Context and Background

Securities and Exchange Board of India (SEBI) had earlier released a Master Circular (dated May 16, 2024) outlining procedural and disclosure requirements for ERPs. Based on representations from stakeholders and public consultations, SEBI has now refined certain provisions to enhance operational clarity, regulatory alignment, and ease of compliance for ERPs.

Key Clarifications and Procedural Changes

1. Withdrawal of ESG Ratings

SEBI has specified new norms governing the withdrawal of ESG ratings for ERPs operating under different business models:

1.1 Subscriber-Pays Business Model:

• • ERPs may withdraw a rating if there are no subscribers for it at the time of withdrawal.
  • Ratings forming part of a broader package (such as Nifty 50-linked ratings) cannot be withdrawn if the package still has subscribers.
  • Ratings withdrawn must not be made available to any subscriber in the future.
  • Withdrawal is permitted in cases where the Business Responsibility and Sustainability Report (BRSR) is unavailable for the rated entity.

1.2 Issuer-Pays Business Model:

• • For security ratings, withdrawal is allowed after three years or 50% of the security’s tenure, whichever is higher, with NOC from 75% of bondholders.
  • For issuer/entity ratings, withdrawal is permitted after a continuous three-year rating period.

2. Disclosure of Rating Rationale

SEBI has revised the disclosure norms for rating rationales:

2.1 Subscriber-Pays Business Model:

• • Detailed rating rationales will be shared only with subscribers and may not disclosed publicly.
  • However, ERPs must disclose basic details (name, sector, ESG rating, date of rating) on their website, segmented year-wise, along with reference to the BRSR.

2.2 Issuer-Pays Business Model: No specific additional disclosures were mandated beyond existing requirements.

3. Disclosure on Stock Exchanges

• SEBI has directed that stock exchanges should prominently display ESG ratings in a dedicated section on the entity or security’s page.
• ERPs must provide ESG rating data to stock exchanges in the specified format:
  • Issuer/Security Name
  • Symbol/ISIN
  • Sector
  • ESG Rating
  • Date of Rating
  • ERP Name
  • Business Model (Subscriber-Pays/Issuer-Pays)
  • Rating Press Release (PDF Attachment)

4. Internal Audit Requirements

• SEBI has delayed internal audit requirements for Category-II ERPs, allowing them two years from the issuance date of this circular to implement audit frameworks.
• Expansion of audit team qualifications: SEBI has added Cost Accountants (ACMA/FCMA) and individuals with Diploma in Information System Security Audit (DISSA) to the list of eligible professionals for conducting internal audits.

“The audit team must be composed of at least a Chartered Accountant (ACA/ FCA) or a Cost Accountant (ACMA/ FCMA) and a certified Information Systems Auditor/ Diploma in Information System Auditor/ Diploma in Information System Security Audit (CISA/ DISA/ DISSA).”

5. Governance Norms

• Category-II ERPs are exempted from forming an ESG Ratings Sub-Committee and a Nomination & Remuneration Committee (NRC) for two years.
• Until compliance is mandatory, relevant governance matters will be handled by the Board of the Category-II ERP.

Regulatory Implications

• Greater flexibility: ERPs now have clearer withdrawal criteria aligning with credit rating agency norms.
• Improved confidentiality: Subscriber-Pays ERPs are not required to disclose full rating rationales publicly, protecting proprietary methodologies.
• Stronger transparency: Exchange-level disclosures improve visibility for investors while ensuring structured presentation.
• Ease of compliance: Category-II ERPs benefit from delayed audit and governance committee requirements.

Conclusion

The circular strengthens regulatory clarity while balancing transparency, operational feasibility, and confidentiality. By aligning ESG rating withdrawal criteria with established credit rating norms, SEBI ensures coherence across regulatory frameworks. Additionally, enhanced disclosure standards promote better investor awareness while safeguarding ERPs’ intellectual property.