The Securities and Exchanges Board of India (SEBI) has proposed additional norms for environmental, social and governance (ESG) rating providers to withdraw ratings. Currently, the withdrawal is not allowed, except in cases where the rated issuer is wound up/merged/amalgamated with another company.
Further, subject to credit rating agencies regulations, the withdrawal can be made, as per documented policies available on the website. Ratings for practices are important as they can improve the company’s reputation by emphasising on its sustainable procedures and ethical practices.
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In a new draft circular, SEBI has proposed additional circumstances for the ESG rating withdrawal for both subscriber-pays and issuer-pays business models.
For subscriber-pays, an ERP may withdraw a rating in the case of no subscribers for the rating as on the date of withdrawal. However, if rated entity/instrument is part of a rating package like Nifty 50, which continues to have subscribers, such rating may not be withdrawn. If any rating is withdrawn, it has to be done for all subscribers, the circular said.
In the issuer-pays model, the withdrawal may happen subject to the ERP having rated the security continuously for 3 years or 50% of the tenure of the security, whichever is higher, and having received a no-objection certificate from 75% of the bondholders by value.
Moreover, the draft circular has specified that while an ERP with the subscriber-pays model may share the detailed rating rationales, only with their subscribers and may not disclose the same on their websites. “However, ERPs following a subscriber-pays business model shall disclose the ESG ratings assigned on their website,” it said.
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The regulator has also proposed internal audit requirements for rating providers. It said that considering the challenges faced by Category-II ERPs in the initial years of operation, the requirement for constitution of an ESG Ratings Sub-Committee and NRC (nomination and remuneration committee) shall become effective for Category-II ERPs after a period of two years from the date of issuance of this Circular. “Until the said time, the relevant issues under the purview of NRC and ESG Ratings Sub-Committee may be handled by the Board of the Category-II ERP,“ it said while noting that ERP under Category-I must comply immediately.
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