Sebi proposes mandatory 'Credit Risk-o-Meter' for debt securities

The Securities and Exchange Board of India (Sebi) on Thursday proposed making a colour-coded ‘Credit Risk-o-Meter’ mandatory for debt securities to help investors, particularly retail investors, assess credit risk more easily.

 

Under the proposal, issuers and online bond platform providers (OBPPs) would be required to display the Credit Risk-o-Meter in offer documents, abridged prospectuses, private placement memorandums, all advertisements, and on OBPP web and mobile platforms.

 

A similar mechanism is in place for mutual funds, where the risk is shown through a colour-coded meter.

 

The proposed meter would map the existing credit rating framework, ranging from AAA to D, into six visual risk categories. These would range from “lowest credit risk” for AAA-rated securities to “high to very high risk of default” for securities rated B+, B, B-, C+, C, C- and D. Each category would have a corresponding colour code.

 

Sebi said the proposal is aimed at addressing the difficulty some retail investors may face in interpreting alphanumeric credit ratings such as AAA, AA+ and BBB-. The visual scale is intended to simplify risk assessment and help investors compare securities and align investments with their risk appetite.

 

The regulator has also proposed that the name of the credit rating agency and the actual credit rating be displayed immediately below the meter. Where a security has ratings from multiple agencies, the meter would be based on the lowest rating, while all ratings would continue to be disclosed. For unsecured debt instruments, the word “unsecured” would have to be displayed in bold red text.

 

The framework would apply to all issuances of non-convertible securities, commercial papers, securitised debt instruments, security receipts and structured debt or market-linked debentures, whether issued through a public issue or private placement, as well as to all categories of issuers and OBPPs.

 

OBPPs would have to immediately communicate any change in the Credit Risk-o-Meter on their platforms. They would also be required to derive the meter solely from ratings assigned by Sebi-registered credit rating agencies and maintain automated systems and audit trails for updates.