SEBI proposes additional circumstances under which ESG ratings can be withdrawn

Currently, under the Credit Rating Agencies (CRA) Regulations, an ERP cannot withdraw ratings except when the issuer is wound up or merged or amalgamated with another company, or except in cases specified by SEBI.

The market regulator has proposed specific instances where an ESG Ratings Provider (ERP) can withdraw ESG Ratings.

The Securities and Exchange Board of India (SEBI) released the consultation paper on February 13.

Currently, under the Credit Rating Agencies (CRA) Regulations, an ERP cannot withdraw ratings except when the issuer is wound up or merged or amalgamated with another company, or except in cases specified by SEBI.

SEBI has now suggested other circumstances under which the ESG Rating may be withdrawn, and the proposals cover ERPs following a subscriber-pays model and an issuer-pays business model.

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For ERPs following a Subscriber-Pays business model:
The ERP may withdraw a rating provided that there are no subscribers for the rating as on the date of withdrawal.
ii. However, where the rated entity/ instrument is part of a rating package (e.g. Nifty 50), which continues to have subscribers, such rating may not be withdrawn.
iii. Further, if any rating is withdrawn, the rating has to be withdrawn for all subscribers

For ERPs following an Issuer-Pays business model:
i. In case of rating of a security, the ERP may withdraw the rating subject to the ERP having rated the security continuously for 3 years or 50 % of
the tenure of the security, whichever is higher, and having received NOC from 75% of the bondholders by value.

ii. In case of rating of an issuer/ entity, the ERP may withdraw the rating
subject to the ERP having rated the issuer/ entity continuously for 3 years.

The consultation paper also includes changes in disclosure of rating rationale, internal audit for ERPs and governance norms for ERPs.