The Criteria set out in this Part shall be applicable to bodies corporate carrying on business as a Credit Rating Agencies.

01 (1) A Registered Credit Rating Agency shall not appoint an individual as a director or a person involved in the rating process, if such person has been;

(a) convicted by any Court of Law in Sri Lanka or abroad, subsequent to a finding of guilt for the commission of any offence which involves fraud, deceit or dishonesty; or

(b) found to have committed or been connected with the commission of any act which involves fraud, deceit or dishonesty by any regulatory or supervisory authority;

1. established by law in Sri Lanka or abroad; or
2. constituted under law as a commission of inquiry, tribunal or other similar body; or
3. by any professional body which in the opinion of the SEC is of an established and credible stature; or

(c) where a commission of an offence by such person has been compounded in terms of Section 51A of the SEC Act during the past 3 years, preceding the date of the appointment; or

(d) found guilty of a capital market offence by a Court of Law in terms of the SEC Act, or the Securities Law of any other country;

unless the prior approval of the Commission is obtained for such appointment. The Commission on an application made under this provision by a Registered Credit Rating Agency may grant approval for such person to be appointed notwithstanding the above said prohibition under exceptional circumstances. 01

(2) (a) A Registered Credit Rating Agency shall not allow an individual to continue as a director or a person involved in the rating process on behalf of a Credit Rating Agency, for a period as determined by the Commission, if such person, subsequent to his appointment as a director or a person involved in the rating process has been;

1. convicted by any Court of Law in Sri Lanka or abroad subsequent to a finding of guilt for the commission of any offence which involves fraud, deceit or dishonesty; or
2. found to have committed or been connected with the commission of any act which involves fraud, deceit or dishonesty by any regulatory or supervisory authority;
   1. established by law in Sri Lanka or abroad; or
   2. constituted under law as a commission of inquiry, tribunal or other similar body; or
   3. by any professional body which in the opinion of the SEC is of an established and credible stature; or

iii. where a commission of an offence by such person has been compounded offence in terms of Section 51 A of the SEC Act; or

iv. found guilty of a capital market offence by a Court of Law in terms of the SEC Act, or the Securities Law of any other country;.

01 (2) (b) For the avoidance of doubt, the period in which a person described in 01 (2) (a) above shall be barred from functioning as a director or a person involved in the rating process for and on behalf of a Registered Credit Rating Agency may be;

1. for a period of months or for a period of years with a right to reapply at the end of the said period; or
2. a permanent bar from the industry; or
3. for a period from acting in a supervisory capacity or from performing a particular duty;

depending on the gravity of the offence, the impact of such offence on the market or other factor which the Commission shall deem to be relevant considering the circumstances surrounding the commission of such offence.

03. The applicant shall have at least two persons in its employment with the qualifications and experience set out in the criteria set out herein to act as rating analysts. The SEC may direct an increase in the number of such qualified personnel if the volume of the business proposed to be undertaken or undertaken by such Credit Rating Agency increases.

04.(a) The applicant shall always maintain adequate financial human and other resources sufficient to carry out the business as a Credit Rating Agency.

(b) A Credit Rating Agency shall appoint a Compliance Officer with qualification and experience the criteria set out herein who shall be responsible for ensuring compliance procedures and practices of the Credit Rating Agency.

05. A Credit Rating Agency shall keep the SEC informed of the percentage holding in it by its parent/owning company(s), subsidiary companies, associate companies and partnerships and of shareholders holding more than 20% or more of its equity.

06.(a) The Commission shall not consider an application made for the registration of a Credit Rating Agency unless the applicant is promoted by persons belonging to any of the following categories;

1. A bank regulated by the Central Bank of Sri Lanka; or
2. A foreign bank operating in Sri Lanka with the approval of the Central Bank of Sri Lanka; or
3. A foreign Credit Rating Agency recognized in the country of its incorporation, having at least five years experience in rating securities.

(b) The promoters of the applicant shall collectively hold at least 30% of the total paid up capital of the applicant for a minimum period of five years.

07. A person registered as a Credit Rating Agency shall ensure continued compliance with the following requirements:

(1) Financial /Disclosure Requirements

Capital Requirements –

1. A Credit Rating Agency will at all times maintain the Net Capital stipulated by the SEC from time to time.
2. A Credit Rating Agency will at all times, maintain Liquid Capital as stipulated by the SEC from time to time.

(2) Professional Indemnity Policy

A Credit Rating Agency shall at all times maintain a Professional Indemnity Policy with an approved insurer. The policy should cover legal liability for claims against the Credit Rating Agency arising out of its business as a Credit Rating Agency. Without prejudice to the generality the policy shall include the following:

1. The Professional Indemnity Policy shall be for a minimum amount of Rupees 15 Million or 20% of the annual revenue of the Credit Rating Agency rounded to the closest Rs.5 Million.
2. The excess under the policy shall be for no more than 10% of the policy cover with a maximum excess of Rupees 2.5 Million.
3. SEC shall be notified of events reportable under the policy to the insurance company.
4. A copy of policy or cover note until issued is to be lodged with the SEC.

(3) A Credit Rating Agency shall at all times have appropriate staff and systems to monitor compliance and conflicts of interest.

(4) All ratings completed are to be published on the Credit Rating Agency’s web site unless the rating is a result of a request for a private rating. For the avoidance of doubt, any rating given to an instrument intended to be issued to the public or to qualify an instrument shall be published on the website.

(5) All open ratings or changes thereto must be lodged monthly with the SEC. A copy of all listed securities’ rating is to be copied to the SEC when completed.

(6) A Credit Rating Agency shall inform the SEC immediately if Liquid Capital falls below 120% of the required Liquid Capital or if Liquid Capital has fallen by over 50% since it was last reported to the SEC.

08. A Credit Rating Agency shall execute a written contract prior to carrying out any business for and on behalf of a client in its capacity as a Credit Rating Agency, containing the terms and conditions agreed to between the parties including the procedure to be followed in carrying out a rating, the fees to be charged by the Credit Rating Agency and shall ensure that such procedure is complied with uniformly in respect of all rating activities carried out by such company. Such contract shall not be modified in any way other than in writing.

09. (a) The applicant shall have formulated in writing its rating criteria and any amendments made there to from time to time. The rating criteria and methodology must be forwarded to the Commission together with the application for registration. Upon completion of the registration process this criteria must be made readily available to the public free of charge and shall be published on the company web-site.

including the introduction of any new rating instruments. 

Attorney-at-Law) that they will not engage in the rating process of securities issued by companies in which they have any interest as shareholders or otherwise. The Commission has to be informed of the appointment of any new members to the Rating Committee.

10.(a) A Credit Rating Agency shall engage solely in the business of operating a Credit Rating Agency;

(b) The directors and the employees of the Credit Rating Agency and the members of the Rating Committee shall not have transactions with companies whose securities are rated by them except for those entered into on an “arm’s length” basis.

Such “arm’s length” transactions would include transactions as a subscriber or consumer of a utility company and a holder of a current account with a commercial bank, or a holder of an insurance policy with an insurance company.

However, all such arm’s length transactions and the attendant terms and conditions of such transaction, inclusive of all such transactions entered into by the Credit Rating Agency itself as a body corporate, (i.e. instances where a Credit Rating Agency, a director or employee or member of the rating committee obtains a loan or borrowing facility from such company whose securities are being rated) shall be strictly disclosed to the Compliance Officer, who shall take note of same.

(c) A Credit Rating Agency’s disclosures of actual and potential conflicts of interest to the client should be complete, timely, clear, concise and specific.

(d) A Credit Rating Agency shall demonstrate the organization’s independence from the companies it rates if and when required to do so by the Commission;

(e) A Credit Rating Agency shall ensure that its rating analysts owning any shares in any corporate entity or business firm shall refrain from participating in the rating process of such corporate entity or business firm;

(f) A Credit Rating Agency shall ensure that they do not carry out any activities which could cause a conflict of interest in terms of its credit rating functions;

(g) No employee of the Credit Rating Agency with the “capacity to influence” a rating shall participate in or otherwise influence the determination of the Credit Rating Agency’s rating of any particular entity or obligation.

An employee shall be deemed to have the “capacity to influence” the same in circumstances which has potential to impair his independence which shall include the circumstances set out below, where he;

1. owns securities of the rated entity or any entity related and/or connected thereto;
2. has had employment or other significant business relationship with the rated entity within the six months immediately preceding such rating;
3. has an immediate relation (i.e. spouse, partner, child, sibling) who currently works for the rated entity; and
4. has any other relationship with the rated entity or any agent of the rated entity that could in the particular circumstances be perceived as presenting a conflict of interest.

(h) No Credit Rating Agency shall rate a security issued by an entity which is;

1. a borrower of its promoter, or
2. a subsidiary of its promoter, or
3. an associate of its promoter, if
   1. there are common chairman, directors between Credit Rating Agencies and these entities.
   2. there are common employees.
   3. there are common chairman, directors, employees on the rating committee.

(i) No Credit Rating Agency shall rate a security issued by its associate or subsidiary rating agency or if its rating committee has a chairman, director or employee who is a chairman, director or employee of any such entity.

(j) A Registered Credit Rating Agency shall provide for an independent review panel to handle appeals by the clients who are dissatisfied with the rating. Such review panel shall consist of minimum three qualified persons in terms of 02 above and shall be independent from the issue and the original rating panel.

(k) In the event there is an appeal, it is required to publish the report of the review panel on the website of the Credit Rating Agency.

11. A Credit Rating Agency shall ensure that their directors and staff act with due diligence and a reasonable degree of care in carrying out their functions.

12. A Credit Rating Agency shall provide the information set out below;

(a)(i) a ‘Financial Report’ prepared on a quarterly basis. The report shall be submitted to the Commission by the twentieth day of the following month;

(ii) the Financial Report shall-

• conform to the Sri Lanka Accounting Standards In the case of a holding company financial information of the group and the said holding company shall be set out separately;
• be signed by a director and its Chief Executive Officer;
• be endorsed with a certification by the directors that ‘The information contained in the Report is accurate and is subject to audit;

(b) audited accounts prepared in accordance with the Sri Lanka Accounting Standards. The accounts shall be submitted to the Commission within a period of six months from the close of each financial year; and

(c) all audit and non-audit services carried out by the Auditors of the Credit Rating Agency for the agency itself together with the fees and expenses charged should be disclosed separately in the relevant Audited Accounts.

13. A Credit Rating Agency shall have an internal Compliance Manual applicable to its directors and employees which sets out adequate compliance procedures and practices to ensure that the directors and employees of the Credit Rating Agency do not contravene the provisions of the SEC Act, Part V to the Schedule to the SEC Act, criteria stipulated hereunder or any other Directive issued by the Commission from time to time;

(a) A Credit Rating Agency shall be required to instruct the Compliance Officer in writing to immediately inform the Commission in writing where any member of the staff or a director contravene the provisions of the SEC Act, Part V of the Schedule to the SEC Act, standards stipulated hereunder or any other Directive issued by the Commission from time to time; and

(b) The Compliance Officer of every Credit Rating Agency shall make an Annual Compliance Report setting out the extent of compliance with the SEC Act, Part V of the Schedule to the SEC Act, standards stipulated hereunder or any other Directive issued by the Commission from time to time and forward same to the SEC signed by a director and the Chief Executive Officer within 45 days after the closure of each financial year.

14.(a) A Credit Rating Agency shall establish and implement good business practices and follow just and fair principles in the conduct of business.

(b) A Credit Rating Agency shall comply with Codes and Best Practices applicable to the activities of a Credit Rating Agency as may be issued by the Commission or determined by the Commission to be applicable.

(c) A Credit Rating Agency shall make full and material written disclosure to the public of the ratings carried out by them and the key elements underlying the decision and also the bases for the same.

(d) A Credit Rating Agency shall ensure that their rating analysts use reasonable care and exercise independent judgment when conducting credit analysis and also use reasonable judgment regarding the inclusion or exclusion of relevant factors and distinguish between facts and opinions in credit analysis reports.

(e) A Credit Rating Agency shall have internal practice manuals sufficient to ensure the continuity of its operational activities.

(f) A Credit Rating Agency shall maintain an effective complaints handling process.

(g) A Credit Rating Agency shall ensure that the credit rating analysts and the members of the Rating Committee refrain from soliciting or obtaining any benefits from anyone with whom the Credit Rating Agency does business.

(h) A Credit Rating Agency shall disclose in all its communications to the public, when its ratings are not initiated at the request of the issuer and whether the issuer participated in the rating process.

(i) A Credit Rating Agency shall refrain from rating any issue of a company in which:

a) it has any interest whatsoever, whether financially or otherwise and/or;

b) its director(s) has any interest whatsoever, whether financially or otherwise.

(j) A Credit Rating Agency shall have its own Code of Conduct to be strictly adhered to by its Rating Committee, directors, analysts and employees.

(k) In the event the Credit Rating Agency resorts to outsourcing of work, then the Credit Rating Agency shall include that fact in the Credit Rating Agreement entered into with the client in order for the client to be informed of same. The Credit Rating Agency shall obtain from the person to whom the functions are outsourced an undertaking to comply with the SEC Act, Part V to the Schedule to the SEC Act, criteria stipulated hereunder or any other Directive issued by the Commission from time to time particularly which prohibits conflict of interest situations.

15.(a) A Credit Rating Agency shall maintain the following records in its office;

1. all internal records to support its credit rating opinions for a period of six years;
2. all particulars relating to clients up to date at the rating agency office which shall include the name and registered address and contact numbers of such companies, names and addresses of its directors as at the date of rating, its issued share capital and the nature of business; and
3. a comprehensive written record of all complaints received from clients and action taken thereon by the Credit Rating Agency for a period of at least six years from the date of receipt of such complaint;

(b) A Credit Rating Agency shall have a suitable information recording and retrieval system and maintain such information for inspection by the Commission.

(c) A Credit Rating Agency shall ensure confidentiality at all times of all information relating to clients including such client’s identity and transactions carried out for such client unless and to the extent such disclosure is required by law; and

(d) The employees of the Credit Rating Agency shall be prohibited from engaging in transactions in securities when they possess confidential information concerning the issuer of such security.

16.(a) Credit Rating Agencies shall ensure that the content in advertisements promoting its services is accurate, materially complete and does not have the capacity to mislead the public.

(b) The Credit Rating Agency shall submit the contents of all advertisements for the perusal of the SEC at least 5 days prior to its publication in the media.

(c) Credit Rating Agencies shall comply with any guidelines that may be issued by the Commission from time to time in respect of advertisements.