SEBI opens new business avenues for credit rating agencies beyond traditional debt ratings: Report

The Securities and Exchange Board of India (SEBI) has expanded the scope of operations for credit rating agencies (CRAs), allowing them to undertake rating assignments for financial instruments regulated by other financial sector regulators, according to the regulator's Annual Report 2025-26. The move is aimed at broadening business opportunities for CRAs while maintaining safeguards to protect investors and preserve regulatory oversight.

CRAs can rate products overseen by other regulators

The report said CRAs have been permitted to rate financial instruments that fall under the purview of regulators other than SEBI. While this expands the business opportunities available to rating agencies beyond traditional debt instruments, SEBI has prescribed a series of ring-fencing measures to ensure that activities regulated by SEBI remain clearly segregated from those governed by other authorities.

Under the revised framework, CRAs undertaking such assignments must maintain separate email IDs and dedicated sections on their websites for grievances and disclosures related to non-SEBI regulated instruments. In addition, all rating reports and marketing materials for such instruments must clearly identify the applicable regulator and explicitly state that SEBI's investor protection framework does not apply to those products.

SEBI has also stipulated that CRAs must continue to meet the minimum net worth requirements prescribed under its regulations independently. Any additional capital requirements imposed by other financial sector regulators must be fulfilled separately without affecting compliance with SEBI's norms.

Broader reforms for the credit rating industry

According to the annual report, the changes are part of SEBI's policy initiatives during 2025-26 aimed at strengthening the credit rating ecosystem by improving ease of doing business, refining rating methodologies and enhancing disclosure standards. The regulator said these measures are intended to foster greater transparency, standardisation and efficiency across the industry while supporting better capital allocation and risk pricing.

The report also outlines changes relating to ESG Rating Providers (ERPs), which are governed under the SEBI (Credit Rating Agencies) Regulations, 1999. Subscriber-pays ERPs have been allowed to share rating reports simultaneously with subscribers and issuers instead of first circulating draft reports. They have also been permitted to rate products and issuers regulated by other financial authorities, subject to disclosure of the governing regulator and compliance with applicable laws.

Municipal bonds get an additional rating framework

In another policy measure, SEBI has extended the use of Expected Loss (EL) ratings to municipal bonds. The report said EL ratings can provide a more comprehensive assessment of project-based municipal bond issuances by reflecting recovery prospects alongside the existing probability of default-based rating scale. CRAs have therefore been permitted to assign EL-based ratings in addition to the standardised rating scale for municipal bonds.

The report noted that credit rating agencies serve as key intermediaries between issuers and investors by simplifying complex credit profiles into standardised ratings. This helps reduce information asymmetry, supports efficient capital allocation and enables more accurate pricing of credit risk across financial markets.