The Securities and Exchange Board of India (SEBI) issued a circular on May 15, 2025, permitting Credit Rating Agencies (CRAs) to use the Expected Loss (EL) based Rating Scale for rating Municipal Bonds. This is in addition to the standardized rating scales already in use. The decision follows discussions with stakeholders, including the Corporate Bonds and Securitisation Advisory Committee (CoBoSAC). The regulator noted that EL ratings, when used alongside standard or Probability of Default (PD) ratings, could provide a clearer reflection of the recovery prospects for municipal bonds. Given that these bonds are frequently issued by Urban Local Bodies and Municipalities primarily to finance infrastructure development, extending the EL-based scale, previously permitted for the infrastructure sector, was considered appropriate. The circular specifies that CRAs may utilize this additional rating scale for Municipal Bonds specifically issued for financing infrastructure assets. The new provision is effective immediately. The circular has been addressed to various market participants, including registered CRAs, Debenture Trustees, issuers of listed debt securities including Municipal Debt Securities, Stock Exchanges, and Depositories.
Securities and Exchange Board of India
Circular No. SEBI/HO/DDHS/DDHS-PoD-2/P/CIR/2025/70 Dated: May 15, 2025 To,
All Registered Credit Rating Agencies (CRAs)
All Registered Debenture Trustees,
Issuers who have listed and/ or propose to list Non-Convertible Securities,
Securitized Debt Instruments, Security Receipts, Municipal Debt Securities or Commercial Paper
Recognized Stock Exchanges
All Depositories registered with SEBI
Dear Sir / Madam,
Sub: Rating of Municipal Bonds on the Expected Loss (EL) based Rating Scale
1. Para 5.6.1 of the Master Circular for Credit Rating Agencies (CRAs) (“Master Circular”) dated May 16, 2024 provides that in addition to the standardized rating scales prescribed for various instruments, an Expected Loss (EL) based Rating Scale may be used by CRAs for ratings of projects/ instruments associated with infrastructure sector.
2. Pursuant to deliberations with various stakeholders, including the Corporate Bonds and Securitisation Advisory Committee (CoBoSAC), it is felt that EL Ratings, when used along with standardized rating scale/ Probability of Default (PD) Rating, can better reflect the recovery prospects of municipal bonds. Further, Urban Local Bodies/ Municipalities issue bonds primarily for the creation/ development of infrastructure. Therefore, it has been decided that CRAs may, in addition to the standardised rating scale, extend the EL-based Rating Scale for rating of Municipal Bonds which are issued for financing infrastructure assets.
3. This circular shall be applicable with immediate effect.
4. This circular is issued with the approval of competent authority, in exercise of the powers conferred by Section 11 (1) of Securities and Exchange Board of India Act, 1992 read with the provisions of Regulation 20 of CRA Regulations to protect the interest of investors in securities and to promote the development of, and to regulate, the securities market.
5. This Circular is available on the website of the Securities and Exchange Board of India at sebi.gov.in under the category “Legal” and under the drop down “Circulars”.
Yours faithfully,
Ritesh Nandwani
Deputy General Manager
Department of Debt and Hybrid Securities
Tel No.022-2644-9696
Email ID – riteshn@sebi.gov.in
