SEBI issues guidelines to strengthen firewall between credit rating agencies and unrated entities


New SEBI Guidelines for CRAs: The Securities Exchange Board of India (SEBI) has issued guidelines for Credit Rating Agencies (CRAs) asking to strengthen the firewall between them and unrated agencies. The market regulator has required rating agencies to formulate a policy on segregation or firewall practices with unrated entities and document the same in their internal operational manuals or governing document.

The new rules include formulating a separation policy with unrated entities and documenting it in their internal operational manuals. In addition, the nature and extent of the sharing of infrastructure, employees and resources between the ARC and the unrated entity will need to be specified.

The rules also ensure the independence of the credit rating process given such agreements and provide guidance on resource sharing avoiding conflicts of interest.

Here are the new rules for rating agencies to avoid conflicts of interest:
There should be adequate legal barriers between credit rating agencies and their unrated affiliates.

Shared information and confidential information between the rating agency and its associated rating company must be in writing.

Shared resources, employees and infrastructure must also be written.

It should be mentioned what measures have been taken to ensure that the independence of the rating is not affected due to a subsidiary.

It will be mandatory to update monthly the rating and the unrated company associated with the same director, managing director and CEO.

There should be separate websites for rating agencies and their associated unrated companies.

Unrated companies associated with rating agencies will be prohibited from using rating scales.

The new rules will come into effect from January 1, 2023. CRAs will have to report on their compliance within one quarter of the date of applicability of the circular. The monitoring of the circular will have to be done through half-yearly internal audits.

What are credit rating agencies?
A rating agency is a company that assesses the financial strength of companies and government entities, in particular their ability to meet the payment of principal and interest on their debts.
The rating assigned to a given debt shows an agency’s level of confidence that the borrower will honor its debts as agreed.


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