Purpose and Relevance

• Credit ratings assess the subsidiary’s creditworthiness and financial stability for lenders, investors, and regulatory bodies.
  
• A credit rating is often mandatory for raising debentures, bonds, or external commercial borrowings (ECBs).
  
• It enhances the transparency and trustworthiness of the subsidiary in the financial market.
  
• Ratings may be required for participation in public issues, loan syndication, or government tenders.
  
• Regulatory authorities such as SEBI, RBI, and stock exchanges rely on ratings for compliance assessments.
  

Applicability of Rating

• Credit rating is not compulsory for all subsidiaries by default.
  
• It becomes mandatory if the subsidiary issues listed debt instruments, raises ECB, or seeks funding from certain regulated entities.
  
• Listed subsidiaries must maintain ratings for their debt instruments as per SEBI’s Listing Obligations and Disclosure Requirements (LODR).
  
• NBFC subsidiaries or financial services arms require credit ratings for capital adequacy and regulatory compliance.
  
• Ratings may be voluntary if the subsidiary seeks to improve credit terms or market image.
  

Process of Obtaining a Credit Rating

• The subsidiary must approach an RBI-registered Credit Rating Agency (CRA) such as CRISIL, ICRA, CARE Ratings, or India Ratings.
  
• The process includes submission of audited financial statements, business model, management information, and projected cash flows.
  
• The CRA conducts a detailed analysis covering liquidity, solvency, business risk, and market position.
  
• An initial rating is assigned along with an outlook (e.g., stable, positive, negative).
  
• The subsidiary must pay a rating fee and enter into an agreement with the rating agency.
  

Periodic Review and Disclosure

• Ratings are subject to regular surveillance—typically annual reviews or earlier if material changes occur.
  
• Downgrades or upgrades must be promptly disclosed if the company is listed.
  
• Credit rating must be mentioned in offer documents, annual reports, and loan agreements if applicable.
  
• Any default in debt repayment or breach of covenants may trigger an automatic review.
  
• The CRA has the right to withdraw the rating upon non-cooperation or termination of agreement.
  

Impact on Financing and Compliance

• Higher-rated subsidiaries can avail loans at lower interest rates and enjoy better market confidence.
  
• Lenders use ratings to assess risk exposure and loan limits.
  
• Regulatory guidelines (such as those under ECB norms) restrict borrowing amounts based on rating levels.
  
• Unrated or low-rated entities may face restrictions or need additional collateral.
  
• Maintaining a strong credit rating helps in strategic planning, investor relations, and corporate governance.