SEBI publishes standards to standardize the use of rating scales used by credit rating agencies

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On October 31, 2022, the Securities and Exchange Board of India (SEBI) issued standards regarding the standardization of rating scales used by Credit Rating Agencies (CRA) which will be applicable from January 1, 2023.

The notice for the same is issued by SEBI in exercise of the powers conferred by section 11(1) of the SEBI Act 1992, read together with the provisions of Regulation 20 of the SEBI (Credit Rating Agencies- ARC), 1999, to protect the interest of investors in securities and to promote the development of the securities market.

What are ARCs?

Credit rating agencies, such as Crisil and CARE etc. under Regulation 9(f) of the SEBI (CRA) Regulations 1999 undertake ratings of various financial instruments in accordance with the guidelines of different regulators or industry authorities financial. They analyze and rate financial instruments and suggest the risks incurred based on the ratings they assign to the instruments. But the notes are complicated for an ordinary person to understand. Therefore, to overcome this scenario, SEBI has put forth the following standards:

Standards :

I.A “rating outlook” will indicate the expected direction of rating movement in the short to medium term.

ii.A ‘rating watch’ will indicate an CRA’s view of the expected direction of rating movement in the near term.

iii.SEBI specified standard descriptors for rating watch and outlook.

  • For ratings monitoring: positive implications, development implications and negative implications
  • For rating outlook: stable, positive and negative

iv.Pricing symbols must have the CRA’s first name as a prefix.

v.Issuers with the “AAA” rating symbols are considered to have the highest degree of security in the timely service of debt securities. The debt exposures of these issuers present the lowest credit risk.

  • Transmitters bearing the “AA” and “A” rating symbols have a high and adequate degree of security.
  • Issuers rated BBB are considered to have a moderate degree of security with respect to the timely service of debt securities.
  • Those rated BB, B and C are considered to have “moderate”, “high”, “very high” risk of default.
  • D-rated issuers are in default or expected to be in default soon.

Key points:

I.The monitoring of the implementation of these standards will be carried out through bi-annual internal audits for CRAs mandated under the SEBI Rules (CRA).

  • It will be conducted by chartered accountants, company secretaries and management controllers (CMA).

ii.Each rating agency is mandated to assign a rating outlook and publish it in a press release.

iii.CRAs will be required to report their compliance as ratified by their respective Board of Directors to SEBI within one quarter of January 1, 2023.

Recent Related News:

I.SEBI has joined the Account Aggregator (AA) framework which will give a boost to the financial data sharing system regulated by the Reserve Bank of India (RBI). This will allow customers to share information about their mutual funds and stock holdings with financial service providers.

ii.SEBI imposed a fine of Rs 3 Lakh on BSE (Bombay Stock Exchange) Ltd for indirectly engaging in work that was unrelated to its activities as an exchange without SEBI’s approval.

About the Securities and Exchange Board of India (SEBI):

President– Madhabi Puri Buch
Headquarter– Bombay, Maharashtra
Establishment– 1992

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