Sebi proposes allowing ERPs to rate unlisted securities, other changes for ease-of-doing business

The regulator has proposed that entities that are not undertaking Sebi-regulated activities need not seek registration with Sebi.

The market regulator has proposed allowing environmental social governance (ESG) rating providers to rate unlisted and other products/issuers.

A consultation paper released, on October 31, by the Securities and Exchange Board of India (Sebi) proposes various changes for ease of doing business for ESG rating providers (ERPs).

The proposals include an activity-based regulatory framework for ERPs, under which the Credit Rating Agencies (CRA) Regulations may include a provision for ERPs to undertake rating of products/issuers that are not listed.

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Currently, ERPs are allowed to provide ratings only to listed/proposed to be listed issuers/securities. The extant regulations also do not allow ERPs to rate products/issuers that fall under the purview of other financial regulators or authorities as may be specified by Sebi.

Following industry representations, the markets regulator has proposed various changes.

Besides allowing for rating of unlisted securities, the regulator has proposed that entities that are not undertaking Sebi-regulated activities need not seek registration with Sebi.

It has also proposed that ERPs that are Sebi-registered but are rating other products/issuers should not project themselves as Sebi-regulated ERPs and should explicitly specify the regulator/authority under whose purview such ratings are undertaken and should do so in adherence to the rules issued by such a regulator/authority.

The other ease-of-doing business proposals in the consultation paper include sharing the report on a issuer to the ERPs subscribers and the issuing entity at the same time; including clarifications given by the rated entity/issuer as an addendum to the rating report; and dispensing with the requirement of disclosure of ESG rating (or changes to the rating) by an ERP that follows a subscriber-pays-model to the stock exchange where the issuer/security is listed.

Some of the changes have been suggested taking into consideration the ERP's business model.

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The ERPs put forward to the regulator that sharing of the report with the rated entity/issuer divulges a considerable amount of information and results in loss of business for ERPs that follows the subscriber-pays model. But, the regulator noted, there is a need to give the rated entity an opportunity to clarify or respond to the rating report.

Therefore, the regulator has proposed that the report be shared with the subscriber and the rated entity/issuer at the same time.

The regulator has added that the ERPs have to ensure that the rated entity/issuer or its associates are not subscribers to the ERP.