Under the current CRA regulations, credit rating agencies are only allowed to rate securities that are listed or proposed to be listed on a stock exchange recognised by Sebi.
However, the regulations do not stop CRAs from rating products, securities, or issuers if such ratings are done under the guidelines of another financial sector regulator or any authority specified by Sebi.
In its consultation paper, Sebi proposed that CRAs may be permitted to undertake activities that are not regulated by it, subject to certain conditions.
“CRA may undertake rating of financial instruments, which fall under the purview of any other FSR, provided it shall comply with the regulatory framework, if any, as may be specified by the respective FSR for the matters relating to policy, eligibility criteria, risk management, investor grievance or dispute handling mechanism, inspection, enforcement and claims,” Sebi proposed.
The regulator suggested that CRAs may undertake only those rating activities that are fee-based and non-fund-based. Additionally, such activities should be carried out strictly on an arm’s length basis through one or more Separate Business Units (SBUs), which should be segregated by a Chinese Wall and ring-fenced from Sebi-regulated functions.The regulator further stated that CRAs should ensure the transfer of all non-Sebi-regulated activities to these separate business units within six months from the date of notification of the proposal.These SBUs would also be required to establish distinct grievance redressal mechanisms, including escalation procedures, which are separate from those applicable to Sebi-regulated activities.
Moreover, CRAs should maintain independent records within the SBU for such non-Sebi-regulated activities, and the personnel engaged in these functions must be distinct from those involved in Sebi-regulated operations.
However, crossing the Chinese Wall may be permitted for staff, subject to due procedures approved by the Board of Directors and proper documentation.
Notably, this restriction does not apply to key managerial personnel.
Sebi also clarified that the minimum net worth requirement of a CRA, as specified under the CRA Regulations, should be protected from any impact arising out of non-Sebi-regulated activities.
A CRA will be required to disclose on its website the list of activities that are not regulated by Sebi, along with a disclaimer clearly stating that Sebi’s investor protection mechanisms will not apply to any grievances or disputes related to such activities. This disclosure should also be prominently displayed in rating reports associated with non-Sebi-regulated activities.
Prior to undertaking any such activities, the CRA should provide an upfront written disclosure to all relevant stakeholders, including clients, beneficiaries, and counterparties. This disclosure should be included in all engagement letters, contracts, agreements, and business communications, indicating that the activities do not fall within Sebi’s regulatory framework.
Also, stakeholders should confirm, at the time of engagement, that they understand the nature of the activities, associated risks, and the non-availability of Sebi’s investor protection mechanisms.
For existing and ongoing arrangements related to non-Sebi-regulated activities, CRAs should make the necessary disclosures and obtain acknowledgements from stakeholders. A compliance report on this should be submitted to Sebi within six months of the notification.
In addition, every CRA undertaking any activity outside the purview of Sebi should submit an undertaking as part of its half-yearly internal audit report, confirming compliance with the specified requirements. This report should be duly reviewed and approved by the CRA’s board of directors.
Sebi has invited public comments on the proposal until July 30, 2025.
The move comes in response to representations from industry participants and stakeholders, who have requested that CRAs be allowed to rate financial products and instruments under the purview of other FSRs, even where no rating-related guidelines exist.
It was highlighted that such rating activities are closely aligned with CRAs’ current business, and allowing them could lead to operational synergies while filling an existing gap in the market.
