SEBI Issues CRA Framework for Activities Regulated by Other FSRs

Markets watchdog Sebi on Tuesday came out with a comprehensive framework for credit rating agencies (CRAs) that undertake ratings of financial instruments regulated by any other financial sector regulator (FSR), aiming to ensure clearer segregation of activities, disclosures and investor protection mechanisms.

Under the new norms, CRAs are required to put in place distinct operational, disclosure and grievance-handling mechanisms for Sebi-regulated activities and those falling under the purview of other financial sector regulators (FSRs).

In its circular, Sebi asked CRAs to handle grievances related to Sebi-regulated activities and those linked to other regulators through separate and distinct email IDs. In addition, they must maintain separate webpages or clearly demarcated sections on their websites for disclosures pertaining to Sebi-regulated activities and those under other FSRs.

The regulator said that the minimum net worth requirement prescribed by Sebi for CRAs must not be impacted by their undertaking ratings of instruments governed by other regulators. Any net worth stipulations imposed by other FSRs will be over and above Sebi's minimum requirement.

CRAs will also be required to disclose on their websites the full list of activities they undertake, along with the name of the regulator overseeing each activity. Further, all advertising and marketing material related to activities under other FSRs must be separate and clearly distinct from material related to Sebi-regulated activities.

For all activities under the purview of other FSRs, CRAs need to clearly disclose on their website as well as in advertising and marketing material that Sebi's investor protection and grievance or dispute redressal mechanisms will not be available for such activities.

For all rating reports, press releases and rating rationales issued after the provisions come into force, CRAs need to mention the name of the regulator governing the rated instrument and explicitly state that Sebi's investor protection and grievance redressal mechanisms do not apply to such ratings.

While CRAs may issue common rating reports or press releases, the markets watchdog said there must be clear segregation and labelling between Sebi-regulated instruments and those regulated by other FSRs.

Before commencing any activity regulated by another FSR, CRAs will have to make an upfront written disclosure to clients stating that the activity falls under the jurisdiction of another regulator. This disclosure will also form part of the rating agreements or engagement letters.

Additionally, CRAs need to obtain written confirmation from clients acknowledging their understanding of the nature of the activity, associated risks, and the non-availability of Sebi's investor protection mechanisms.

Further, every CRA undertaking activities regulated by other FSRs needs to submit an undertaking as part of its half-yearly internal audit report, confirming compliance with Sebi's CRA regulations and related circulars.

This undertaking need to be reviewed and approved by the CRA's board of directors, the regulator said.