MUMBAI: To ensure clearer segregation of activities, disclosures and investor protection mechanisms, the capital markets watchdog Sebi has issued a comprehensive framework for credit rating agencies (CRAs) to undertake ratings of financial instruments regulated by other financial sector regulators.
Under the new norms, CRAs are required to put in place distinct operational, disclosure and grievance-handling mechanisms for Sebi-regulated activities and those falling under the purview of other financial sector regulators, Sebi said in a circular Tuesday.
One key demand is on the disclosure on rating activities. For all rating reports, now Sebi wants press releases and rating rationales issued after the provisions come into force. CRAs must mention the name of the regulator governing the rated instrument and explicitly state that Sebi's investor protection and grievance redressal mechanisms do not apply to such ratings.
CRAs are now asked to handle grievances related to Sebi-regulated activities and those linked to other regulators through separate and distinct email IDs. In addition, they must also maintain separate webpages or clearly demarcated sections on their websites for disclosures pertaining to Sebi-regulated activities and those under other regulators.
The minimum net worth requirement prescribed by Sebi for CRAs must not be impacted by their undertaking ratings of instruments governed by other regulators, it said, adding any net worth stipulations imposed by other regulators will be over and above Sebi's minimum requirement.
CRAs will also be required to disclose on their websites the full list of activities they undertake, along with the name(s) of the regulator(s) overseeing each activity.
Not only that, they also have to clearly separate all their advertising and marketing related to activities under other regulators from the material related to Sebi-regulated activities.
For all activities under the purview of other regulators, CRAs need to clearly disclose on their websites as well as in advertising and marketing material that Sebi's investor protection and grievance or dispute redressal mechanisms will not be available for such activities.
While CRAs may issue common rating reports or press releases, the markets watchdog said there must be clear segregation and labelling between Sebi-regulated instruments and those regulated by other regulators.
Before commencing any activity regulated by another FSR, CRAs will have to make an upfront written disclosure to clients stating that the activity falls under the jurisdiction of another regulator. This disclosure will also form part of the rating agreements or engagement letters.
Additionally, CRAs need to obtain written confirmation from clients acknowledging their understanding of the nature of the activity, associated risks, and the non-availability of Sebi's investor protection mechanisms.
Further, CRAs with activities regulated by other regulators need to submit an undertaking as part of the half-yearly internal audit report, confirming compliance with Sebi's CRA regulations and related circulars.