SEBI’s intension to stay vigilant is proven from its act of suspending the licence and winding up of the Bangalore based Brickwork Ratings within six months last year, a move unprecedented, even by international standards. The Indian regulator cited failure on the part of Brickwork Ratings to “exercise proper skill, care and diligence, while discharging its duties as a credit rating agency”. Delay in recognition of default of NCDs (non convertible debenture) by one of its clients, even after disclosure of default by the debenture trustee is one among the many lapses cited by the SEBI.
The Brickwork Rating case sets a precedent and gives the regulator teeth to pull up errant rating agencies. The sharper oversight would help to improve the debt market trust in the country.
To plug the gap in making the system robust, SEBI also came out with a new framework for CRAs working in India, involving ratings of securities having explicit credit enhancement features. The new framework, became applicable from January 1st this year, is aimed again at enhancing transparency and improving the rating process. CRAs are allowed to give the suffix ‘CE’ (credit enhancement) while rating of such instruments having to enable investors understand the extent of credit enhancement provided by a third party.
Further, Environmental, Social, and Governance (ESG) factors have gained significant prominence in the financial world as investors increasingly considering them while making investment decisions. Recognizing the importance of ESG considerations in credit risk assessment, SEBI introduced a framework to incorporate ESG factors into credit ratings. SEBI’s Amendment Regulations 2023 for ESG requires credit rating agencies to evaluate the credit risk of issuers based not only on traditional financial metrics but also on their ESG performance. The assessment encourages entities to manage and respond to environmental, social, and governance challenges, allowing credit rating agencies to better capture the long-term sustainability and resilience of businesses.
A significant change introduced is the Business Responsibility and Sustainability Report (BRSR) Core. Mandated to enhance the reliability of ESG disclosures, the report contains comprehensive information about a company’s approach to addressing ESG concerns and its impact on stakeholders. The BRSR Core empowers investors to make better-informed decisions, taking into account a company’s commitment to sustainable practices and responsible business conduct.
With the aim to further boost transparency, SEBI has also asked credit rating companies to disclose lists of issuers who are non-cooperative with them. The action follows the regulator’s observation that the number of issuers that are non-cooperative with CRAs have increased over the time and a vast majority of them are being unlisted and small entities. They are asked to disclose information about these entities starting from July 15, 2023. Further, every CRA is required to carry out periodic reviews of all published rating during the lifetime of the securities, unless the rating is withdrawn. It lays the foundation for more transparency in credit rating regime in India.
The regulatory environment for credit rating agencies has undergone significant improvements, leading to a more transparent and reliable credit rating process. The reforms have positively impacted the business and investment environment by boosting investor confidence, mitigating risks, and improving borrowing terms for companies. They align with the growing trend of responsible and sustainable investing. As the regulatory landscape continues to evolve, credit rating agencies are committed to upholding the highest standards of independence, transparency, and accountability to foster a robust financial ecosystem and improving Indian credit rating ecosystem.
