SEBI Proposes Expanded Role for Credit Rating Agencies

The Securities and Exchange Board of India (SEBI) has released a consultation paper proposing to expand the permitted activities of Credit Rating Agencies (CRAs) beyond securities listed or proposed to be listed on stock exchanges. The draft is open for public comments until 30 July 2025.

Credit Rating Agencies (CRAs)

Credit Rating Agencies (CRAs) are organizations that assess the creditworthiness of borrowers, like companies or governments, and assign ratings to their debt instruments. These ratings reflect the agency’s opinion on the likelihood that the borrower will repay its debts, including principal and interest, on time. Investors use these ratings to gauge the risk associated with investing in those debt instruments. 

Current Regulatory Gap

• SEBI regulations currently restrict CRAs to rating listed or to-be-listed securities.
• CRAs can rate financial instruments under other financial sector regulators (FSRs) like RBI or IRDAI only if those regulators have issued relevant guidelines.
• A lack of such guidelines from some FSRs has led to ambiguity over CRA roles in rating unlisted financial instruments.

Key Proposals in the Consultation Paper

Current Norms:

• CRAs are currently allowed to rate only those securities that are:
  • Listed or proposed to be listed on SEBI-recognised stock exchanges.
  • Governed under SEBI regulations.

SEBI’s Key Proposal:

• CRAs may be allowed to rate financial instruments regulated by other FSRs (e.g., RBI, IRDAI, PFRDA) even if:
  • The respective regulator has not issued detailed CRA guidelines.
  • The instrument is not listed or proposed to be listed on an exchange.

Conditions:

• Ratings must be:
  • Fee-based: The CRA receives a professional fee.
  • Non-fund-based: No financing or credit exposure involved.

TH & Mint