📘 Introduction

In 2025, the Securities and Exchange Board of India (SEBI) introduced a series of landmark enhancements to the disclosure framework for Credit Rating Agencies (CRAs). These revisions—spanning multiple circulars and regulatory amendments—are aimed at bolstering transparency, operational rigor, and investor protection in India’s credit markets.

This comprehensive narrative explores the new regulatory regime, providing clarity on each major change and its implications for CRAs, issuers, policymakers, and investors.

🔍 1. Background: Why the Revisions?

Conflict of Interest & Market Failures

The IL&FS collapse and controversies around agencies such as Brickwork Ratings exposed weaknesses in CRA processes. Critics pointed to blurred lines between business development and rating assignment—for instance, the Head of Ratings and Head of Business Development meeting the same issuer in a single forum—a conflict SEBI has since sought to eliminate.

Need for Uniformity & Investor Confidence

Previously, disparate timelines, opaque rating methodologies, and inconsistent disclosures hindered investor understanding and trust. SEBI’s new framework addresses these gaps by standardizing operating procedures, timelines, and disclosure norms across agencies.

⚖️ 2. Key Timelines Revised: From Calendar Days to Working Days

🗓️ New Circular dated 7 January 2025

SEBI replaced calendar-day deadlines with working-day benchmarks to align CRA operations with practical coordination realities involving debenture trustees, banks, and issuers.

📝 Highlights:

• Press releases on rating actions must now be published within 7 working days instead of 7 calendar days.
• Delayed debt servicing reviews: CRA must issue rating actions within 2 working days of receipt of issuer statements.
• Issuers not cooperating (INC): After three consecutive months of non-submission of No-Default Statements, tagging must occur within 5 working days, not 7 calendar days.
• Debt-servicing confirmations: Follow-ups are required within 1 working day, and press release must follow within 2 working days.

⚙️ These conditional refinements help CRAs manage operational delays inherent in complex debt confirmation processes, while ensuring investors continue to receive timely updates.

📢 3. Enhanced Disclosure Regime

a) Press Release & Retention Obligations

• CRAs are mandated to communicate rating decisions to issuers within one working day post the Rating Committee meeting.
• Issuers have three working days to request reviews or appeals.
• Press release must be published and intimated to exchanges and Trustees within seven working days.
• All disclosures and press releases must be archived on CRA websites for a minimum of 10 years, accessible to debenture trustees.

b) List of Non-Cooperative Issuers

• CRAs must maintain a daily-updated list of issuers tagged as non-cooperative.
• Disclosures regarding ratings not accepted by issuers and delays in periodic review must be retained for 12 months.

c) Standardized Sensitivity & Liquidity Indicators

• CRAs must include a “rating sensitivity” section in press releases, explaining potential triggers in plain language.
• Liquidity conditions (e.g., “strong,” “adequate,” “stretched,” “poor”) must be clearly explained to help users gauge issuer financial health.

🧠 4. Key Regulatory Amendments – CRA Regulations (2025)

4.1 Second Amendment Regulations (22 April 2025)

SEBI issued the SEBI (Credit Rating Agencies) (Second Amendment) Regulations, 2025, effective immediately upon notification.

Notable changes:

• Subscriber-Pays Model Definition: The subscriber-pays model is formally defined for ESG rating providers, specifying that revenues may come from banks, insurers, funds, or the rated entity itself.
• Mandatory Disclosure of Regulator: ESG rating providers must publicly disclose which financial-sector regulator governs their ratings and affirm compliance with its applicable laws.
• Conflict-Free Pricing & Reporting: If a subscriber is also the rated entity, they must be charged the lowest fee; details of report-sharing policies, timelines, and appeal mechanisms must be disclosed on the CRA’s website.

4.2 Amendment Introducing Past Risk & Return Verification (March 2025)

SEBI inserted Chapter IIA into the CRA Regulations, allowing eligible CRAs, with approval, to act as Past Risk and Return Verification Agencies under SEBI’s intermediary framework. Such agencies must also engage a recognized stock exchange as a data centre and comply with Board-specified terms.

🌱 5. ESG Rating Providers: Higher Standards

📍 On 11 July 2025, SEBI issued a Master Circular for ESG Rating Providers, consolidating prior guidance and streamlining regulatory norms for ESG ratings—now integrated into CRA Regulations.

Highlights:

• Registration Requirement: ESG Rating Providers must register via SEBI’s intermediary portal under the amended CRA Regulations.
• Structured Business Models: Both subscriber-pays and issuer-pays models are defined and regulated.
• Methodology Transparency: Providers must publish rating methodologies, scoring frameworks (e.g., ESG Rating, Transition Score, Combined Score), and monitor periodic performance updates.
• Governance Oversight: Establishment of an ESG Sub-Committee on the board is mandatory; Category-II providers also need a Nomination & Remuneration Committee.
• Mandatory Internal Audit: Annual internal audits under Regulation 28S must assess governance, compliance, conflict management, and control effectiveness.
• Withdrawal Conditions: Ratings may be withdrawn if BRSR data is missing, insufficient data exists, or the rating engagement ends.

🌍 6. Broader Regulatory Vision & Future Proposals

a) Expansion into Non-SEBI Instruments

On 9 July 2025, SEBI floated a consultation paper proposing that CRAs be allowed to rate instruments regulated by other financial-sector regulators (such as unlisted securities or fixed deposits), subject to strict safeguards:

• Separate business units must be established within six months.
• Operational independence from SEBI-regulated rating operations.
• Mandatory charging of fees to clients for such non-SEBI rating work.

b) Conflict-Of-Interest Review Committee

In early 2025, under Chairman Tuhin Kanta Pandey, SEBI constituted a committee to review conflict-of-interest norms—both internal (among officials) and external (with rating providers). The committee will report publicly within three months and aims to set a precedent for other regulators like RBI and IRDAI.

💡 7. Practical Impacts: What Changes for Stakeholders?

For CRAs:

• Greater procedural discipline and clarity.
• Need to publish and maintain archives, methodologies, and sensitivity disclosures.
• Strict separation of ESG and CRA operations under subscriber-pays models.

For Issuers:

• Faster communication and appeals.
• Transparent, publicly visible criteria for ratings and revisions.
• Clearer governance and audit expectations from rating providers.

For Investors:

• Better visibility into criteria and rationale behind rating actions.
• Standardized, plain-language indicators for liquidity and default risks.
• Reduced opacity around issuer cooperation and rating transitions.

For Regulators:

• More robust oversight while encouraging smoother operations.
• Enhanced coordination across financial sector regulators via modular rating permissions.
• Periodic internal audits offer a mechanism for compliance enforcement.

🛠️ 8. Case Examples: Brickwork & IL&FS

Brickwork Ratings

SEBI ordered Brickwork to wind up operations due to severe process irregularities and conflict of interest lapses. For instance, the rating head and business development head met with IDFC First Bank’s CEO in the same meeting—creating an unacceptable overlap. Ratings were also revised late in multiple cases including Sintex, contradicting required timelines.

IL&FS Collapse

The failure of IL&FS triggered regulatory scrutiny of multiple CRAs that had continued to assign top ratings despite deteriorating fundamentals. SEBI's forensic audit suggested systemic breakdowns in rating oversight—leading to a renewed focus on enforcement and disclosure adequacy.

📌 9. Summary of Reforms (Narrative Form)

• Timelines: Shift from calendar to working days, improving coordination and response speed.
• Disclosures: CRAs must retain, publish, and archive data more transparently, including rating decisions, issuer cooperation logs, and methodology.
• ESG Standards: More rigorous framework introduced for ESG rating providers, including internal governance, transparency, and audits.
• Expanded Scope: CRAs may rate non-SEBI instruments under clearly separated business units.
• Conflict of Interest: Governance reforms and regulatory oversight mechanisms introduced to minimize conflicts.

🔭 10. Future Outlook & Recommendations

What next?

• SEBI likely to finalize rules based on stakeholder feedback from recent consultation.
• Issuers and CRAs may seek further clarifications on methodology benchmarks and default models.
• Ongoing performance audits and periodic regulatory reviews expected to sustain reform momentum.

Recommendations for Stakeholders:

1. CRAs should fine-tune systems for quick turnaround, website transparency, and segregated business units for ESG and other instruments.
2. Issuers must proactively engage in appeals and periodic review processes, leveraging the clearer timelines.
3. Investors can monitor CRA websites for daily updates, methodology disclosures, and non-cooperation logs.
4. Monitoring Bodies should ensure internal audit findings are periodically reviewed and acted upon.
   

Created & Posted by Aashima Verma

Accounts Executive at TAXAJ

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