SEBI Proposes Expansion of Credit Rating Agencies’ Mandate

by Priya Bhatiya

Posted on July 10, 2025

SEBI Proposal: Allowing Rating Agencies to Rate Assets Outside Its Ambit

Overview

The Securities and Exchange Board of India (SEBI) has proposed a significant change that could allow credit rating agencies (CRAs) to rate financial instruments and products that fall outside SEBI’s direct regulatory purview. This move is aimed at leveraging CRAs’ expertise for a broader range of financial instruments, especially those regulated by other financial sector regulators such as the Reserve Bank of India (RBI), Insurance Regulatory and Development Authority of India (IRDAI), and Pension Fund Regulatory and Development Authority (PFRDA).

Key Points of the Proposal

• Expanded Scope: CRAs may be permitted to rate financial products and instruments regulated by other financial sector regulators, even if those regulators have not issued specific rating guidelines.
• Structural Safeguards:
  • CRAs must create separate business units (SBUs) for these non-SEBI-regulated activities.
  • These SBUs should be segregated from SEBI-regulated operations by a “Chinese wall” and ring-fenced to prevent conflicts of interest.
• Disclosure and Transparency:
  • CRAs must clearly disclose on their websites and in rating reports which activities are not regulated by SEBI.
  • Disclaimers must state that SEBI’s investor protection mechanisms do not apply to these ratings.
  • All stakeholders must be informed, and their acknowledgement obtained, regarding the non-SEBI-regulated nature of these activities.
• Compliance and Oversight:
  • CRAs must submit compliance reports to SEBI and ensure that their minimum net worth is protected from potential risks associated with non-SEBI activities.
  • Regular audits and board approvals are required for these activities.
• Public Consultation: SEBI has invited public comments on the proposal until July 30, 2025.

Rationale and Implications

• Market Gaps: The proposal responds to industry requests to allow ratings for products under other regulators, aiming to fill operational gaps and enhance investor confidence in a wider array of financial instruments.
• Investor Protection: By requiring clear disclosures and structural separation, SEBI aims to ensure that investors are aware of the regulatory boundaries and the extent of protection available.
• Operational Synergies: Allowing CRAs to rate a broader set of instruments could lead to greater efficiency and consistency in the financial markets.

Current Context

• Under existing regulations, CRAs are limited to rating securities listed or proposed to be listed on SEBI-recognized exchanges.
• The move comes amid concerns about unregulated instruments and the need for greater transparency and oversight in the financial markets.

In summary: SEBI’s proposal, if implemented, would allow credit rating agencies to rate financial assets outside its direct regulatory ambit, provided strict operational, disclosure, and compliance safeguards are put in place. This is expected to address market needs while maintaining transparency and investor awareness.

Ref: SEBI proposes to opening up activities for credit rating agencies