Sebi proposes rules to beef up ERP framework; aims to enhance transparency

Key areas include withdrawal of ESG ratings, disclosure of rating rationale

The Securities and Exchange Board of India (Sebi) on Thursday proposed new measures to strengthen the regulatory framework for ESG Rating Providers (ERPs), aiming to enhance transparency and accountability. The proposals focus on key areas such as withdrawal of ESG ratings and disclosure of rating rationale.

 

ERPs are entities providing environment, social and governance (ESG) ratings. Last year, the market regulator made it mandatory for such entities to register and obtain an ERP license.

 

Now, in a discussion paper, Sebi has outlined conditions for ERPs to withdraw ratings under both subscriber-pays and issuer-pays models.

 

Under the subscriber-pays model, Sebi has proposed that ERPs can withdraw a rating if there are no subscribers for the rating. However, if the rated entity or instrument is part of a rating package (such as the Nifty 50 index) with subscribers, the rating may not be withdrawn. Also, if any rating is withdrawn, the rating has to be withdrawn for all subscribers, Sebi has said.

 

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Meanwhile, under the issuer-pays model, ERPs will be able to withdraw a rating after rating the security continuously for three years, or 50 per cent of the security’s tenure -- whichever is higher-- and on receiving a nod from 75 per cent of bondholders by value.

 

Sebi has also proposed that ERPs following a subscriber-pays model should share detailed rating rationales and reports only with subscribers and not disclose them on their websites. However, they must disclose the ESG ratings assigned on their websites in a specified format.

 

Further, stock exchanges will be asked to prominently disclose ESG ratings on their websites under a separate tab or a section for listed companies and securities.

 

The regulator has also proposed that internal audits and composition of nomination and remuneration committee (NRC) for Category-II ERPs will be mandated after two years after issuance of the new rules.

 

The regulator has invited public comments on the proposals by March 6.

 

Since the introduction of ERP framework, close to a dozen entities have either obtained an ERP registration or are in the process of obtaining one. Some of these include NSE’s arm NSE Sustainability Ratings & Analytics, units owned by credit rating agencies ICRA, Crisil and CareEdge. Also the units of MSCI and London Stock Exchange Group and that of voting advisory firm Stakeholders Empowerment Services and Institutional Investor Advisory Services (IiAS). 

Key Suggestions

 

*  Sebi has recommended conditions for ERPs to withdraw ratings

  *  ERPs can withdraw a rating if there are no subscribers for it

  *  Prominent disclosure of ESG ratings on exchange websites for listed companies

  *  Detailed rating rationales and reports to be shared only with subscribers under subscriber-pay model

  *  Last year, it was made mandatory for ERPs to register with Sebi