SEBI issues guidelines to strengthen firewall between credit rating agencies and non-rating entities

SEBI’s new guidelines for CRA: The Securities Exchange Board of India (SEBI) has issued guidelines for Credit Rating Agencies (CRA) asking to strengthen the firewall between them and the non-rating agencies. The market regulator has asked the rating agencies to formulate a policy on separation or firewall practices with the non-rating entities and document the same in their internal operational manuals or governing document.  

The new rules include formulating a policy on separation with non-rating entities and document the same in their internal operational manuals. Further, the nature and extent of sharing of infrastructure, employees and resources between the CRA and the non-rating entity will be required to be specified.

The rules also ensure the independence of the credit-rating process in view of any such arrangements and provide guidance on sharing of resources by avoiding conflict of interest.

Here are the new rules for rating agencies to avoid conflict of interest:
There should be adequate legal barriers between credit rating agencies and their associated non-ratings affiliates.

Shared information and confidential information among the rating and its associated non-rating company should be in writing.

Shared resources, employees and infrastructure should also be in writing.

What measures have been taken to ensure the independence of the rating is not affected due to a subsidiary company should be mentioned.

It will be mandatory to update monthly for rating and associated Non-Rating Company with the same Director, MD and CEO.

There should be separate websites of rating agencies and their associated non-rating companies.

Non-rating companies associated with rating agencies will be prohibited from using rating scales.

The new rules will come into effect from January 1, 2023. CRAs will have to report on their compliance within one quarter from the date of applicability of the circular. The monitoring of the circular will be required to be done through half-yearly internal audits.

What are Credit Rating Agencies?
A rating agency is a company that assesses the financial strength of companies and government entities, especially their ability to meet principal and interest payments on their debts.
The rating assigned to a given debt shows an agency’s level of confidence that the borrower will honour its debt obligations as agreed.