Securities and Exchange Board of India has issued a circular on 16/07/21[1] to all credit rating agencies registered with SEBI regarding the introduction of the expected loss-based rating scale and standardization of the rating scale used by credit rating agencies. Securities and Exchange Board of India head devices of standardized rating symbol and their definitions used by CRAs through circular dated 15/06/11[2]. The circular issued by SEBI dated 13/06/19[3] had explicit credit enhancement features in the standardized symbols and defines for the rating of instruments.
CRAs may use the expected loss-based rating scale for projects and instruments associated with the infrastructure sector. Rating symbols used are EL 1, EL2, EL 3, EL 4, EL 5, EL 6 and, EL 7 that defines as instrument rates considered to have Lowest, very low, low former moderate, high, very high, and highest expected loss, over the life of instruments respectively. Paragraph 6 of the circular dated 15/06/2011 provides for existing outstanding ratings that shall guide the credit rating agencies.
The circular provides for standardization of rating scale used by credit rating agencies and is mentioned in section B. Ratings of various financial instruments Are undertaken by credit rating agencies as provided for regulation 9(f) of SEBI (credit rating agencies) regulation, 1999 (“CRA regulations”). It was advised to credit rating agencies to align the rating scales with the prescribed rating scales given in the guidelines of respective financial sector regulators or authorities in terms of the provision mentioned above. in case of the absence of the prescribed rating scale, the agency must follow the rating scales prescribed by board given circulars dated June 15, 2011, or June 13, 2019. Any other circular issued by the board which prescribes a particular rating scale can also be followed. Regulation 24 (6) read with regulation 24 (9) of the CRA regulations must be noted and if the financial sector regulator or authority has not prescribed a rating scale then the agency shall follow the rating scale prescribed by the board from time to time.
The circular also states the applicability of the provisions stated as section C. Compliance with the requirements must be done latest by March 31st, 2022 and the same shall be ensured by the credit rating agencies. The board of directors is to bound by the same. it is advised to confirm the compliance of the circular dated July 16th, 2021 latest by April 15, 2022. Except section be that will come into effect from April first, 2021 all the provisions of the circular are applicable with the immediate effect. Section 11 1 of the Securities and Exchange Board of India act comment 1992 read with the provision of regulation 20 of SEBI credit rating agency regulations, 1999 has conferred the power to issue the circular to protect the interest of investors in securities, promote development, and regulate the securities market.
[1] SEBI/HO/MIRSD/MIRSD_CRADT/P/CIR/2021/594
[2] CIR/MIRSD/4/2011
[3] SEBI/ HO/ MIRSD/ DOS3/CIR/P/2019/70
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