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Sebi Issues Guidelines On Standardisation Of Rating Scales By CRAs, Effective From January 1, 2023

Sebi wants to standardise the ratings given by credit rating agencies, from January 1, 2023 onwards

The Securities and Exchange Board of India (Sebi) is looking to standardise the way credit rating agencies (CRAs) assign ratings to securities. This is expected to help investors make more informed decisions regarding securities in the debt investment space.

Sebi laid out certain guidelines with regard to this in a circular published on October 31, 2022.

CRAs are rating agencies which undertake ratings of various financial instruments under the guidelines of different financial sector regulators or authorities. They are an important part of the financial industry, as investors and institutions often base their decisions on the rating and guidance of CRAs. Some examples of CRAs in India include, Crisil, and CARE, among others.

Now, with this new guideline coming into effect from January 1, 2023, CRAs will have to report on their compliance as ratified by their respective board of directors to Sebi within one quarter from the date of applicability of the circular.

For drafting these set of guidelines, Sebi has also held several consultations with CRAs, and devised standardised symbols and definitions for Issuer Rating/Corporate Credit Rating.

"The objective way to evaluate the credit is ratings as the agencies take into consideration both qualitative and quantitative judgement of financial instrument. Something which an individual cannot do with limited information," said Vivek Bajaj, cofounder, StockEdge, a financial market research and analytics platform.

Here are the details:

What Did Sebi Say?

Standard Descriptors For Rating Outlook And Watch: Sebi said that a ‘rating outlook’ indicated a CRA’s view on the expected direction of the rating movement in the near- to medium-term, while a ‘rating watch’ indicated a CRA’s view on the expected direction of the rating movement in the short term.

Henceforth, the following will be the rating descriptors for ‘rating outlook’ to be used:

  • Stable
  • Positive, and
  • Negative

For ‘rating watch’, the following will be the rating descriptors to be used:

  • Rating watch with positive implications
  • Rating watch with developing implications
  • Rating watch with negative implications.

Sebi has also directed CRAs to assign a rating outlook and disclose the same in the press release for future reference.

Ratings Of Capital Protection Oriented Schemes: Sebi has said in an earlier circular dated June 15, 2011 that ratings of capital protection oriented schemes shall be given by CRAs using rating scales, i.e., symbols, along with their definitions for structured finance instruments.

Monitoring Of This Circular’s Application: Sebi has further said that the monitoring of the implementation of this circular by CRAs shall be done through a half-yearly internal audit, which will be conducted by chartered accountants, company secretaries, and cost and management accountants (CMAs). Further, these qualified persons would have to be in practice and have no conflict of interest with the respective CRA.

This internal audit report will have to be submitted to the CRA within two months from the end of the half-year, and then the Board of Directors of the CRA shall consider the report and take steps to rectify the deficiencies (if any). The CRA will then send an action taken report to Sebi within the next two months

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