SEBI Plans to Expand Credit Rating Agency Roles Beyond Market-Regulated Instruments

In a move to bridge regulatory gaps and enhance the credibility of India’s credit rating ecosystem, the Securities and Exchange Board of India (SEBI) has proposed widening the role of Credit Rating Agencies (CRAs). A consultation paper issued by SEBI outlines plans to allow CRAs to rate financial instruments regulated by other financial sector authorities like the RBI, IRDA, and PFRDA, even if those regulators haven’t issued formal rating guidelines.

Addressing a Long-standing Regulatory Gap

Currently, SEBI-registered CRAs are limited to rating securities listed or proposed to be listed on recognised stock exchanges. While SEBI regulations don’t explicitly prevent them from rating other financial products, ambiguity has persisted, especially when other regulators haven’t provided specific guidance.

Responding to industry feedback, SEBI now aims to formally allow CRAs to expand into this broader space. The move is intended to improve rating coverage, particularly for unlisted debt instruments and issuer-level evaluations that have been left in regulatory limbo.

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Public comments on the proposed changes are open until July 30, 2025.

Key Provisions of the Proposal

SEBI’s proposal permits CRAs to rate instruments falling under other Financial Sector Regulators (FSRs) as long as certain safeguards are met. These FSRs include the RBI, IRDA, PFRDA, IFSCA, MCA, and IBBI.

To ensure transparency and risk containment, SEBI proposes the following:

• Separate Business Units (SBUs): All non-SEBI-regulated activities must be conducted through a distinct SBU within six months of implementation.
• Chinese Wall Policy: SBUs must maintain strict separation from SEBI-regulated operations, with limited and board-approved staff movement.
• Record Keeping: Each SBU must maintain independent records and employ separate personnel.
• Disclosure Requirements: CRAs must publicly list all non-SEBI activities on their websites and include disclaimers in all relevant reports, clarifying that SEBI’s investor protections do not apply.
• Minimum Net Worth Protection: The financial buffer required under SEBI regulations must be safeguarded from exposure to non-SEBI activities.
• Compliance Reporting: CRAs must submit a compliance report to SEBI within six months of the new framework’s notification.

Encouraging Synergies While Safeguarding Investors

SEBI highlighted that allowing CRAs to undertake such adjacent business activities could create synergies while plugging current market gaps. However, the regulator remains cautious, stressing that all non-SEBI activities must be fee-based and non-fund-based, with no crossover risk to investors.

By formalising these practices, SEBI aims to boost confidence among stakeholders and bring uniformity to India’s credit rating landscape.

Conclusion

A progressive start towards updating the credit rating system is represented by SEBI's suggestion. To strike a balance between innovation and investor safety, the regulator has given CRAs a more expansive authority while maintaining stringent operating and disclosure standards. The idea might change the rating landscape if it is put into effect, allowing for more thorough coverage of India's intricate and changing financial markets.