SEBI tightens norms for credit rating agencies rating instruments regulated by other regulators

SEBI tightens norms for credit rating agencies rating instruments regulated by other regulators

• SEBI tightens norms for credit rating agencies on disclosure and investor safety
• CRAs must segregate SEBI and non-SEBI activities, including grievance redressal
• New rules mandate clear disclosures, separate marketing for non-SEBI activities

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Market regulator Securities and Exchange Board of India (SEBI) has issued a circular tightening compliance, disclosure and investor protection norms for credit rating agencies (CRAs) that undertake ratings of financial instruments falling under the regulatory purview of other financial sector regulators.

Under the new framework, SEBI has sought to clearly ring-fence SEBI-regulated activities from non-SEBI regulated activities, mandating enhanced disclosures, client communication and internal controls to avoid regulatory ambiguity and investor confusion. SEBI said the circular has been issued to protect investor interests and strengthen regulatory clarity in the securities market.

SEBI clarified that while credit rating agencies are permitted under existing regulations to rate instruments overseen by other regulators, such activities must not dilute SEBI’s investor protection framework or minimum regulatory standards applicable to credit rating agencies.

As part of the measures, credit rating agencies have been directed to maintain separate grievance redressal email IDs and distinct website sections for SEBI-regulated activities and those governed by other financial sector regulators. Although infrastructure and manpower may be shared, grievance intake for SEBI and non-SEBI activities must remain segregated.

The regulator has also mandated that a credit rating agencies minimum net worth requirement under SEBI regulations should not be impacted by ratings undertaken for other regulators. Any additional net worth conditions imposed by other sectoral regulators will have to be met over and above SEBI’s requirement.

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Additionally, credit rating agencies will now be required to disclose on their websites the full list of activities undertaken along with the name of the regulator concerned. Advertising and marketing material for non-SEBI regulated activities must be kept separate, with explicit disclosures stating that SEBI’s investor protection and grievance redressal mechanisms will not be available for such activities.

In rating reports and press releases, credit rating agencies must clearly mention the regulator governing the instrument being rated and disclose the non-availability of SEBI protection mechanisms.

Where common rating reports are issued, SEBI-regulated and non-SEBI regulated instruments must be distinctly segregated and labelled.

SEBI has also tightened client communication norms. Before commencing any activity regulated by another regulator, credit rating agencies must make upfront written disclosures to clients and obtain written confirmations acknowledging the nature of the activity, associated risks and the absence of SEBI protection. For existing clients and outstanding ratings, credit rating agencies have been directed to issue written intimations and confirm compliance to SEBI.

Credit rating agencies undertaking activities regulated by other authorities will be required to submit a board-approved undertaking as part of their half-yearly internal audit report confirming compliance with SEBI regulations and circulars.

Most provisions of the circular will come into effect after 60 days from today, however requirements relating to separate grievance email IDs and client intimations for existing activities will be implemented after one year.

SEBI’s board in December meeting had approved the proposal to expand the scope of activities permitted for SEBI-registered credit rating agencies (CRAs), allowing them to undertake rating activities for financial instruments regulated by other financial sector regulators where no specific rating framework currently exists. It was aimed at addressing regulatory gaps faced by market participants, while putting in place safeguards to ensure clear separation between SEBI-regulated rating activities and non-SEBI-regulated businesses undertaken by credit rating agencies.

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