Sebi To Consider Broadening Scope Of Operations For CRAs

Sebi CRA Regulations: The Securities and Exchange Board of India (Sebi) has proposed to amend its norms for credit rating agencies (CRA Regulations, 1999). Credit rating agencies gauge the creditworthiness of borrowers by assessing their ability to repay the debt they wish to take. At present, regulations do not allow CRAs to undertake activities other than the rating of securities which are listed or proposed to be listed on the exchanges. However, CRAs can still conduct the rating of products, securities or issuers if such rating activities are conducted under the guidelines of a financial sector regulator (FSR) or any other authority specified by Sebi.

Sebi has now proposed in its consultation paper that the Sebi CRA Regulations 1999 be modified to grant rating agencies the ability to rate financial instruments, which are regulated by FSRs other than Sebi, even if those regulators have not explicitly issued guidelines for conducting credit ratings.

“Accordingly, it is proposed that CRAs may be permitted to undertake activities that are not regulated by Sebi, subject to the following conditions,” Sebi said in the consultation paper.

The market regulator added that in the context of the amendment, FSR refers to any authority or body, such as the Reserve Bank of India (RBI), Insurance and Regulatory Development Authority of India (Irdai), Pension Funds Regulatory and Development Authority (PFRDA), International  Financial Services Centres Authority (IFSCA), Ministry of Corporate Affairs (MCA), and Insolvency and Bankruptcy Board of India (IBBI).

Previously, industry stakeholders have made representations to Sebi seeking amendment to this regulation. The stakeholders have indicated that the rating of products and entities is similar to the current business which CRAs undertake, thus permitting the same is likely to lead to significant  synergies, while also addressing gaps in the industry.

Sebi added that while rating agencies will be permitted to undertake such rating operations, such business activities will also be subject to several conditions in order to protect investors. Some of the major conditions include CRAs being permitted to undertake rating activities in exchange on a fee basis and not a fund basis.

Additionally, such rating activities will be done at ‘arm’s length basis’ through one or multiple separate business units (SBUs). CRAs will have to mandatorily transfer their activities to the SBU(s) within a period of six months.

Further, the rating agency will also have to create a separate grievance redressal mechanism for the SBU. Sebi also mentioned in the consultation paper that CRAs which undertake non-Sebi regulated activities will have to employ different staff members for the SBU which handles activities regulated by Sebi. Notably, the key managerial personnel of the SBU and the agency will be exempt from this rule.

Also, the minimum net worth requirement of a CRA will remain ring-fenced from any impact of the non-Sebi regulated activities undertaken by the agency. Sebi has further proposed that CRAs will have to show the non-Sebi regulated activities they undertake on their website and advertising  or marketing material.

The CRAs will also be required to give clients and beneficiaries a written disclosure before commencing non-Sebi regulated operations. The market regulator has invited comments on its proposal. Sebi said in the consultation paper that the last date to submit the comments is July 30, 2025.