Sebi seeks public feedback on draft norms for ESG rating providers

Markets regulator Sebi on Thursday issued a draft circular seeking public comments on the proposed guidelines aiming to strengthen the framework for environmental, social, and governance rating providers (ERPs).

The proposed norms look to address key aspects such as the withdrawal of environmental, social, and governance (ESG) ratings, disclosure of rating rationales, internal audits, and governance requirements for ERPs.

The Securities and Exchange Board of India (Sebi) has invited public comments on the draft circular by March 6, the regulator said.

Under the draft framework, the regulator has outlined distinct conditions for the withdrawal of ESG ratings based on the business model of the rating provider.

The ERPs operating under a subscriber-pays model will be permitted to withdraw ratings only if there are no existing subscribers at the time of withdrawal, Sebi said in a draft circular.

However, ratings that are part of broader indices, such as the Nifty 50, which continues to have subscribers, such rating cannot be withdrawn.

In case of ERPs following an issuer-pays model, the withdrawal of security ratings will be subject to certain conditions, including a minimum three-year rating period or 50 per cent of the tenure of the security, whichever is higher, and having received no-objection certificate from 75 per cent of the bondholders by value, as per the circular.

The regulator has also proposed that ERPs operating under the subscriber-pays model may share the detailed rating rationales/rating reports to their subscribers and should not disclose the same on their websites.

Additionally, for listed entities and debt securities, the stock exchanges will be required to prominently disclose the ESG ratings on their websites under dedicated sections.

Further, the markets watchdog has mandated that all ERPs to undergo internal audits.

"Considering the challenges faced by category II ERPs in the initial years of operation, the requirement to conduct internal audit shall become effective after a period of two years from the date of issuance of this circular," Sebi said.

Similarly, the constitution of ESG Ratings sub-committees and nomination and remuneration committees (NRC) for category II ERPs will also be deferred for two years.

"...The relevant issues under the purview of NRC and ESG ratings sub-committee may be handled by the Board of the category II ERP," the regulator added.