SEBI Proposes Colour-Coded Risk Meter for Bonds to Simplify Credit Risk Assessment

The Securities and Exchange Board of India (SEBI) has proposed introducing a visual risk indicator for debt securities that would link credit ratings to six colour-coded risk categories, aiming to make credit risk easier for investors to understand. The proposal is intended to help investors, particularly retail participants, assess bond-related risks more clearly.

In a consultation paper released on 13 August, the market regulator said traditional credit ratings such as AAA, AA+ and BBB- may not always be easily understood by investors. Under the proposed framework, these ratings would be assigned to six separate risk bands, with each category represented by a distinct colour.

According to the proposal, securities carrying a AAA rating would fall under the “lowest credit risk” category and be represented by the colour “Irish Green”. Instruments rated AA+, AA and AA- would be grouped under “very low credit risk” and assigned the colour “Chartreuse”. Similar classifications would apply across the remaining rating categories.

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SEBI has suggested that the proposed system, referred to as the “Credit Risk-o-Meter”, be displayed across key investor-facing documents. These would include offer documents, abridged prospectuses, private placement memorandums and advertisements. The regulator has also proposed that online bond platform providers display the meter on their websites and mobile applications.

The market regulator has invited public comments on the proposal until 3 September.

SEBI has further proposed that the actual credit rating and the name of the rating agency be shown below the Credit Risk-o-Meter. Where a debt security carries ratings from multiple agencies, the meter would be determined using the lowest rating assigned to the instrument, although all ratings would still need to be disclosed.

For unsecured debt instruments, the word “unsecured” would need to be displayed prominently in red, according to the consultation paper.

The regulator emphasised that the proposed meter would reflect only the credit risk associated with a debt security and should not be interpreted as investment advice. It noted that such securities would continue to be subject to other risks, including market risk and liquidity risk.

SEBI has also proposed a separate warning requirement for unsecured perpetual bonds such as AT1 bonds. These instruments may carry the risk of a complete loss of invested capital, the regulator said.

In addition, online bond platforms would be required to promptly communicate any change in a security’s Credit Risk-o-Meter classification. The platforms would need to update the meter within 24 hours of receiving information about a rating revision and would not be permitted to manually alter the assigned classification.