SEBI Tightens Norms For Credit Rating Agencies Rating Non-SEBI Instruments

The Securities and Exchange Board of India (SEBI) has tightened compliance and disclosure requirements for credit rating agencies (CRAs) that rate financial instruments regulated by other financial sector regulators, according to a circular issued by the market regulator on Tuesday.

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SEBI said the move is aimed at protecting investor interests and strengthening regulatory clarity by clearly separating activities regulated by SEBI from those governed by other authorities. While CRAs are permitted under existing regulations to rate instruments overseen by other regulators, SEBI said such activities must not dilute its investor protection framework or minimum regulatory standards.

Clear Separation Of Regulated Activities

Under the revised framework, SEBI has mandated that CRAs must ring-fence SEBI-regulated activities from non-SEBI-regulated ones. Credit rating agencies will be required to maintain separate grievance redressal email IDs and distinct sections on their websites for activities regulated by SEBI and those regulated by other financial sector regulators.

Although CRAs may continue to share infrastructure and manpower across activities, SEBI said grievance intake and handling for SEBI-regulated and non-SEBI-regulated activities must remain segregated to avoid regulatory ambiguity and investor confusion.

Net Worth And Disclosure Requirements

SEBI clarified that the minimum net worth requirement prescribed under SEBI regulations for credit rating agencies must not be affected by ratings undertaken for other regulators. Any additional net worth requirements imposed by other sectoral regulators will need to be met separately, over and above SEBI’s norms.

The regulator has also directed CRAs to disclose on their websites a complete list of activities undertaken, along with the name of the regulator governing each activity. Advertising and marketing for activities that aren't regulated by SEBI must be kept separate and must make it clear that SEBI's investor protection and grievance redressal systems won't apply to those activities.

Reporting And Client Communication Norms

Credit rating agencies must clearly say in rating reports and press releases what regulator is in charge of the instrument being rated and that SEBI protection mechanisms are not available. Where common rating reports are issued, SEBI-regulated and non-SEBI-regulated instruments must be clearly segregated and labelled.

SEBI has also tightened client communication requirements.Before doing anything that is regulated by another authority, CRAs must give clients written disclosures ahead of time and get written confirmation that the client understands the nature of the activity, the risks involved, and that there is no SEBI protection. For current clients and good ratings, they will have to send written notice and confirmation of compliance.

Implementation Timeline And Background

Credit rating agencies undertaking activities regulated by other authorities will also be required to submit a board-approved undertaking as part of their half-yearly internal audit report, confirming compliance with SEBI regulations and circulars.

SEBI said most provisions of the circular will come into effect after 60 days, while requirements related to separate grievance email IDs and client intimations for existing activities will be implemented after one year.

The circular follows SEBI’s December board decision to expand the scope of activities permitted for SEBI-registered credit rating agencies, allowing them to rate financial instruments regulated by other authorities where no specific rating framework exists, while ensuring clear regulatory separation.