SEBI Considers Allowing CRAs to Rate Instruments Beyond its Regulatory Scope
SEBI, the markets watchdog, is contemplating a significant shift by proposing to permit credit rating firms (CRAs) to evaluate financial instruments falling under the jurisdiction of other financial sector regulators. This move, if implemented, would mark a departure from the current regulatory framework that limits CRAs to rating only securities listed on Sebi-recognized stock exchanges.
Expanding the Rating Horizon
Under the current regulations, CRAs are restricted to rating instruments that are either listed or intended for listing on Sebi-approved exchanges. However, Sebi’s recent consultation paper suggests a potential expansion of CRAs’ scope beyond its regulatory purview under certain conditions.
New Regulatory Framework
The proposal outlines that CRAs could rate financial instruments governed by other Financial Sector Regulators (FSRs) as long as they adhere to the regulatory framework specified by the respective FSRs. This includes compliance with guidelines related to policy, risk management, and investor complaint resolution, among others.
Operational Guidelines
Should this proposal materialize, CRAs would be restricted to fee-based and non-fund-based activities conducted through Separate Business Units (SBUs) segregated from Sebi-regulated functions by a Chinese Wall. These SBUs must establish distinct grievance redressal mechanisms and maintain separate records for non-Sebi-regulated activities.
Ensuring Transparency and Disclosure
Furthermore, CRAs undertaking non-Sebi-regulated activities must ensure transparent disclosure on their websites regarding such operations. Stakeholders engaging with CRAs for these activities need to acknowledge the absence of Sebi’s investor protection mechanisms, emphasizing the need for informed consent.
Compliance and Reporting
CRAs are required to submit compliance reports to Sebi within six months of the proposal notification, detailing their adherence to the new guidelines. Additionally, half-yearly internal audit reports must include undertakings confirming compliance with the specified requirements.
Public Feedback and Industry Response
Sebi has invited public comments on this proposal until July 30, 2025, following requests from industry participants seeking broader rating capabilities for CRAs. The proposed changes aim to align CRAs’ rating activities with market demands and operational efficiencies.
This potential regulatory shift signifies a significant evolution in the credit rating landscape, offering CRAs the opportunity to diversify their rating portfolios and cater to a broader spectrum of financial instruments.
