Sebi publishes guidelines on standardization of rating scales by rating agencies, effective from January 1, 2023

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The Securities and Exchange Board of India (Sebi) seeks to standardize the way Credit Rating Agencies (CRA) assign ratings to securities. This should help investors make more informed decisions regarding securities in the realm of debt investing.

Sebi has set out certain guidelines in this regard in a circular published on October 31, 2022.

Credit rating agencies are rating agencies that undertake ratings of various financial instruments under the guidelines of different financial sector regulators or authorities. They are an important part of the financial industry, as investors and institutions often base their decisions on ratings and the advice of rating agencies. Examples of ARC in India include Crisil and CARE, among others.

Now, with the entry into force of this new guideline on January 1, 2023, CRAs will have to report their compliance as ratified by their respective Board of Directors to the Sebi within one quarter of the date applicability of the circular.

In drafting this set of guidelines, Sebi also held several consultations with credit rating agencies and designed standardized symbols and definitions for issuer rating/corporate credit rating.

“The objective way to assess credit is through scoring, as the agencies consider both qualitative and quantitative judgment of the financial instrument. Something an individual cannot do with limited information,” he said. said Vivek Bajaj, co-founder of StockEdge, a financial market research and analysis firm. Platform.

Here are the details:

What did Sebi say?

Standard descriptors for evaluating Outlook and Watch: Sebi said a “ratings outlook” indicates a CRA’s view of the expected direction of rating movement in the near to medium term, while a “ratings watch” indicates the point of view. a CRA’s view of the expected direction of rating movement in the near term. term.

From now on, the rating descriptors for the “rating outlook” to be used will be:

  • Stable
  • Positive, and
  • Negative

For the “rating watch”, the rating descriptors to be used will be the following:

  • Rating watch with positive implications
  • Rating watch with development implications
  • Rating monitoring with negative implications.

Sebi also asked rating agencies to assign a rating outlook and disclose it in the press release for future reference.

Valuations of plans focused on capital protection: Sebi stated in an earlier circular dated June 15, 2011 that ratings for capital protection schemes will be assigned by rating agencies using rating scales, i.e. symbols, as well as their definitions for structured finance instruments.

Control of the application of this circular: Sebi further indicated that the monitoring of the implementation of this circular by the NCAs will be done through a half-yearly internal audit, which will be carried out by chartered accountants, company secretaries and management accountants. (CMA). Additionally, these qualified individuals should be in practice and have no conflict of interest with the respective CRA.

This internal audit report must be submitted to ARC within two months of the end of the semester, after which the ARC Board of Directors will review the report and take action to remedy deficiencies (if any). The ARC will then send a report on the measures taken in Sebi in the next two months.

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