SEBI Proposes Stricter Rules for ESG Rating Withdrawals
The Securities and Exchange Board of India (SEBI) has recently announced proposed measures to enhance the framework for Environmental, Social, and Governance (ESG) Rating Providers (ERPs) to withdraw ratings and disclose rating rationales. This move aims to strengthen transparency and clarity within the market, ensuring that investors are equipped with accurate and reliable information.
Conditions for ERPs
SEBI has outlined specific conditions for ERPs to withdraw ratings, particularly under two distinct revenue models: the subscriber-pays and the issuer-pays models. It is essential to note that ERPs were mandated by the regulator last year to register and obtain an ERP license to operate within the market.
In the subscriber-pays model, ERPs are permitted to withdraw a rating if there is a lack of subscribers for that particular rating. However, if the rated entity or instrument is included in a subscriber’s rating package, such as the Nifty 50 index, the rating cannot be withdrawn. It is crucial to emphasize that once a rating is withdrawn, it must be removed for all subscribers, as clarified by SEBI.
On the other hand, ERPs operating under the issuer-pays model can only withdraw a rating after a continuous three-year rating period for the security, or halfway through the security’s tenure—whichever is longer. However, this withdrawal is contingent upon securing approval from 75% of bondholders by value.
Enhanced Transparency Measures
Moreover, SEBI has proposed that ERPs following the subscriber-pays model must share detailed rating rationales and reports exclusively with subscribers, refraining from publishing them on their websites. Ratings exhibited on ERP websites must adhere to a specified format for transparency purposes.
Stock exchanges are mandated to prominently disclose ESG ratings of listed issuers on their websites under a designated tab or section for listed companies and securities. In the case of ESG ratings pertaining to a debt security, the stock exchange where the security is listed must disclose this information on its website.
Industry Challenges and Future Implementation
Acknowledging the challenges faced by category II ERPs during their initial operational years, SEBI has announced that the requirement to conduct an internal audit shall come into effect for category-II ERPs after a two-year grace period from the issuance of the circular. Similarly, the mandate for establishing an ESG Ratings sub-committee and a Nomination and Remuneration Committee (NRC) will be enforced for category-II ERPs after a two-year timeline following the enactment of the new regulations.
In conclusion, SEBI’s proposed measures aim to streamline and fortify the ESG rating framework, ensuring accountability, transparency, and reliability within the market. By implementing these enhanced regulations, the regulator seeks to bolster investor confidence and foster a more sustainable and responsible investment landscape.
Please provide your feedback and insights on SEBI’s proposed measures for ESG rating providers before the public comment period ends on March 6. Let us work together to shape a more transparent and reliable financial ecosystem for all stakeholders involved.
