Credit rating practices in India: SEBI’s exemplary role (2024)

Credit rating agencies play a crucial role in the financial world by providing investors and businesses with valuable insights into the credit worthiness of issuers. Credit rating is an independent assessment of the creditworthiness of a business or government entity in general terms with respect to specific financial obligations such as a new bond issue.

In the aftermath of the 2008 financial crisis, there has been an increased scrutiny on credit rating agencies (CRA) due to concerns over their role in the crisis. The need for enhanced oversight became evident, and regulatory bodies across the globe responded by implementing significant reforms. In the last few years, the regulatory environment for credit rating agencies has become more robust, with regulators focusing on independence, transparency and disclosure and increased oversight for increasing investor confidence. Additionally, the integration of Environmental, Social and Governance (ESG) considerations into credit rating frameworks has further improved transparency and risk assessment.

Indian regulator Securities and Exchange Board of India’s (SEBI) vigilant oversight and strong regulatory framework are the bedrocks of Indian thriving stock market ecosystem. SEBI fosters an environment conducive to long-term growth and helps to boost investor confidence by ensuring investor protection, promoting market integrity, and regulating various entities.

In case of Bangalore based Brickwork Ratings a SAT vide order dated (6/6/2023) has remitted the matter to SEBI to "pass a fresh order on the quantum of penalty other than the order of the cancellation of the license in the light of the observation made [in the SAT order] and in accordance with law after giving an opportunity of hearing to the [CRA]."

To plug the gap in making the system robust, SEBI also came out with a new framework for CRAs working in India, involving ratings of securities having explicit credit enhancement features. The new framework, became applicable from January 1st this year, is aimed again at enhancing transparency and improving the rating process. CRAs are allowed to give the suffix ‘CE’ (credit enhancement) while rating of such instruments having to enable investors understand the extent of credit enhancement provided by a third party.

Further, Environmental, Social, and Governance (ESG) factors have gained significant prominence in the financial world as investors increasingly considering them while making investment decisions.

SEBI has not specifically mandated that CRAs must consider ESG factors in assessing credit risk. SEBI regulations, under code of conduct for CRAs, required that CRAs must monitor closely all relevant factors that might affect the creditworthiness of the issuers.

The assessment encourages entities to manage and respond to environmental, social, and governance challenges, allowing credit rating agencies to better capture the long-term sustainability and resilience of businesses.

A significant change introduced is the Business Responsibility and Sustainability Report (BRSR) Core. Mandated to enhance the reliability of ESG disclosures, the report contains comprehensive information about a company's approach to addressing ESG concerns and its impact on stakeholders. The BRSR Core empowers investors to make better-informed decisions, taking into account a company's commitment to sustainable practices and responsible business conduct.

With the aim to further boost transparency, SEBI has also asked credit rating companies to disclose lists of issuers who are non-cooperative with them. The action follows the regulator's observation that the number of issuers that are non-cooperative with CRAs have increased over the time and a vast majority of them are being unlisted and small entities. They are asked to disclose information about these entities starting from July 15, 2023. Further, every CRA is required to carry out periodic reviews of all published rating during the lifetime of the securities, unless the rating is withdrawn. It lays the foundation for more transparency in credit rating regime in India.

The regulatory environment for credit rating agencies has undergone significant improvements, leading to a more transparent and reliable credit rating process. The reforms have positively impacted the business and investment environment by boosting investor confidence, mitigating risks, and improving borrowing terms for companies. They align with the growing trend of responsible and sustainable investing. As the regulatory landscape continues to evolve, credit rating agencies are committed to upholding the highest standards of independence, transparency, and accountability to foster a robust financial ecosystem and improving Indian credit rating ecosystem.

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