The Securities and Exchange Board of India (SEBI) has proposed measures to strengthen and provide clarity on the framework for ESG Rating Providers (ERP) to withdraw ratings and disclose the rating rationale.
Conditions for ERPs
The market regulator has laid down conditions for ERPs to withdraw ratings under the two types of revenue models: subscriber-pays and issuer-pays models. Last year, the regulator had mandated environment, social and governance (ESG) rating providers to register and obtain an ERP license.
In the subscriber-pays model, ERPs can withdraw a rating if there are no subscribers for the rating. In case the rated entity or instrument is part of a subscriber’s rating package, such as the Nifty 50 index, the rating may not be withdrawn. Once the rating is withdrawn, it has to be withdrawn for all subscribers, SEBI clarified.
ERPs with the issuer-pays model can only withdraw a rating after continuously three years of rating the security, or half way through the security’s tenure—whichever is higher. However, this is subject to receiving approval from 75 per cent of the bondholders by value.
Further, SEBI has proposed that ERPs following a subscriber-pays model should share detailed rating rationales and reports only with subscribers and not publish on their websites. Ratings displayed on their websites must be in a specified format, it said.
Stock exchanges will also prominently disclose ESG ratings of listed issuers on their websites under a separate tab or section for listed companies and securities. In case of ESG ratings of a debt security, the stock exchange where the security is listed must disclose on its website.
“Considering the challenges faced by category II ERPs in the initial years of operation, the requirement to conduct internal audit shall become effective for category-II ERPs after a period of 2 years from the date of issuance of this circular,” SEBI said in the draft circular, inviting public comments till March 6.
Similarly, the requirement for constitution of an ESG Ratings sub-committee and nomination and remuneration committee (NRC) shall become effective for category-II ERPs after a period of 2 years of the new rules.