Sebi proposes broadening Credit Rating Agencies' mandate amid regulatory gaps
Currently, Sebi's rules restrict CRAs to rating securities that are listed or proposed to be listed on recognized stock exchanges. However, CRAs are not barred from rating other financial products if permitted by guidelines from other financial sector regulators (FSRs) like the Reserve Bank of India (RBI) or the Insurance Regulatory and Development Authority (IRDA).
The industry pointed out a regulatory gap: financial products under other FSRs lack specific rating guidelines. This has led to confusion about whether CRAs can rate such products, such as unlisted securities.
Sebi's new consultation paper seeks to address this ambiguity, responding to feedback from industry stakeholders who believe that allowing CRAs to rate a wider range of products would bring synergies and fill an important gap in the market.
Sebi is considering allowing CRAs to rate financial instruments under the jurisdiction of other FSRs, even if those regulators have not issued explicit rating guidelines. However, this expanded role comes with strict conditions designed to protect investors and ensure transparency.
CRAs must ensure that the existing non-Sebi-regulated activities are transferred to a separate business unit (SBU) within six months of the new rules coming into effect. Each SBU must have its own grievance redressal mechanism, separate from that for Sebi-regulated activities.
SBUs must maintain their own records and employ staff distinct from those handling Sebi-regulated work. Staff movement across the Chinese Wall is allowed only with proper board-approved procedures.
The minimum net worth required for a CRA under Sebi regulations must be protected from any risks arising out of non-Sebi regulated activities. CRAs must clearly disclose all non-Sebi regulated activities on their website and in related rating reports, along with a disclaimer that Sebi's investor protection mechanisms do not apply.
Market participants, investors and other stakeholders have until 30 July to share their views.
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