SEBI vide its Circular dated 28th September, 2022 came out with a new framework for credit rating agencies (CRAs), involving ratings of securities having explicit credit enhancement features.
Applicability :
- This circular shall be applicable to credit ratings of securities that are listed, or proposed to be listed, on a recognized stock exchange, and other credit ratings that are required under various SEBI Regulations or circulars thereunder.
- The circular shall be applicable with effect from 01st January, 2023, and CRAs shall report on their compliance with this circular (as ratified by their respective board of directors) to SEBI within one quarter from the date of applicability of this circular.
Subject to the measures specified in aforesaid SEBI circular dated June 13, 2019, on CE-ratings, it is reiterated that credit ratings pertaining to Para II(A) above, where the credit enhancement is external (or from third party), but the rated security is not bankruptcy remote of the issuer/ originator, will carry the ‘CE’ suffix. A list of such support considerations for CE-suffix is specified at Annexure A. (“specified support considerations”) is considered in the rating process:
In order to strengthen the rating process as well as to promote transparency, the following measures are being mandated for credit ratings pertaining to Para II(A) above, wherein any of the support considerations specified at Annexure A (“specified support considerations”) is considered in the rating process:
| In partial modification of Para 1(IV)(B)(b) of SEBI circular dated June 13, 2019, in order to bring further transparency and to enable investors to understand the extent of credit enhancement provided by third party/parent/ Group Company or specified support considerations, the press release for credit ratings, with or without the CE-suffix, backed by specified support considerations shall contain the following disclosures: |
| i. Unsupported ratings without factoring in the explicit credit enhancement or specified support considerations, and ii. Supported rating after factoring in the explicit credit enhancement or specified support considerations Further, the Press Release shall also contain a detailed explanation of all the covenants of the security. It is reiterated that while assigning such credit ratings, CRAs shall conduct independent due diligence on the nature of specified support consideration and form a definitive internal view / opinion, and, wherever warranted, obtain an independent external legal opinion for ascertaining the strength of the credit enhancement. |
Further, the Press Release shall also contain a detailed explanation of all the covenants of the security.
It is reiterated that while assigning such credit ratings, CRAs shall conduct independent due diligence on the nature of specified support consideration and form a definitive internal view / opinion, and, wherever warranted, obtain an independent external legal opinion for ascertaining the strength of the credit enhancement.
| Furthermore, for such credit ratings, it is reiterated that CRAs shall verify the documentation related to the specified support considerations to ensure inter alia the following: |
| The support is unconditional, irrevocable, and legally enforceable till all the obligations of the rated security has been paid to the investors. CRAs shall undertake independent examination of financial strength of the support provider to ascertain the ability to honour the obligations guaranteed by the support provider. The support provider has a lower probability of default on a continuous basis, compared with the rated issuer, till the time such ratings are outstanding. |
Monitoring: Monitoring of this circular shall be done in terms of the half-yearly internal audit for CRAs, mandated under Regulation 22 of the SEBI (Credit Rating Agencies) Regulations, 1999 and Circular dated 06th January, 2010 issued thereunder.
This circular is applicable to all Credit Rating Agencies (CRAs) registered with SEBI.
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