Sebi rolls out framework for credit rating agencies, applicable from Jan'23

Markets regulator Sebi on Wednesday came out with a new framework for credit rating agencies (CRAs), involving ratings of securities having explicit credit enhancement features.

The new framework, applicable from January 1, 2023, is aimed at enhancing transparency and improving the rating process, the Securities and Exchange Board of India (Sebi) said in a circular.

Under the rule, CRAs can assign the suffix 'CE' (Credit Enhancement) to the rating of instruments having explicit credit enhancement.

To enable investors to understand the extent of credit enhancement provided by a third party or parent or group company and support considerations specified by the regulator, including debt backed by a pledge of shares and a letter of comfort, Sebi said that the press release for credit ratings, with or without the CE-suffix, backed by such support considerations need to contain certain disclosures.

These disclosures are unsupported ratings without factoring in the explicit credit enhancement or specified support considerations and supported rating after factoring in the explicit credit enhancement.

Further, the press release should also contain a detailed explanation of all the covenants of the security.

While assigning such credit ratings, CRAs will have to conduct independent due diligence on the nature of specified support consideration and form a definitive internal view and, wherever warranted, obtain an independent external legal opinion for ascertaining the strength of the credit enhancement.

Furthermore, for such credit ratings, CRAs will have to verify the documentation related to the specified support considerations to ensure that the support is unconditional and legally enforceable till all the obligations of the rated security have been paid to the investors.

In addition, CRAs will have to undertake an independent examination of financial strength of the support provider to ascertain the ability to honour the obligations guaranteed by the support provider and the support provider has a lower probability of default on a continuous basis, compared with the rated issuer, till the time such ratings are outstanding.

Sebi reiterated that credit ratings, where the credit enhancement is external or from a third party, but the rated security is not bankruptcy remote of the issuer will carry the 'CE' suffix.