SEBI Releases New Rules on Ratings of Credit-enhanced Securities
SEBI (Securities and Exchange Board of India) has issued new rules on credit ratings of securities having explicit credit enhancement features, in order to enhance transparency and improve the rating process for such ratings.
In a circular, SEBI said the new rules are applicable to all CRAs (credit rating agencies), and will come into force starting 1 January 2023.
Under the rules, CRAs can assign the suffix 'CE' to the rating of instruments that have an explicit credit enhancement provided by an external or third party.
To help investors to understand the extent of credit enhancement provided by a third party or parent or group company and the support considerations, including debt backed by a pledge of shares and a letter of comfort, SEBI said that the press release for credit ratings, with or without the CE-suffix, backed by such support considerations needs to contain certain disclosures.
Such disclosures must include unsupported ratings (without factoring in the explicit credit enhancement or specified support considerations) as well as supported ratings (after factoring in the explicit credit enhancement). The press release must also contain a detailed explanation of all the covenants of the security.
While assigning such credit ratings, CRAs will be required to conduct independent due diligence on the nature of specified support consideration and form a definitive internal view. Wherever warranted, the CRA may obtain an independent external legal opinion for ascertaining the strength of the credit enhancement.
CRAs will also be required to verify the documentation related to the specified support considerations to ensure that the support is unconditional and legally enforceable until all the obligations of the rated security have been paid to the investors.
SEBI said CRAs would have to undertake an independent examination of the financial strength of the support provider to ascertain their ability to honour the obligations they have guaranteed.
CRAs will be required to report on their compliance to SEBI within one quarter from the date of applicability set for 1 January 2023. Monitoring will be done through CRAs' half-yearly internal audits.
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