SEBI Propose Changes To Withdrawal Norms Followed By ESG Rating Providers
SEBI has suggested that environmental, social and governance rating providers deal with rating withdrawals in respect of whether they follow a subscriber pays model or an issuer pays model.
The market regulator, the Securities and Exchange Board of India, on Thursday proposed stronger measures for ESG rating providers to deal with rating withdrawals, disclosures, audits and government norms.
The regulator has suggested that environmental, social and governance rating providers deal with rating withdrawals in respect of whether they follow a subscriber pays model or an issuer pays model.
In the case of the subscriber pays model, the rating providers can withdraw the ratings only if there are no active subscribers but for the issuer pays model, other conditions like having a minimum rating period of three years will have to be fulfilled. Additionally, in the issuer pays model, rating providers will also need an approval from 75% of bondholders before withdrawing ratings.
ERPs following a Subscriber-Pays model may limit detailed rating reports to their subscribers but must still publish ESG ratings on their website in a standardised format. Additionally, stock exchanges will be required to display ESG ratings for listed companies and securities prominently under a dedicated section.
SEBI has also proposed internal audit requirements for rating providers. While Category-I ERPs must comply immediately, Category-II ERPs will have a two-year grace period before these audit requirements take effect. This is being proposed because of the challenges faced by the category II rating providers in the initial years of operation.
The norms applicable to the two categories have always been different. On one hand, category one can undertake certification of green debt securities, have to maintain a liquid net worth of Rs. 5 crores at all times and have four employees; the second category cannot undertake certification of green debt securities. The second category needs to have only two employees and can even function remotely. Such ESG rating providers only need a liquid net worth of Rs. 10 lakh.
Similarly, the mandate for forming ESG Rating Sub-Committees and Nomination and Remuneration Committees (NRCs) will also be deferred for two years for Category II ERPs. Until then, their board of directors will handle these responsibilities.
