The Securities and Exchange Board of India (Sebi) has published a fresh compilation all credit rating agencies (CRA)-related circulars with some changes, superseding the old ones.
In a circular on January 6, 2023, Sebi said henceforth all the provisions and laws stated in the compiled version will be the rule, and they will come into effect from February 1, 2023.
An unbiased credit rating agency is critical for the capital markets. The recent shutdown of Brickworks, a rating agency, highlights the case.
Sebi Makes Some Changes To CRA Circulars
Sebi divided the new CRA-specific regulations in five chapters: registration, operations, reporting, internal audit, and miscellaneous.
Registration Requirements: Sebi said a new intermediary portal has been operationalised for intermediaries, including CRAs, and they must submit all their registration applications through it, which will process the grant of final registration, surrender or cancellation, etc.
“All applications for registration/ surrender/other requests will be made through SEBI Intermediary Portal. The applicants will be separately required to submit relevant documents viz. declarations/undertakings required as a part of application forms prescribed in relevant regulations, in physical form, only for records without impacting the online processing of applications for registration,” said Sebi. Sebi has also mentioned several other registration-related changes in its 107-page compilation of circulars.
Operations Related: Sebi said the rating symbols and characters must be standardised.
Sebi published a detailed page of symbols and definitions to be used henceforth. In addition, it advised CRAs to align their rating scales based on the prescribed guidelines.
Reporting & Disclosure: Sebi said to enable investors compare the performance of a CRA with respect to a standardised PD benchmark, all CRAs in consultation with Sebi shall prepare and disclose standardised and uniform PD benchmark for each rating category on their respective website for one year, two-year and three-year cumulative default rates, and for both short-run and long-run time frames.
“The short-run benchmarks may account for spikes due to economic cycles or unforeseen events, and hence, may have a wider band. The long-run benchmarks iron out economic cycles since these are over a longer tenure (10-year period) and may, therefore, be narrower,” said Sebi.
Internal Audit: Sebi said in the circular that the internal audit be conducted on a half yearly basis and it shall be done by chartered accountants, company secretaries or cost and management accountants who are in practice and do not have any conflict of interest with the CRA. The internal audit “shall cover all aspects of CRA operations and procedures, including investor grievance redressal mechanism, compliance with the requirements stipulated in the SEBI Act, rules and regulations made there under, and guidelines issued by SEBI from time to time.”
