakings specified therein:

Provided that the existing credit rating company shall take prior approval from the Commission for re-appointment of its existing chief executive and its board of directors.

(7) A credit rating company shall not,- (a) rate its own instruments; (b) hold or transact in trading instruments presenting a conflict of interest with credit rating company; (c) rate its associated companies and undertakings or the instruments issued by them; (d) disclose or discuss with outside parties or make improper use of the non-public information which has come to its knowledge during business relationship with the customer; (e) issue rating for entities or obligations for which it does not have appropriate information, knowledge and expertise; and (f) accept a rating assignment where a customer has terminated a rating contract with its existing credit rating company before its expiry, unless such customer obtains No Objection Certificate from its existing credit rating company or ensures in writing that it shall continue credit rating with its existing credit rating company for a period of at least one year. A clause to this effect shall be included by the credit rating company in each rating agreement; (g) make unsubstantiated claims, in order to induce customers, about qualifications of its professional staff or its capabilities to render certain services or its achievements concerning services rendered to other customers; (h) get involved in acts of frauds, misrepresentations, oppressive or unethical practices, nor shall solicit the customers of any other rating company on implicit or explicit assurance of higher rating or any other undue benefit; (i) publish, circulate or distribute any advertisement or any information which is false, misleading or deceptive; (j) willfully make false statements or conceal any material fact in any document, report or statement furnished to the Commission; and (k) make proposals or recommendations regarding the activities of

rated entities that could impact a credit rating of entity subject to rating

11. Duties and Obligations of a credit rating company.- A credit rating company licensed under these regulations shall fulfil the following obligations:

(A) Conduct of Business: A credit rating company shall,

(a) fulfill its obligations in a fair, efficient, transparent and ethical manner and render high standards of services in performing its functions and obligations;

(b) engage independent foreign or local experts at least once in every three years to conduct comprehensive review of its rating policies, procedures and methodologies with a view to revamp its existing rating system,; Terms of reference of the foreign or local experts shall be finalized with the prior written approval of the Commission;

Provided that this clause shall not be applicable to a credit rating company which is continuing its joint venture or technical collaboration arrangement as prescribed in regulation 4(g);

(c) employ analysts who meet the fit and proper criteria annexed as Annexure F to these regulations and are competent and qualified to carry out rating assignments and subsequent monitoring of the ratings;

(d) ensure that its analysts and all its relevant officers maintain sufficiently high level of analytical and monitoring standards and possess the requisite skill and expertise. A credit rating company must consider the number of entities/instrument/issues that can be effectively covered by a particular analyst, taking into account a broad spectrum of variables, including the size and complexity of the particular issue and the experience and expertise of the analyst;

(e) employ sufficient human resource which is adequately trained to efficiently perform its functions as credit rating company and arrange/conduct training programs for its employees from time to time for capacity building and skill development;

(f) assist investors and other users of rating in developing a greater understanding of the rating by disclosing in plain language among other things, the nature and limitations of the ratings and the risk of unduly relying on them to make investment or other financial decisions;

(g) establish a cell within its organization responsible to communicate with market participants and the public about any questions, concerns or complaints that the credit rating company may receive;

(h) ensure that the criterion for constitution of the rating committees is capable to promote continuity and to discourage bias in the rating process;

(i) considering the adequacy of its staffing strength, use its best endeavor to subject its rating analysts to an appropriate rotation mechanism that provides for gradual change in rating teams;

(j) engage with the issuer and the debt securities trustee, to remain updated on all information pertaining to the rating of the entity/instrument;

(k) upon the occurrence of default of an entity/instrument rated by it, the credit rating company shall prepare a descriptive default note and disseminate the same to the securities exchange, the Commission, State Bank of Pakistan, , Mutual Fund Association of Pakistan, Pakistan Banking Association, NBFI and Modaraba Association of Pakistan and publish the same on its website for public information. The default notes must describe the definition of default, the reasons for the defaults, historical transitions and the factors overlooked, if any, by the credit rating company;

(l) publish annually, within one month of calendar year, a comprehensive default and transition study developed in line with methodologies practiced by credit rating agencies globally. The annual default and transition study must contain cumulative default rates (CDRs) and transitions for each rating grade for periods 1, 3 and 5 years

(m) ensure strong firewalls to prevent disclosure or use of the said non-public information by the related parties or their personnel in cases where a credit rating company is a parent, subsidiary, joint venture partner or affiliate of any organization that might benefit from the non-public information available with the credit rating company;

(n) formulate necessary code of conduct for its employees regarding handling of the non-public information which should contain as a minimum the requirements set out in Annexure I;

(o) except as required under these regulations and without obtaining prior written approval of its customers, not share with or disclose to media or any other party including its other customers, any confidential information about its customers, which has come to its knowledge in the course of the rating process;

(p) clearly indicate the attributes and limitations of each rating and to the extent to which it has verified information provided by the rated entity;

(q) prohibit its employees and analysts from soliciting money, gifts or favors from anyone with whom the credit rating company conducts business;

(r) ensure that an analyst or employee has not had a recent employment or other significant business or personal relationship with the rated entity that may cause or may be perceived as causing a conflict of interest;

(s) observe a disengagement period of minimum two years between the notification of the unsolicited rating and acceptance of the assignment of the solicited rating, where an unsolicited rating becomes a solicited rating;

(t) ensure that any advertisement is written in clear language and is not such which may prejudice interest of any person or investors in general;

(u) maintains principal of integrity in seeking rating business: and

(v) obtain prior approval from the Commission for offering of any new rating product/services.

(B) Internal control, compliance policies and procedures: A credit rating company shall, -

(a) have internal control procedures or policies and financial and operational capabilities which can be reasonably expected to protect its operations, its customers;

(b) develop a human resource policy encompassing the recruitment, selections compensation, promotions, , trainings, and other human resource related matters;

(c) establish a human resource committee headed by an independent director of the credit rating company, to ensure implementation of human resource policy and manual for its employees;

(d) establish and maintain comprehensive risk management systems and controls to enable it to identify, assess, mitigate, control and monitor risks arising from its activities;

(e) frame policies and procedures to ensure its own and its employees’ compliance with the regulatory requirements and inculcate a culture

of compliance of the regulatory requirements through ongoing education and training of its employees;

(f) establish policies, procedures and controls which should require proper disclosures by employees and directors regarding their actual or potential conflict of interest to the compliance officer or the credit rating company;

(g) establish policies and procedure governing investments and trading in securities by its employees and for monitoring the same to prevent insider trading, market manipulation or any other market abuse;

(h) establish policies and procedures for an analyst who intends to join an entity of which he/she was been part of the rating process ;

(i) frame and implement a whistle-blower protection policy encouraging all employees to intimate the compliance officer of any unethical practice or misconduct relating to the credit rating, by another employee of the credit rating company that came to his knowledge;

(j) ensure that all policies are duly approved by its board of directors and shall define clear lines of responsibility, authority and tasks that are adequately assigned to employees;

(k) ensure that all policies are widely disseminated for compliance by all employees and is reviewed for appropriateness and sufficiency by the competent authority at least once every year;

(l) ensure that a periodic or annual review of all policies and assessment of overall level of compliance of the credit rating company is carried out by the internal audit department, which reports directly to the board of directors or its audit committee;

(m) promptly investigate, in the event of a misconduct or a breach of the policies, procedures and controls, and take appropriate steps to rectify any weaknesses to prevent any recurrence along with suitable punitive action against the responsible employee(s);

(n) ensure that all reported events are investigated promptly by the compliance officer in accordance with the provisions provided in the whistle-blower policy; and

(o) ensure that all investigations are completed within the time period specified in the whistle-blower policy;

(C) Quality of the rating process. A credit rating company shall,-

(a) develop well defined rating criteria, methodologies and procedures for solicited and unsolicited credit ratings for each class of entity,

instrument and issue and such rating criteria, methodologies and procedures shall act as guiding principles for the analysts employed by the credit rating company;

(b) proactively update the criteria, methodologies and procedures taking into account changes in the market environment;

(c) review the rating criteria and methodologies at least once in a year and update accordingly, if required;

(d) ensure that its analysts follow the defined rating criteria, methodologies and procedures carefully, uniformly and in a consistent manner;

(e) establish a rating committee consist of at least five members and duly approved by Board of directors;

(f) ensure that the members of rating committee including external members are fit and proper as prescribed in Annexure C;

(g) ensure that at least one-third or two members of the rating committee, whichever is higher, including the Chairman of the committee are external members who are appointed with the prior approval of Commission to ensure objectivity and effectiveness of the rating committee;

(h) ensure that any remuneration/fee arrangement for external member, if any have been duly approved by its board of directors and shall not be construed in any manner as employment of rating company:

(i) ensure that the remuneration/fee arrangement for external member of the rating committee shall not be linked to the business performance of the credit rating company and must be arranged so as to ensure their independence ;

(j) ensure that rating committee shall assign and decide on each credit rating and all rating decisions, including decisions regarding changes in the ratings;

(k) ensure that the quorum of the rating committee shall be at least three members including one external member as chairman of the rating committee;

Provided that if the quorum is not present due to an emergency, the chairman of the rating committee, in consultation with at least one member of the rating committee, may take decisions and record in writing the decisions and the circumstances of the emergency and circulate the document to other members of the

rating committee;

(l) ensure that the rating committee act with due care, skill and diligence in carrying out its duties and responsibilities;

(m) ensure that rating decisions are consistent with the methodologies, procedure and process used in the rating;

(n) ensure that proper record of meetings of rating committee including detailed minutes and its rating decisions are maintained along with rational for assigning the rating, which shall be available for review and inspection by the Commission

(o) keep the following records in support of each credit rating and review thereof:

(i) summary of discussions with the issuer, its management, auditors and creditors which have a bearing on the credit rating;

(ii) decisions of the rating committee, including voting details and notes of dissent, if any, by any member of the rating committee; and

(iii) where a quantitative model is a substantial component of the rating process, rationale for any material difference between the rating implied by the model and the rating actually assigned.

(p) ensure that record of all ratings whether active, withdrawn or matured, is maintained for a period of not less than ten years and in case of instrument rating/grading, the time period of ten years shall be reckoned from the date of maturity of such instrument;

(q) establish a set of transparent policies, controls and procedures in order to ensure consistency of its rating operations;

(r) assess whether the existing rating criteria, methodologies and procedures for ratings of structured products are appropriate when the risk characteristics of the assets backing a structured product change materially and where the complexity or structure of any structured product or the lack of information about the assets backing the structured product raise the questions as to whether the credit rating company has the capability to determine a credible rating for the security, the credit rating company should refrain from assigning a rating;

(s) establish a criteria group, comprising of at least two senior analysts having minimum relevant experience of at least five years and headed

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by CEO, which shall be responsible for formulating and reviewing such criteria, methodologies and procedures as specified in Annexure G to these regulations and such group shall ensure that all new ratings criteria, methodologies and procedures and subsequent amendments therein have been made after careful and thorough analysis from both analytical and market perspective; and

(t) the analysts shall submit their initial analysis reports along with the initial indicative ratings to the rating committee.

(D) General: A credit rating company shall-

(a) acquire and maintain membership of the regional or international association of credit rating agencies and follow their best practice guidelines;

(b) unless provided otherwise in these regulations, encourage to adopt all the requirements of the Code of Conduct for credit rating companies issued by International Organization of Securities Commissions;

(c) encourage to adopt the Code of Corporate Governance issued by the Commission for listed companies;

(d) take reasonable measures to protect its property and records belonging to or in possession of the credit rating company from fraud, theft or misuse;

(e) participate in public awareness programs with other market participants for the development of the capital market.

(E) Submission of ratings reports and other information to the Commission.-

(a) A credit rating company shall furnish to the Commission such other documents, information or explanation relating to its affairs as the Commission may, at any time, by order in writing, require;

(b) A credit rating company shall report to and file with the Commission following information/documents,-

(i) a copy of the rating criteria, methodologies and policies and any subsequent modification or change therein as and when it takes place;

(ii) intimation regarding designation of the compliance officer within seven working days of the date of such designation;

(iii) intimation of cessation of employment of the compliance officer within seven working days of the date of such

cessation; and

(iv) certified true copy of the minutes of the meetings of its board of directors and that of the general meetings within seven days of the confirmation of the same.

(F) Appointment of the Compliance Officer-

(a) The credit rating company shall designate an officer as a compliance officer who shall be responsible for monitoring compliance of the credit rating company with the applicable regulatory regime;

(b) In order to enable the compliance officer to discharge his duties properly and independently, the credit rating company shall ensure that:

i. the compliance officer has the necessary authority, resources and access to all the relevant information; and

ii. the compliance officer has direct line of reporting, relating to his duties as compliance officer, to the board of directors of the credit rating company, in addition to his regular reporting on carrying out of his routine duties to the senior management.

(c) The credit rating company shall ensure that compliance officer shall not participate in rating operations of the company and shall be responsible for monitoring compliance by the credit rating company with the applicable regulatory regime, particularly compliance relating to dissemination, reporting and filing, and implementation of the policies relating to rating processes and employees, and redressal of customers’ and other stakeholders’ grievances and complaints;

(d) The compliance officer shall immediately report any non-compliance with these regulations to the board of directors shall immediately take steps to ensure compliance with the regulatory regime;

(e) Where the credit rating company fails to take steps as required under sub-regulation (c), the compliance officer shall immediately inform to the Commission of the non-compliance by the credit rating company;

(f) The compliance officer shall fulfil the fit and proper criteria and must have at least three years of experience in audit, finance or compliance function;

(g) The compliance officer shall prepare quarterly compliance reports which shall be submitted to the board of directors of the credit rating company.

12. Independence and Conflict of Interest: (1) The credit rating company shall ensure that;

(a) at least one third of its board of directors are independent directors;

Explanation: For the purpose of this clause, the expression "independent director" means the same as provided in clause (i) (b) of the Code of Corporate Governance for listed companies;

Provided that in case of any ambiguity in determining independence of a person for the purposes of these regulations, the decision of the Commission shall be final and binding upon the credit rating company.

Provided further that the existing credit rating company shall ensure compliance with above stated clause latest by January 31, 2017 or at the due date of AGM whichever is earlier;

(b) an independent director shall be appointed in the following manner:

i. a credit rating company shall, solely or jointly with other licenced persons, maintain a panel of fit and proper persons suitable for appointment of independent directors;

ii. a minimum of two names from the panel to be maintained under clause (i) above shall be submitted by the credit rating company to the Commission for each vacancy, for its approval. The credit rating company shall ensure that such persons are selected from relevant diverse fields of work with appropriate qualification and experience;

iii. the Commission may, if satisfied that a person is suitable for appointment as independent director grant its approval for the appointment of the selected person as independent director by credit rating company:

Provided that where the Commission is not satisfied about the suitability of the proposed persons for appointment as a director, it may refer the matter back to the credit rating company for proposing other names after following the due process.

iv. unless provided otherwise, the term of the independent directors so appointed shall be the same as that of the other directors;

v. an independent director may resign or be removed by the board of directors of the credit rating company with prior written approval of the Commission if such persons fail to meet fit and proper criteria:

Provided that the Commission may direct credit rating company to remove an independent director from his/her office if the Commission

consider it appropriate to do so in public interest or in interest of capital market.

vi. any vacant position of an independent director shall be filled in the similar manner as provided for initial appointment of an independent director

(c) At least one independent director shall be present in the meeting of board of directors of a credit rating company to constitute the quorum;

(d) The chairman of the board of directors of a credit rating company shall be from amongst the independent directors;

(2) The credit rating company shall ensure that;

(a) directors on its board shall not be involved in the rating process and shall provide an undertaking to this effect at the time of appointment as directors on the board:

Provided that CEO being deemed director, may be part of the rating committee subject to the condition that his shareholding, directly or indirectly, in the credit rating company is less than 5% of the share capital of the company;

(b) its rating committee is able to perform its duties free of undue intervention or influence from its shareholders, its management or its board of directors;

(c) it has not appointed any individual as a member of a rating committee who has or is perceived to have a business development function of the credit rating company; or who initiates or participates in a discussion regarding fee or payment with any customer of the credit rating company;

(d) it shall not provide consultancy/advisory services or other services to any of its customers or to any of its customers’ associated companies and associated undertakings that is being rated or has been rated by it during the preceding three years unless it has adequate mechanism in place ensuring that provision of such services does not lead to a conflict of interest situation with its rating activities;

(e) it has included a statement in each rating report that the credit rating company, the analysts involved in the rating process and members of its rating committee do not have any conflict of interest relating to the rating done by them. In case there is any conflict of interest, the credit rating company shall disclose the fact in the respective rating report, nature of such conflict of interest and its impact on the rating grade assigned;

(f) it has disclosed in the rating report if a shareholder directly or indirectly holding 10% or more of the share capital of credit rating company also holds

directly or indirectly 10% or more of the share capital of the entity which is subject to rating or the entity which issued the instrument subject to rating by the credit rating company;

(g) it has made the reporting lines and compensation arrangements for its employees in a way to eliminate or effectively manage actual and potential conflicts of interest. An analyst must not be compensated on the basis of revenue generated from the entities rated by him;

(h) it shall conduct periodic reviews of compensation policies for analysts and other employees who participate in or who might otherwise have an effect on the rating process to ensure that these policies do not compromise the objectivity of the credit rating company’s rating process;

(i) the rating assigned to an entity or instrument should not be affected by the existence of a business relationship between the credit rating company and the entity or any other party, or the non-existence of such a relationship;

(j) an analyst or any of his family members have any interest in a rating, shall not be involved in such rating process;

(k) the analysts and members of the rating committee including the external members have submitted statement about all the conflicts of interest, including those of their family members, if any, to the officer designated by the credit rating company for the purpose; and

Explanation: for the purpose of above clause, the term “family members” shall include only those family members who are dependent on the analyst and members of the rating committee;

(l) the analysts or any of their family members shall not buy or sell or engage in any transaction in any security which falls in the analyst’s area of primary analytical responsibility. This clause shall, however, not be applicable on investment in securities through collective investment schemes.

13. Contents of the Rating Agreement.- (1) A credit rating company shall not accept any rating assignment except through a rating agreement in writing and the rating agreement must contain all the necessary provisions including but not limited to the following:

(a) requiring the customer to provide the credit rating company true, accurate, complete, and updated information to enable it to arrive at and maintain a fair and true rating of the customer and/or the instrument, as the case may be;

(b) empowering the credit rating company to call and obtain, any time during the validity period of the agreement or during the tenure of the instrument, all such information as deemed necessary by it for conducting effective and