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Informist, Wednesday, Jul. 9, 2025

 

NEW DELHI – The Securities and Exchange Board of India Wednesday proposed to allow a broader activity horizon for credit rating agencies, allowing them to undertake activities that are not regulated by the market regulator. SEBI has sought comments on the proposals, which are part of a consultation paper, by Jul. 30. 

 

SEBI has proposed allowing rating agencies to undertake the rating of financial instruments which fall under the purview of any other financial sector regulator. The current regulations for credit rating agencies permit them to undertake ratings of only listed or proposed to be listed issuers, securities or rating of financial instruments under the guidelines of a financial sector regulator or any authority specified by the SEBI.

 

The proposals follow representation and feedback from the industry and other stakeholders for allowing rating agencies to undertake the rating of financial products and instruments under the purview of other financial sector regulators, even where no rating-related guidelines may have been issued by the financial sector regulator.

 

"It has also been represented that since rating of said products/entities is adjacent to the current business of CRAs (credit rating agencies), permitting the same may lead to significant synergies, while also addressing a gap in the industry," the paper said.

 

However, the paper said rating agencies may only undertake rating activities that are fee-based and non-fund-based. The credit rating agencies should undertake activities that are not regulated by SEBI only at an arm's length basis through separate business units, segregated by a Chinese Wall and ring-fenced from the SEBI-regulated activities, the paper said. 

 

Further, credit rating agencies are required to ensure that they transfer their activities not regulated by SEBI to a separate business unit within six months from the date of notification of such proposal. Moreover, the rating agencies are required to ensure that the grievance redressal mechanism, including the escalation mechanism for activities not regulated by SEBI, is separate and distinct from the grievance redressal mechanism provided for activities regulated by SEBI.

 

According to the consultation paper, rating agencies are also required to prepare and maintain separate records for the non-SEBI-regulated activities. The staff engaged in such activities will also have to be distinct from the staff handling activities regulated by SEBI. "However, the staff can cross the Chinese Wall, subject to due procedures approved by the board of directors of the CRA (credit rating agencies) and documentation. Such a Chinese Wall shall not be applicable for the key managerial personnel," it said. 

 

Other resources, including the information technology infrastructure, will be allowed to be shared between the activities regulated by the exchange regulator and activities that are not regulated by SEBI, subject to due procedures approved by the board of directors of the rating agency, as per the consultation paper.

 

The paper also said that the minimum net worth requirement of a credit rating agency should be ring-fenced from any impact arising out of undertaking the activities that are not regulated by the SEBI. Rating agencies are also required to duly disclose on their website the list of activities that are not SEBI-regulated, along with a disclosure that none of the SEBI investor protection mechanisms will be available for any grievances or disputes arising out of such activities.

 

Credit rating agencies will also be required to give an upfront written disclosure to stakeholders, including clients, beneficiaries and counterparties, before undertaking any activities which are not regulated by the SEBI.

 

Rating agencies taking up activities not regulated by SEBI will have to submit an undertaking as part of the half-yearly internal audit report, confirming compliance with the requirements of these regulations, duly reviewed and approved by the board of directors, the paper said.  End

 

Reported by Pratiksha

Edited by Saji George Titus

 

 

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