Introduction
The Securities and Exchange Board of India (SEBI) has issued a circular aimed at enhancing the transparency and quality of credit ratings supported by Credit Enhancement (CE). This guidance is particularly relevant to Credit Rating Agencies (CRAs) and will take effect from January 1, 2023.
Applicability of the Circular
Scope
- This circular applies to credit ratings of securities that are either listed or proposed for listing on a recognized stock exchange, in addition to other credit ratings required by various SEBI regulations or circulars.
- Compliance with the guidelines outlined in this circular is mandatory for CRAs, which must report their adherence, as approved by their boards, within one quarter following the circular's effective date.
Key Provisions on Credit Ratings
Reiteration of Previous Guidelines
- As stated in the SEBI circular dated June 13, 2019, credit ratings that feature external credit enhancement but are not bankruptcy-remote will carry a 'CE' suffix. Annexure A lists the specified support considerations relevant to this suffix.
Additional Mandates for Ratings
To bolster the credit rating process and improve transparency, the following mandates are established for ratings described in the applicability section:
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Disclosure Requirements:
- Ratings should include disclosures regarding:
- Unsupported ratings without factoring in explicit credit enhancement or specified support considerations.
- Supported ratings that incorporate the aforementioned factors.
- Detailed explanations of all security covenants must also be included in the press release.
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Independent Due Diligence:
- CRAs are required to perform independent assessments of the specified support considerations and secure external legal opinions when necessary to evaluate the credit enhancement strength.
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Documentation Verification:
- CRAs must ensure:
- The support is unconditional, irrevocable, and legally enforceable until all obligations of the rated security are fulfilled.
- Independent evaluations of the financial stability of the support provider to confirm their ability to meet guaranteed obligations.
- That the support provider has a consistently lower probability of default than the rated issuer while the ratings are active.
Monitoring Compliance
The implementation of this circular will be supervised through half-yearly internal audits, as mandated by Regulation 22 of the SEBI (Credit Rating Agencies) Regulations, 1999, alongside Circular SEBI/MIRSD/CRA/Cir-01/2010, dated January 06, 2010.
Conclusion
This circular, issued under the authority conferred by Section 11 (1) of the Securities and Exchange Board of India Act, 1992, and Regulation 20 of the SEBI (Credit Rating Agencies) Regulations, 1999, is intended to protect investor interests and promote the regulatory framework within the securities market.