Securities and Exchange Board of India (SEBI) has introduced the Securities and Exchange Board of India (Credit Rating Agencies) (Amendment) Regulations, 2023, which specifically target Environmental, Social, and Governance (ESG) rating providers. These regulations are a significant development in the ESG rating industry and aim to govern the activities of ESG rating agencies, ensuring transparency and reliability in their operations.
Applicability and Definitions: The regulations state that the provisions, with some exceptions, will be applicable to ESG rating providers. This means that entities engaged in the business of issuing ESG ratings will be subject to these regulations. To provide clarity, the regulations define various terms related to ESG ratings, such as client, issuer, promoter, and liquid net worth.
Registration and Eligibility: According to the regulations, no person can act as an ESG rating provider unless they obtain a certificate from SEBI. This requirement ensures that ESG rating providers meet certain criteria and are regulated by SEBI. To obtain the certificate, the applicant must fulfill specific eligibility criteria. This includes being incorporated as a company under the Companies Act, 2013, and having ESG rating as the main object in its Memorandum of Association. The applicant must also submit a business plan, demonstrate the necessary infrastructure, and have employees with relevant experience.
Categories and Conditions: The regulations establish two categories of ESG rating providers: Category I and Category II. Category I providers have additional criteria that they must meet, such as being a subsidiary of an intermediary registered with SEBI or having a promoter who is regulated by a financial sector regulator. Category II providers have less stringent criteria compared to Category I.
The regulations outline the conditions attached to the certificate granted by SEBI. These conditions include compliance with SEBI regulations, the obligation to inform SEBI about any false information or changes, obtaining prior approval for changes in control, maintaining a minimum liquid net worth, paying registration fees, and meeting the targets set at the time of application.
Procedure and Reconsideration: The regulations specify the procedure for granting or rejecting a certificate. SEBI will review the application and make a decision. If SEBI decides not to grant a certificate, the applicant has the right to be heard and can apply for reconsideration within thirty days. SEBI will review the application for reconsideration and communicate its decision.
Analysis:
The introduction of regulations specifically for ESG rating providers is a significant step by SEBI. It highlights the growing importance of ESG factors in investment decisions and emphasizes the need for reliable and transparent ESG ratings. These regulations aim to ensure that ESG rating providers meet certain criteria, maintain adequate infrastructure, and have qualified personnel to offer accurate and consistent ESG ratings.
By requiring ESG rating providers to obtain a certificate from SEBI, the regulations establish a regulatory framework that promotes credibility and accountability in the ESG rating industry. The conditions attached to the certificate, such as compliance with regulations and the maintenance of minimum net worth, aim to safeguard the interests of investors and ensure the integrity of the ESG rating process.
The categorization of ESG rating providers into Category I and Category II acknowledges the varying scale and complexity of these entities’ operations. It provides flexibility in the regulatory requirements based on the level of expertise and resources available to ESG rating providers.
Code of Conduct: The regulations include a Code of Conduct for ESG rating providers in the Seventh Schedule. This code sets standards for the conduct and operations of ESG rating providers. It covers various aspects such as transparency, governance, conflict of interest, rating process, monitoring, review, disclosure, reporting, confidentiality, and shareholding.
Transparency, Governance, and Conflict of Interest: The regulations emphasize the importance of transparency, governance, and the prevention of conflicts of interest in the operations of ESG rating providers. ESG rating providers are expected to maintain transparency and prevent conflicts of interest. To achieve this, the regulations specify various requirements. ESG rating providers must maintain a website and disclose ESG ratings, methodologies, and scores on environmental, social, and governance parameters. They must also disclose changes in the rating methodology and ensure that ESG ratings are not affected by potential business relationships or conflicts of interest. ESG rating providers should have policies and internal codes of conduct to deal with conflicts of interest and ensure independent decision-making.
Rating Process and Monitoring: The regulations highlight the importance of the rating process and monitoring. ESG rating providers are required to have appropriate internal resources to assign ESG ratings and inform the public of new rating instruments or symbols introduced by them. They should review and disclose ESG ratings promptly, have rigorous and systematic processes, and track material developments related to environmental, social, and governance factors. ESG rating providers are expected to continually improve their information gathering processes and address issues raised by issuers while maintaining objectivity. They must also monitor the ratings of their clients and review ratings annually or more frequently as required.
Review of ESG Rating: ESG rating providers are mandated to review published ratings annually or more frequently and should not withdraw ratings except in specified cases. They must disclose their policies for rating withdrawal and review ratings based on the best available information if the rated issuer refuses to cooperate. ESG rating providers are also required to establish procedures and systems to prevent insider trading and other fraudulent practices.
Disclosure and Reporting: The regulations emphasize the importance of disclosure and reporting by ESG rating providers. They must disclose the definitions of ESG ratings along with symbols and explicitly state that the ratings do not constitute recommendations to buy, hold, or sell securities. ESG rating providers should submit information and reports to SEBI as required and furnish financial statements at the end of each accounting period. They must appoint a compliance officer to monitor compliance with applicable laws and maintain books of accounts, records, and documents for a minimum period of five years.
Confidentiality and Shareholding: ESG rating providers are required to maintain the confidentiality of information received and not disclose it unless required or permitted by law or with the written consent of the provider. They should have policies and procedures to protect non-public information related to their rating products. The regulations also impose restrictions on shareholding in other ESG rating providers, limiting direct or indirect shareholding or voting rights to 10%, unless approved by SEBI.
Schedules: The regulations include additional schedules related to the application process, fees, and the code of conduct for ESG rating providers. These schedules provide detailed guidelines and requirements for ESG rating providers in India, covering various aspects such as the application process, fees, and professional conduct.
Conclusion: SEBI’s Amendment Regulations 2023 for ESG rating providers mark a significant step towards promoting credibility, accountability, and transparency in the ESG rating industry. By establishing a regulatory framework and setting specific criteria, SEBI aims to ensure reliable ESG ratings and enhance investor protection. The Code of Conduct and various requirements specified in the regulations emphasize transparency, governance, and the prevention of conflicts of interest. Compliance with these regulations will contribute to the integrity and trustworthiness of ESG ratings, ultimately fostering sustainable practices in the corporate sector.
SECURITIES AND EXCHANGE BOARD OF INDIA
NOTIFICATION
Mumbai, the 3rd July, 2023
SECURITIES AND EXCHANGE BOARD OF INDIA (CREDIT RATING AGENCIES) (AMENDMENT)
REGULATIONS, 2023
No. SEBI/LAD-NRO/GN/2023/136.—In exercise of the powers conferred under section 30 read with section 11 of the Securities and Exchange Board of India Act, 1992 (15 of 1992), the Board hereby makes the following regulations to further amend the Securities and Exchange Board of India (Credit Rating Agencies) Regulations, 1999, namely: –
1. These regulations may be called the Securities and Exchange Board of India (Credit Rating Agencies) (Amendment) Regulations, 2023.
2. They shall come into force on the date of their publication in the Official Gazette.
3. In the Securities and Exchange Board of India (Credit Rating Agencies) Regulations, 1999,
(1) After Chapter IV and before Chapter V, the following shall be inserted, namely –
“CHAPTER IVA
ESG RATING PROVIDERS
Applicability
28A. The provisions of these regulations, except chapters II, III, and IV, shall be applicable to ESG rating providers:
Provided that any reference to a “credit rating agency” under chapters I, V, VI and VII shall also be construed as a reference to an “ESG rating provider”, as may be applicable:
Provided further that the provisions of this Chapter shall only be applicable to ESG rating providers covered in the Fourth Schedule.
Definitions
28B. (1) In this chapter, unless the context otherwise requires: –
(a) “client” means any person who avails or proposes to avail the services of an ESG rating provider;
(b) “environmental, social, and governance ratings”, or “ESG ratings” means the rating products that are marketed as opinions about an issuer or a security, regarding its ESG profile or characteristics or exposure to ESG risk, governance risk, social risk, climatic or environmental risks, or impact on society, climate and the environment, that are issued using a defined ranking system of rating categories, whether or not these are explicitly labelled as “ESG ratings”;
(c) “ESG rating provider” means a person which is engaged in, or proposes to engage in, the business of issuing ESG ratings;
(d) “liquid net worth” means net worth deployed in liquid assets which are unencumbered;
Explanation. – For the purposes of this chapter,
(i) “liquid asset” is a low risk asset that can easily be converted into cash in a short period of time, such as cash, fixed deposits, government securities, treasury bills and repo on government securities.
(ii) “Net Worth” means the aggregate value of the paid up equity capital and free reserves (excluding reserves created out of revaluation), reduced by the aggregate value of accumulated losses and deferred expenditure not written off, including miscellaneous expenses not written off;
(e) “issuer” means any person who is, or whose securities are, rated or proposed to be rated by an ESG rating provider; and
(f) “promoter” shall have the meaning assigned to it in Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018.
Registration of ESG rating providers
28C. On and from the date of this regulation coming into force, no person shall act as an ESG rating provider unless it has obtained a certificate from the Board:
Provided that a person acting as an ESG Rating Provider on the date of this regulation coming into force, may continue to do so for a period of six months from the date of this regulation coming into force or such other period as may be specified by the Board, or if it has made an application for grant of a certificate for registration within the specified period, till the disposal of such application.
Application for grant of certificate
28D. (1) Any person intending to undertake business as an ESG rating provider, on or after this chapter coming into force, shall make an application to the Board for grant of a certificate.
(2) An application for the grant of a certificate to act as an ESG rating provider shall be made to the Board, in Form A of the Fifth Schedule.
(3) The application shall be accompanied by a non–refundable application fee, as specified in Part A of the Sixth Schedule, to be paid in the manner specified in Part B of the Sixth Schedule.
(4) The application under sub-regulation (2) shall be made for seeking registration in any one of the following categories, namely –
(a) Category I; or
(b) Category II.
Eligibility criteria
28E. For the purpose of the grant of certificate, the applicant shall fulfil the following criteria namely, —
(a) the applicant shall be incorporated as a company under the Companies Act, 2013 (18 of 2013);
(b) the applicant shall have specified ESG rating activity, as the main object in its Memorandum of Association;
(c) the applicant shall have submitted, to the Board, its business plan pertaining to providing ESG ratings, along with the following information, namely –
(i) a target breakeven date;
(ii) target revenue and the targeted number of clients it plans to service, within two years of obtaining a certificate; and
(iii) cumulative cash losses that the applicant projects to incur until the targeted breakeven date, along with the activities or areas in which such losses shall be incurred;
Explanation. – The targets mentioned in clause (c) of this regulation shall:
(A) be set by the applicants themselves;
B. be limited to their operations in securities markets, i.e. related to issuers that are listed, or proposed to be listed, or whose securities are listed or proposed to be listed, on a recognized stock exchange; and
C. be reasonable;
(d) the applicant shall have submitted a declaration that it does not and shall not undertake any activity or offer any product or service, except the following:
(i) ESG rating of an issuer, that is listed or proposed to be listed on a stock exchange recognized by the Board, or
(ii) ESG rating of a security, that is listed or proposed to be listed on a stock exchange recognized by the Board, or
(iii) Offering any other product or service or undertaking any other activity as may be specified by the Board, or
(iv) ESG rating of any other product or issuer, as may be required by another financial sector regulator or authority, as may be specified by the Board, under the guidelines of such regulator or authority:
Provided that a Category II ESG rating provider shall not undertake certification of green debt securities or such other activities as the Board may specify from time to time.
(e) the applicant shall have and shall maintain the net worth as required under the provisions of these regulations:
Provided that the net worth shall be in the form of positive liquid net worth;
(f) the applicant shall have necessary infrastructure including adequate office space, technology, equipment and manpower, to enable it to provide ESG rating services in accordance with the provisions of the Act and these regulations:
Provided that the requirement of having an office space shall not be mandatory for a Category II ESG rating provider if it conducts its operations remotely subject to a declaration by it to this effect;
(g) the applicant is not a credit rating agency or any other intermediary registered with the Board;
(h) the applicant shall have appointed a compliance officer;
(i) the applicant shall have, in its employment, persons with adequate professional and other relevant experience to the satisfaction of the Board;
(j) the applicant and its promoter(s), are fit and proper person(s), as per Schedule II of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008;
(k) the applicant, during the past three years from the date of filing the application, has not been –
(i) refused by the Board a certificate under these regulations, or
(ii) deemed not fit and proper by the Board, or
(iii) subject to any enforcement action for a contravention of the Act or of any rules or regulations made under the Act.
(l) the grant of certificate to the applicant would be in the interest of investors;
(m) the applicant shall have, in case it is seeking registration under Category I, satisfied the following additional criteria, namely –
(i) the applicant is a subsidiary of an intermediary registered with the Board, or of ESG rating provider incorporated in a Financial Action Task Force (FATF) member jurisdiction and recognized under their respective law, having a minimum experience of five years in ESG rating of securities or companies;
(ii) the promoter of the applicant is:
A. a person regulated by any of the financial sector regulators namely, the Board, the Reserve Bank of India, the Insurance Regulatory and Development Authority of India or the Pension Fund Regulatory and Development Authority, subject to the receipt of the relevant approval(s) from the concerned regulator or authority; or
B. a foreign ESG rating provider incorporated in the jurisdiction of a member of the Financial Action Task Force (FATF) and recognized under their respective law, having a minimum experience of five years in the business of providing ESG rating of securities or companies; or
C. a body corporate with a continuous net worth of minimum rupees one hundred crores, as per its audited annual accounts for the previous five years, prior to filing of the application with the Board for the grant of certificate:
(iii) the promoter of the applicant shall maintain a minimum shareholding of twnety six per cent. in the ESG rating provider for a minimum period of five years from the date of grant of registration by the Board;
(iv) the applicant shall maintain a minimum liquid net worth of rupees five crores at all times:
Provided that at the time of making the application, the applicant shall have a minimum liquid net worth of the higher of,
A. rupees ten crores, or
B. addition of rupees five crores and the target on cumulative cash losses until breakeven, as provided by the applicant under these regulations:
Provided further that the liquid net worth can be drawn down in terms of the business plan submitted at the time of application for certificate, subject to compliance with these regulations;
(v) the applicant shall have at least four employees specialized across the following areas, at all times:
A. governance,
B. sustainability,
C. social impact or social responsibility,
D. data analytics,
E. finance,
F. information technology, and
Explanation. – For the purposes of this regulation, one employee may be treated as a specialist in at most two of the above areas. A person shall be considered as specialized in an area if such person possesses any of the following:
A. relevant work experience of not less than five years in the specified area; or
B. a professional qualification in the specified area from a university or an institution recognized by the Central Government or any State Government or a foreign university, or a Chartered Financial Analyst charter from the Chartered Financial Analyst Institute; or
C. any other qualification as may be specified by the Board;
(n) the applicant shall, in case it is seeking registration under Category II, satisfy the following additional criteria, namely –
(i) the applicant shall maintain minimum liquid net worth of rupees ten lakh at all times:
Provided that at the time of making the application, the applicant shall have a minimum liquid net worth of the higher of,
A. rupees twenty lakhs; or
B. addition of rupees ten lakhs and the target on cumulative cash losses until breakeven, as provided by the applicant under these regulations:
Provided further that the liquid net worth can be drawn down in terms of the business plan submitted at the time of application for certificate, subject to compliance with these regulations;
(ii) the applicant shall have at least two employees specialized across the following areas, at all times:
A. governance,
B. sustainability,
C. social impact or social responsibility, and
D. data analytics.
Explanation. – For the purposes of this regulations, one employee may be treated as a specialist in at most two of the above areas. A person shall be considered as specialized in an area if such person possesses any of the following:
(a) has relevant work experience of not less than five years in the specified area; or
(b) a professional qualification in the specified area from a university or an institution recognized by the Central Government or any State Government or a foreign university; or
(c) any other qualification as may be specified by the Board;
(o) any other criteria, as may be specified by the Board, from time to time. Furnishing of further information, clarification and personal representation
28F. (1) The Board may require the applicant to furnish any such further information or clarification regarding the activities of the ESG rating provider or any such matter connected thereto, to consider the application for grant of a certificate or after registration thereon.
(2) The Board, if it so desires, may further require the applicant or its authorized representative to appear before it, for personal representation in connection with the grant of a certificate.
Grant of certificate as an ESG rating provider
28G. (1) The Board may grant certificate under any category of ESG rating provider, if it is satisfied that the applicant fulfils the requirements for that category.
(1) The Board shall, on being satisfied that the applicant is eligible, grant a certificate in Form B of Fifth Schedule, and shall send an intimation to the applicant.
(2) The certificate of registration granted under this regulation shall be valid unless it is suspended or cancelled by the Board, or surrendered by the ESG rating provider.
Conditions of certificate
28H. The certificate granted under this chapter shall be subject to the following conditions:
(a) the ESG rating provider shall comply with the provisions of the Act, the regulations made thereunder and the guidelines, directives, circulars and instructions as may be issued by the Board, from time to time;
(b) the ESG rating provider shall forthwith inform the Board, in writing, if any information or particulars earlier furnished to the Board:
(i) is found to be false or misleading in any material particular; or
(ii) has undergone any change subsequent to its furnishing at the time of the application for a certificate.
(c) in case any change in control of the ESG rating provider is proposed, the ESG rating provider shall obtain the prior approval of the Board for continuing to act as such after the change;
(d) the ESG rating provider shall at all times maintain the minimum liquid net worth as required under the provisions of these regulations;
(e) the ESG rating provider shall pay the requisite registration fees in the manner provided in these regulations;
(f) the ESG rating provider shall meet the targets, declared at the time of its application to the Board, within the specified time:
Provided that the above shall not be applicable with respect to projections on cumulative cash losses:
Provided further that in case that the targets are not achieved, the ESG rating provider shall be required to contribute additional capital or take other remedial measures, as appropriate and as may be specified by the Board, within six months of the date of the corresponding target date, or other such period as may be specified by the Board;
(g) the ESG rating provider does not undertake any activity or offer any product or service, except services related to ESG ratings in accordance with these regulations or such other products, services or activities as may be specified by the Board or activities incidental to such activities.
Procedure where certificate is not granted
28I. (1) If, after considering an application made under this Chapter, the Board is of the opinion that a certificate should not be granted, it may, after giving the applicant a reasonable opportunity of being heard, reject the application.
(2) The decision of the Board, not to grant certificate under sub-regulation (1), shall be communicated by the Board to the applicant within a period of thirty days of such decision, stating the grounds of the decision.
(2) Any applicant aggrieved by the decision of the Board rejecting his application under sub-regulation (1) may, within a period of thirty days from the date of receipt by him of the communication referred to in sub-regulation (2), apply to the Board in writing for reconsideration of such decision.
(3) Where an application for re-consideration is made under sub-regulation (3), the Board shall consider the application and communicate to the applicant its decision in writing, as soon as may be.
Code of Conduct
28J. The ESG rating provider shall abide by the Code of Conduct as set out in the Seventh Schedule.
Transparency, governance and prevention of conflict of interest
28K. The ESG rating provider shall:
(a) maintain a website and disclose the ESG ratings, type of ESG rating (whether risk-based or impact-based or otherwise), scores on environmental, social and governance parameters and other parameters forming a part of the ESG rating, on such a website for public access and provide a hyperlink to the methodology of assigning an ESG rating;
(b) prioritize adequate levels of public disclosure and transparency for its ESG ratings products, including its methodologies and processes;
(c) disclose its rating methodology for all ESG ratings on its website, while maintaining a balance with respect to proprietary or confidential aspects of the methodologies, and include category-wise weightages of environmental, social, and governance factors in ESG ratings, as well as the weightage of high-level themes or key issues in each of the three factors;
(d) disclose the category under which the ESG rating provider is registered in all its disclosures related to ESG ratings on its website;
(e) use terminologies which are relevant and reflective of the characteristics of the ESG ratings product offered and, if the ESG rating provider is an associate or subsidiary of a credit rating agency, the ESG rating provider shall prominently display that ESG ratings are different from credit ratings, through its website and the ESG rating reports;
(f) disclose the changes in the ESG rating methodology and consequential changes in ESG ratings on its website;
(g) disclose the extent to which a change in ESG rating is on account of the change in the ESG rating methodology;
(h) maintain and disclose archives of previous ESG rating methodologies and ESG ratings on its website, in an easily downloadable and machine-readable format, preferably in eXtensible Business Reporting Language;
(i) publish its average one-year ESG rating transition rate on its respective website, in a manner as may be specified by the Board;
(j) disclose, on its website, the general nature of compensation arrangements with clients and whether the ESG ratings assigned were solicited or unsolicited;
(k) take other measures that the Board may consider material for a true and fair understanding of the ESG rating;
(l) identify, disclose, and to the extent possible, avoid or appropriately mitigate potential conflicts of interest;
(m) formulate policies and internal codes of conduct for dealing with conflicts of interest and prominently disclose the policies on its website;
(n) identify, disclose and, to the extent possible, mitigate potential conflict of interest that may arise between ESG rating provider and its clients or client groups, or between multiple clients, or between the rated issuer or issuer whose securities are being rated and other clients or client groups, or between the ESG Rating Provider and any other sources;
(o) ensure that ESG ratings are not affected by any existing or potential business relationship between the ESG rating provider or its associates and any person for which it provides ESG ratings or associates of such person;
(p) structure reporting lines for its staff and their compensation arrangements to eliminate or to the extent possible, mitigate actual and potential conflicts of interest;
(q) not provide consulting or advisory services relating to or any areas related to environmental, social and governance aspects including ESG ratings; and
(r) adopt and implement written policies and procedures to ensure that its decisions are independent, free from any form of undue interference or influence.
Rating process and monitoring of ESG rating
28L. (1) An ESG rating provider shall:
(a) have appropriate internal resources to assign an ESG rating;
(b) inform the general public of new ESG rating instruments or symbols introduced by it;
(c) ensure that the ESG rating suitably incorporates the environmental, social and governance aspects that are contextual to the Indian market, in such manner as may be specified by the Board from time to time:
Provided that nothing contained above shall preclude the ESG rating provider from offering additional ESG rating products or services.
(d) promptly disclose the ESG rating assigned to any issuer or security, and any changes in ESG ratings or reviews, after periodic review or otherwise, to the stock exchange(s) where the issuer or the security is listed, and on its website, and issue press releases for the information of the investors;
(e) have written policies, procedures and internal controls to ensure that the processes and methodologies are rigorous and systematic, are consistently applied, and are periodically reviewed and updated;
(f) adopt and implement written policies and procedures to ensure the issuance of high quality ESG ratings based on publicly available information, and if such information is not available publicly, then rely on other information sources using transparent and defined methodologies;
(g) have efficient systems to track material developments related to environmental, social and governance factors to ensure timely and accurate ESG ratings;
(h) attempt to continually improve information gathering processes in respect of the issuers and securities rated by it;
(i) respond to, and address issues flagged by issuers covered by its ESG rating products while ensuring that the same does not compromise the objectivity of the products; and
(j) share the draft ESG rating report with the rated issuer or the issuer whose securities are being rated, before publication of the same:
Provided that the ESG rating provider shall grant an opportunity of appeal and representation, if requested for by the issuer.
(2) The ESG rating provider shall continuously monitor the rating of a client, unless the rating is withdrawn in such manner as may be specified by the Board.
Procedure for review of ESG rating
28M. (1) The ESG rating provider shall annually, or if required, more frequently, review each of the published ESG ratings, unless the ESG rating is withdrawn in accordance with these regulations.
(2) The ESG rating provider shall not withdraw an ESG rating except in cases where the rated issuer, or the issuer whose security is rated, is wound up or merged or amalgamated with another company, or except in cases as may be specified by the Board from time to time.
(3) The ESG rating provider shall withdraw an ESG rating as per its documented policies, subject to sub-regulation (2), which shall also be disclosed on its website.
(4) If the rated issuer or the issuer whose securities are rated by the ESG rating provider refuses co-operate with the ESG rating provider regarding the review of the ESG rating, despite being under a contractual obligation to do so, the ESG rating provider shall review the ESG rating on the basis of the best available information, in such manner as specified by the Board, from time to time:
Provided that if an ESG rating has been provided based on the best available information owing to lack of co-operation by the rated issuer or the issuer whose securities are rated, the ESG rating provider shall disclose the same to the investors.
Internal procedures to be framed
28N. (1) An ESG rating provider shall frame appropriate procedures and systems for monitoring the trading of securities by its employees in the securities of its clients, in order to prevent contravention of –
(a) the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015;
(b) the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to the Securities Market) Regulations, 2003; and
(c) other laws relevant to trading in securities.
Disclosure of ESG rating definitions
28O. The ESG rating provider shall, while disclosing ESG ratings, also disclose:
(a) the definitions of that ESG rating, along with the symbols; and
(b) explicitly state that the ESG ratings do not constitute recommendations to buy, hold or sell any securities.
Submission of information to the Board
28P. (1) The ESG rating provider shall furnish such information as may be called for, by the Board including any report relating to its activities, within such period as may be specified by the Board.
(2) Every ESG rating provider shall, at the close of each accounting period, furnish to the Board copies of its financial statements, in such manner as may be specified by the Board, from time to time.
Appointment of Compliance Officer
28Q. (1) The ESG rating provider shall appoint a compliance officer who shall be responsible for monitoring the compliance of all the applicable laws.
(2) The compliance officer shall immediately and independently report to the Board of any non-compliance observed by him or her.
Maintenance of Books of Accounts records, etc.
28R. (1) Every ESG rating provider shall keep and maintain, for a minimum period of five years, the following books of accounts, records and documents, namely –
(a) copy of its financial statements as on the end of each accounting period;
(b) a copy of the auditor’s report on its accounts for each accounting period;
(c) a copy of the agreement entered into with each client, if applicable;
(d) information supplied by each of the clients, if applicable;
(e) correspondence with each client;
(f) ESG ratings assigned to various issuers or securities including up- gradation and down gradation (if any) of the ratings so assigned;
(g) ESG rating notes and other documents which state the rationale or form the basis for assigning an ESG rating;
(h) letter or reports or press releases or disclosures assigning ESG ratings;
(i) particulars of fees charged for ESG ratings; and
(j) such other records as the Board may specify from time to time.
(2) Every ESG rating provider shall intimate to the Board the place where the books of account, records and documents, required to be maintained under these regulations, are being maintained.
Steps on auditor’s report
28S. Every ESG rating provider shall, within two months from the date of the report of the auditor, take steps to rectify the deficiencies, if any, made out in such report, in so far as they relate to the activity of ESG rating.
Confidentiality
28T. (1) Every ESG rating provider shall treat, as confidential, the information supplied to it by any person and shall not disclose the same to any other person except where such disclosure is required or permitted by or under any law for the time being in force or the ESG rating provider has obtained the consent, in writing, of the provider of information.
(2) The ESG rating provider shall not use the confidential information, shared by any person for any purpose other than ESG ratings, for undertaking ESG ratings, unless the ESG rating provider obtains the consent, in writing, from the provider of the information.
(3) The ESG rating provider shall adopt and implement written policies and procedures to protect all non-public information received related to their ESG rating products.
Restriction on shareholding in an ESG rating provider
28U. (1) An ESG rating provider shall not:
(a) directly or indirectly, hold ten per cent. or more shareholding or voting rights in any other ESG rating provider, or
(b) have representation on the board of directors of any other ESG rating provider:
Provided that an ESG rating provider may, with the prior approval of the Board, in the interest of investors, market integrity and stability, acquire shares or voting rights exceeding ten per cent. in any other ESG rating provider if such acquisition results in change in control in the ESG rating provider whose shares are being acquired.
(2) A shareholder holding ten per cent. or more shares or voting rights in an ESG rating provider shall not hold ten per cent. or more shares or voting rights, directly or indirectly, in any other ESG rating provider:
Provided that the said restriction shall not apply to holdings by pension funds, insurance schemes and mutual fund schemes.
Explanation. – For the purpose of these regulations, a “ESG rating provider” means a ESG rating provider registered with the Board.
Entities connected with a promoter or a rating agency not to be rated
28V. (1) No ESG rating provider shall, rate an issuer or securities of any issuer, which is a borrower of its promoter or a subsidiary of its promoter or an associate of its promoter, if
(a) there are any common Chairpersons, or directors between the ESG rating provider and the borrower or the subsidiary or the associate of the promoter; or
(b) there are common employees between the ESG rating provider and the borrower or the subsidiary or the associate of the promoter.
(2) No ESG rating provider shall, rate an issuer or securities of any issuer, which is its promoter;
(3) An ESG rating provider shall neither assign any ESG rating to an issuer promoted by it or its associates, nor rate securities of such issuers.
(4) No ESG rating provider shall rate an issuer or securities of such issuer, if the ESG rating provider has a Chairperson, director or employee who is also a Chairperson, director or employee of the issuer:
Provided that the ESG rating provider may, subject to the provisions of sub-regulation
(1) rate an entity having a common independent director if, –
(a) the independent director does not participate in the discussions on ESG rating decisions, and
(b) the ESG rating provider makes a disclosure in the ESG rating announcement of such issuer (about the existence of common independent director) on its Board, and that the common independent director did not participate in the rating process or in the meeting of its board of directors, when the rating of such associate was discussed.
Explanation. – For the purposes of this regulation,
(a) “independent director” means a director who, apart from receiving remuneration as a director, does not have any other material pecuniary relationship or transactions with the company, its promoters, its management or its subsidiaries, which in the judgment of the board of the company, may affect the independence of the judgment of such director.
(b) “associate”, in relation to a promoter, includes a body corporate in which the promoter holds ten per cent. or more, of the share capital;
(c) “promoter” means a person who holds ten percent or more, of the shares of the ESG rating provider.”
(2) After the Third Schedule, the following schedules shall be inserted, namely –
“FOURTH SCHEDULE
[See regulation 28A]
APPLICABILITY OF CHAPTER IVA
| S. No. | Location of ESG Rating Provider | Asset class in securities market | Location of ESG Rating User |
Applicability of regulations |
| 1. | India | Indian | India | Yes |
| 2. | India | Indian | Outside India | No |
| 3. | India | Global | India | Yes |
| 4. | Outside India | Indian | India | Yes |
| 5. | Outside India | Indian | Outside India | No |
| 6. | Outside India | Global | India | No |
FIFTH SCHEDULE
[See regulations 28D and 28G]
FORMS
FORM A
Application for grant of Certificate of Registration as an ESG rating provider
NAME OF THE APPLICANT:
NAME OF THE COMPLIANCE OFFICER:
MOBILE NUMDER:
EMAIL ID:
INSTRUCTIONS FOR FILLING UP FORM –
(a) Applicants must submit, to the Board, a completed application form together with appropriate supporting documents.
(b) This application form should be filled in accordance with the regulations.
(c) Application for registration will be considered, only if it is complete in all respects.
(d) All answers must be typed.
(e) Information which needs to be supplied in detail may be given on separate sheets which should be attached with the application form.
(f) All signatures on the application must be original.
(g) Every page of the form as well as every additional sheet must be signed by the authorized signatory of the applicant.
(h) Application must be accompanied by an application fee as specified in Sixth Schedule to these regulations.
(i) All mentions of ‘ratings’ in this Schedule shall be deemed to refer to ESG ratings, unless the context otherwise specifies.
1. PARTICULARS OF THE APPLICANT
1.1. Name, address of the registered office, address for correspondence, mobile number(s), email address of the Applicant. Address of branch offices, if any.
1.2. Name, mobile number and email address of the contact person.
1.3. Category of ESG rating provider for which the application is made.
1.4. If the application is for Category I, please provide the following information, as applicable:
1.4.1. Details of the intermediary registered with the Board, of which the applicant is a subsidiary, or of ESG rating provider registered with any foreign regulatory authority in a Financial Action Task Force (FATF) member jurisdiction and recognized under their law.
1.4.2. Details of the promoters of the applicant.
1.5. Please provide the following information regarding the applicant’s operations pertaining to its business of providing ESG ratings:
1.5.1. business plan, and
1.5.2. a target breakeven date, and
1.5.3. target revenue, and target number of clients it plans to service, within two years of obtaining a certificate, and
1.5.4. cumulative cash losses that the applicant projects to incur until the target breakeven date, along with the activities or areas wherein such losses shall be incurred;
1.6. Liquid Net-worth of the applicant and a declaration that (i) after obtaining its registration with SEBI, the ESG Rating Provider may draw down an amount equivalent to paragraph 1.5.4 above only on the areas specified under the business plan submitted at the time of application; and (ii) this amount shall not be used in any other manner, except for incurring such expense or maintained as part of the liquid net worth.
1.7. Date of incorporation of the applicant (enclose certificate of incorporation and memorandum and articles of association). Specify the following:
1.7.1. Objects (Main and Ancillary) of the applicant company; and 1.7.2. Authorized, issued, subscribed and paid-up capital.
1.8. Structure of the applicant, whether it is incorporated as a company limited by shares or guarantee, private or public, or as an unlimited company.
1.9. Whether the applicant is listed. If yes, names of Stock Exchanges and latest share price to be given.
1.10. Whether the Applicant or its associates are registered with the Board or any other regulatory authority in any capacity, along with details of registration.
1.11. Whether the applicant belongs to or is related to:
1.11.1. any person already in the business of undertaking ESG rating activities
1.11.2. any person proposing to undertake ESG rating activities for the first time.
2. ELIGIBILITY CRITERIA
2.1. Category under which the promoter(s) of the applicant belong to (refer regulation 28E).
2.2. Names of the promoters and their shareholding in the applicant.
2.3. Enclose a certificate obtained from a Chartered Accountant certifying the net worth requirements of the promoter, if applicable.
2.4. Liquid net worth of the applicant as per the last audited accounts, not earlier than three months from the date of application along with a certificate obtained from a Chartered Accountant certifying the same.
3. PARTICULARS OF DIRECTORS/KEY PERSONNEL
3.1. Particulars of directors of the applicant, including the name, qualification, experience, shareholding in the applicant and directorship in other bodies corporate along with
copies of identity proofs and address proofs of the directors.
3.2. Particulars of key personnel of the applicant, including the name, designation in the applicant, qualification, and previous positions held, experience, date of appointment in the applicant and functional areas.
4. INFRASTRUCTURE
4.1. Details of infrastructure including computing facilities, office space, equipment, manpower, facilities for research and database available with the company and whether the existing infrastructure is adequate to carry on the rating activities proposed to be undertaken by the applicant.
4.2. Any further plan for additional/ improved infrastructure, and if applicable, declaration of remote work environment, if any, to be indicated.
5. MAJOR SHAREHOLDERS
5.1. List of major shareholders (holding five per cent. or more shareholding in the applicant, directly or along with associates) in the format provided below:
Shareholding as on:
|
Name of shareholder |
No. of Shares held | %age of total paid up capital of the company |
6. ASSOCIATE CONCERNS
6.1. Particulars of associate companies/concerns which shall include name, address, type of activity handled, nature of interest of the applicant in the associate, nature of interest of promoter(s) of the applicant in the associate.
6.2. Whether the Board has granted or refused registration as ESG rating provider to any associate of the applicant along with the details of date of application, date of refusal/registration, reasons for refusal etc.
7. BUSINESS INFORMATION OF THE COMPANY
7.1. History, major events and present activities along with details of experience in rating activities and other related activities.
7.2. If the applicant is proposing to engage in ESG rating activities for the first time, business plan of the company with projected volume of activities and income for which registration is sought.
7.3. Rating activities handled during the last three years as per the table below:
| Name of Client | Size of Issue | Year of Issue | Security/Instrument Rated |
listed/unlisted |
7.4. Details of other rating activities undertaken during last three years.
7.5. Any other information considered relevant to the nature of services rendered by the applicant.
8. FINANCIAL INFORMATION ABOUT THE APPLICANT
8.1. Liquid Net worth (rupees in lakhs)
|
Items |
Year prior to the preceding year of the current year | Preceding year | Current year |
| (a) Paid-up equity capital | |||
| (b) Free reserves (excluding reserves created out of revaluation) | |||
| Total (a) + (b) | |||
| (c) Accumulated Losses |
|||
| (d) Deferred expenditure not written off, including miscellaneous expenses not written off | |||
| Net worth (a) + (b) – (c) – (d) |
8.2. Please enclose audited annual accounts for the last three years. Where unaudited reports are submitted, give reasons. If minimum liquid net worth Requirement has been met after last audited annual accounts, audited statement of accounts of a later date shall also be submitted.
8.3. Provide a declaration that the liquid net worth of the applicant is in compliance with these regulations. Submit relevant documentation to support the same.
8.4. Name and address of the principal bankers of the applicant. 8.5. Name and address of the auditors.
9. OTHER INFORMATION
9.1. Details of all pending litigation against the applicant company, directors and employees:
| Nature of dispute | Name of the party | Status |
9.2. Indictment or involvement in any legal proceeding connected with the securities market by the applicant or any of its directors, or key managerial personnel in the last three years;
9.3. Details of previous application to the Board as an ESG rating provider, if any.
9.4. If the applicant has, in the past, been deemed not ‘fit and proper’ by the Board, please provide relevant details of the same.
10. DECLARATION
10.1. Give the following declarations signed by two directors:
I/We hereby apply for a certificate.
I/We warrant that I/We have truthfully and fully answered the questions above and provided all the information which might reasonably be considered relevant for the purposes of my registration.
I/We declare that the information supplied in the application form is complete and correct.
For and on behalf of
(Name of Applicant)
Director
Name in Block Letters
Director
Name in Block Letters
Date
Date
FORM – B
Certificate of Registration as an ESG rating provider
I. In exercise of the powers conferred by sub-section (1) of section 12 of the Securities and Exchange Board of India Act, 1992 (15 of 1992), read with the rules and regulations made thereunder, the Board hereby grants a certificate of registration to _______________________________________________ as an Environmental, Social, and Governance (ESG) rating provider, under Category-___________ , in accordance with and subject to the conditions in the regulations to carry out the activity of the ESG rating provider: –
II. Registration Code for the ESG rating provider is IN/ERP/(Category)/_________ .
III. This certificate of registration shall be valid till it is suspended or cancelled by the Board.
Place:
Date
By Order
For and on behalf of
Securities and Exchange Board of India
SIXTH SCHEDULE
[See regulations 28C and 28G]
FEES FOR ESG RATING PROVIDERS
PART A
Amount to be paid as fees
| Sr. No. | Particulars | Fees payable |
| 1. | Application fee for grant of registration | 50,000 |
| 2. | Registration Fees
(a) Category I (b) Category II |
(a) 10,00,000
(b) 1,00,000 |
| 3. | Recurring registration fee (For every three years)(a) Category I(b) Category II |
(a) 5,00,000
(b) 50,000 |
PART B
1. An ESG rating provider who has been granted a certificate, shall pay fees, as specified under item 2 of Part A, within fifteen days from the date of receipt of intimation from the Board.
2. An ESG rating provider who has been granted a certificate shall, to keep its registration in force, pay fee as specified under item 3 of Part A, every three years from the sixth year of the date of grant of certificate.
3.The fee specified above shall be paid by way of direct credit in the bank account through online payment using SEBI payment gateway.
4. The (recurring) registration fee payable every three years as specified under paragraph 3 of Part A, shall be paid by the ESG rating provider one month prior to the expiry of the period, for which the fee has been paid.
SEVENTH SCHEDULE
[See regulation 28J]
CODE OF CONDUCT FOR ESG RATING PROVIDERS
1. An ESG rating provider shall make all efforts to protect the interests of the investors.
2. An ESG rating provider, in the conduct of its business, shall observe high standards of integrity, dignity and fairness in the conduct of its business.
3. An ESG rating provider shall fulfil its obligations in a prompt, ethical and professional manner.
4. An ESG rating provider shall, at all times, exercise due diligence, ensure proper care and exercise independent professional judgment in order to achieve and maintain objectivity and independence in the ESG rating process.
5. An ESG rating provider shall maintain records to support its decisions.
6. An ESG rating provider shall adopt and implement ESG rating processes that reflect consistent rating standards.
7. An ESG rating provider shall not indulge in any unfair competition, nor shall it induce or induct the clients of any other ESG rating provider on assurance of higher or lower ESG rating.
8. An ESG rating provider shall keep track of all important changes relating to the issuers or securities it rates and shall develop efficient and responsive systems to yield timely and accurate ratings.
9. An ESG rating provider shall also monitor closely all relevant factors that might affect the environmental, social or governance characteristics of the rated issuers or their securities.
10. An ESG rating provider shall, wherever necessary, disclose to the client, all possible sources of conflict of duties and interests, which could impair its ability to make fair, objective and unbiased ratings.
11. An ESG rating provider shall ensure that no conflict of interest exists between any member participating in the rating analysis, and that of the person who is being rated or whose securities are being rated.
12. An ESG rating provider shall not make any exaggerated statement, whether oral or written, to the client either about its qualification or its capability to render any services or its achievements with regard to the services rendered to other clients.
13. An ESG rating provider shall not make any untrue statement, suppress any material fact or make any misrepresentation in any documents, reports, papers or information furnished to the Board, stock exchange or public at large.
14. An ESG rating provider shall promptly inform the Board about any action, legal proceedings etc., initiated against it alleging any material breach or non-compliance by it, of any of the laws, rules, regulations to which it is subject, and of directions of the Board or of any other regulatory body.
15. An ESG rating provider shall maintain an appropriate level of knowledge and competence and abide by the provisions of the Act, regulations and circulars, which may be applicable and relevant to the activities carried on by the ESG rating provider.
16. An ESG rating provider shall ensure that there is no misuse of any privileged information including prior knowledge of ESG rating decisions or changes.
17. An ESG rating provider or any of its employees shall not render, directly or indirectly any investment advice about any security being rated or about any rated person or the person whose securities are rated in publicly accessible media.
18. An ESG rating provider shall ensure that any change in registration status or any material change in financials or in case of any penal action taken by the Board which may adversely affect the interests of clients or investors is promptly informed to the clients and any business remaining outstanding is transferred to another registered person in accordance with any instructions of the affected clients or investors.
19. An ESG rating provider shall maintain an arm’s length relationship between its ESG rating activity and any other activity.
20. An ESG rating provider shall develop its own internal code of conduct for governing its internal operations and laying down its standards of appropriate conduct for its employees and officers in the carrying out of their duties within the ESG rating provider and as a part of the industry. Such a code shall provide for the maintenance of professional excellence and standards, integrity, confidentiality, objectivity, avoidance of conflict of interests, disclosure of shareholdings and interests, etc. Such a code shall also provide for procedures and guidelines in relation to the establishment and conduct of the officers and employees serving in the rating process.
21. An ESG rating provider shall provide adequately empower its compliance officer to enable him or her to effectively discharge his duties.
22. An ESG rating provider shall ensure that the senior management, particularly decision makers, have access to all relevant information about its business on a timely basis.
23. An ESG rating provider shall ensure that good corporate policies and corporate governance are adopted and followed.
24. ESG rating provider shall not, generally and particularly, in respect of issuers or securities rated by it, be party to or instrumental for—
(a) creation of false market;
(b) price rigging or manipulation; or
(c) dissemination of any unpublished price sensitive information in respect of securities which are listed and proposed to be listed in any stock exchange, unless required, as part of rationale for the rating accorded.”
BABITHA RAYUDU, Executive Director
[ADVT.-III/4/Exty./246/2023-24
Footnote:
1. The Securities and Exchange Board of India (Credit Rating Agencies) Regulations, 1999 were issued under S.O. No. 547 (E) dated July 7, 1999 published in the Gazette of India.
2. The Securities and Exchange Board of India (Credit Rating Agencies) Regulations, 1999 were subsequently amended on—
a. March 28, 2000 by the Securities and Exchange Board of India (Appeal to Securities Appellate Tribunal) (Amendment) Regulations, 2000 published in Official Gazette vide S.O. No. 278(E).
b. May 29, 2001, by the Securities and Exchange Board of India (Investment Advice by Intermediaries) (Amendment) (Regulations), 2001 vide S.O. No. 476 (E).
c. September 27, 2002 by the Securities and Exchange Board of India (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002 vide No. S.O. No.1045 (E).
d. February 19, 2003 by the Securities and Exchange Board of India (Credit Rating Agencies) (Amendment) Regulations, 2003 vide S.O. No. 203 (E).
e. October 1, 2003 by the Securities and Exchange Board of India (Credit Rating Agencies) (Second Amendment) Regulations, 2003 vide S.O. No. 1160 (E).
f. March 10, 2004 by Securities and Exchange Board of India (Criteria for Fit and Proper Person) Regulations, 2004 vide S. O. No. 398 (E).
g. September 7, 2006 by the Securities and Exchange Board of India (Credit Rating Agencies) (Amendment) Regulations, 2006 vide S. O. No. 1454(E).
h. May 26, 2008 by the Securities and Exchange Board of India (Intermediaries) Regulations, 2008 vide no. LAD/ NRO/GN/2008/11/126538.
i. March 19, 2010 by the Securities and Exchange Board of India (Credit Rating Agencies) (Amendment) Regulations, 2010 vide Notification No. LAD-NRO/GN/2009-2010/30/199044.
j. April 13, 2011 by the Securities and Exchange Board of India (Change in Conditions of Registration of Certain Intermediaries) (Amendment) Regulations, 2011 vide Notification No. LAD/ NRO/ GN/ 201112/03/12650.
k. July 5, 2011 by the Securities and Exchange Board of India (Credit Rating Agencies) (Amendment) Regulations, 2011 vide Notification No. LAD/NRO/GN/2011-12/10/21232.
l. December 27, 2011 by the Securities and Exchange Board of India (Credit Rating Agencies) (Second Amendment) Regulations, 2011 vide Notification No. LAD/NRO/GN/2011-12/31/39022.
m. May 23, 2014 by the Securities and Exchange Board of India (Payment of Fees and Mode of Payment) (Amendment) Regulations, 2014 vide notification no. LAD-NRO/GN/2014-15/03/1089.
n. December 8, 2016 by the Securities and Exchange Board of India (Change in Conditions of Registration of Certain Intermediaries) (Amendment) Regulations, 2016 vide Notification No. SEBI/LAD/NRO/GN/2016-17/023.
o. March 6, 2017 by the Securities and Exchange Board of India (Payment of Fees and Mode of Payment) (Amendment) Regulations, 2017 vide notification no. SEBI/LAD/NRO/GN/2016-17/037 read with notification no. SEBI/LAD/NRO/GN/2016-17/38 dated March 29, 2017.
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