SEBI Likely to Open Up New Activities for Credit Rating Agencies in Financial Sector

The Securities and Exchange Board of India (SEBI) has proposed a regulatory change that will allow credit rating agencies (CRAs) to expand their scope beyond SEBI's domain. With strict compliance norms, this move enables CRAs to rate financial instruments regulated by other authorities, broadening their business while maintaining governance standards.

CRAs May Rate Instruments Outside SEBI’s Jurisdiction

Under the proposed framework, SEBI intends to permit CRAs to perform rating activities for financial products overseen by regulators like the RBI, IRDAI, PFRDA, and IBBI. These ratings, while not regulated by SEBI, must adhere to the applicable frameworks defined by the respective financial regulator. The activities should strictly be fee-based and non-fund-based to avoid conflicts of interest.

Structure, Governance and Segregation of Activities

SEBI mandates that all non-SEBI-regulated activities be managed through a distinct business unit within the rating agency, separated by a Chinese Wall structure to ensure zero interference with SEBI-regulated operations. These subunits must maintain individual records, and personnel should not overlap roles between regulated and unregulated functions.

Compliance and Disclosure Norms for CRAs

The proposal outlines that agencies must make detailed disclosures on their website and in client communication about all non-SEBI-regulated activities. Firms must confirm that clients acknowledge the regulatory scope and risks prior to engagement. A 6-month transition period is granted for existing arrangements to comply with the requirement for a compliance report submission.

IT Infrastructure and Financial Safeguards

While agencies may share IT infrastructure across business units, board-approved protocols must be followed. Furthermore, the agencies' minimum net worth should be protected from risks linked to the new ventures. These steps aim to preserve financial stability amid expansion.

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Conclusion

SEBI’s initiative to allow broader activity for CRAs introduces new business avenues under structured compliance. It ensures operational separation and regulatory clarity while expanding CRAs' functional relevance in India’s financial ecosystem.

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