SEBI board clears expansion of credit rating agencies’ mandate beyond SEBI-regulated instruments

This would be the fourth board meeting chaired by Sebi chief Tuhin Kanta Pandey who assumed office on March 1.

SEBI’s board on Wednesday approved a 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.

The move is 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.

SEBI Chairman Tuhin Kanta Pandey said credit rating agencies often fall under the purview of multiple financial sector regulators, but the absence of a clear framework had created operational difficulties for the industry. “There was a difficulty faced by the industry in this because of the absence of guidelines,” he said, explaining the rationale behind the board’s decision.

Under the approved framework, credit rating agencies will be required to segregate business processes to ensure that investor protection mechanisms and other benefits applicable to SEBI-regulated activities do not extend to rating activities undertaken for non-SEBI-regulated instruments. CRAs must make this distinction explicit to clients, including through disclosures, and maintain separate communication channels, such as a dedicated email ID, for such non-SEBI-regulated activities.

The regulator has also mandated clear labelling and disclosures to ensure that users of ratings are aware when a rating does not fall under SEBI’s regulatory and investor protection framework. Grievance redressal mechanisms for such activities will also need to be clearly segregated from SEBI-regulated operations.

Pandey said that subject to these conditions, credit rating agencies can legally undertake such rating activities, which is expected to benefit the broader economy by providing an organised rating framework for financial instruments that currently lack one. He added that the approach balances ease of doing business with appropriate risk mitigation.

The expanded framework will also apply to unlisted entities and subsidiaries of listed companies, an area where earlier regulations had created challenges due to consolidated compliance requirements covering subsidiaries and unlisted arms. The revised approach is expected to reduce compliance friction while maintaining regulatory clarity.

Earlier, on July 25, SEBI had released a consultation paper proposing to widen the scope of activities permitted for SEBI-registered credit rating agencies, noting growing demand for ratings of certain financial products regulated by other authorities but lacking a structured rating ecosystem. The regulator had sought public feedback on safeguards, disclosures, and conflict-management mechanisms to prevent misuse of ratings and ensure investor clarity.

SEBI said the board’s approval reflects a calibrated approach to regulatory flexibility, ensuring that expanded activities by credit rating agencies are undertaken with clear segregation, transparency, and accountability.