The proposed rules may have several unintended consequences, some foreign portfolio investors (FPIs) led by foreign mutual funds and public asset managers have told Sebi in response to a consultation paper.
The market regulator had floated a consultation in January proposing mandatory Sebi accreditation for all ESG rating providers (ERPs) that want to provide their services to Indian listed companies.
The framework proposed by Sebi works akin to credit rating agencies where the companies hire rating agencies to evaluate their debt situation.
Currently, most blue-chip companies hire international ERPs to provide ESG ratings because foreign funds are more comfortable with the assessment given by such ERPs.
Now, these international ERPs may not be comfortable being registered with and regulated by Sebi. This would mean Indian listed companies will not be able to hire them to provide the ratings since they are unaccredited, some foreign funds have told Sebi.
“If forced to register with Sebi, some of these international ERPs may choose to stay away from Indian companies and suspend the existing ratings which may have an undesirable impact on the companies,” said a person with direct knowledge of the matter. “Foreign funds are not against Sebi’s plan to bring accreditation for Indian ERPs. However, we hope that Sebi will not stop Indian companies from engaging with international ERPs even if they are not registered with Sebi.”
ET could not ascertain the names of the funds that have written to Sebi in this matter.
Email sent to Sebi seeking response remained unanswered till press time Monday.
Another key concern brought forth by foreign funds is regarding the standardisation of ERP mechanism and disclosure of the same.
In the discussion paper, Sebi has proposed that ERPs shall disclose their rating reports along with the methodology for arriving at the same. Also, ERPs have been asked to disclose all the data they relied upon.
Now, most of the methodologies and data used by ERPs are proprietary information that the rating providers may be reluctant to disclose, sources said.
According to market participants, many disclosure and governance-related proposals in the Sebi consultation paper have been derived from industry practices that credit rating agencies are required to follow.
“Credit rating is mostly based on hard numbers on debt and solvency, but ERPs are a very subjective matter where the rating provider gives his interpretation not just using numbers but analytical tools and artificial intelligence,” said one of the persons cited above.
Sebi’s proposals will also have an impact on the internal processes of some of the large global funds, sources said. All the big-ticket public investors like mutual funds, university funds and insurance funds handle a part of ESG rating in house, using their own methodologies. Investment managers of these funds often undertake ERP work, using the specific requirements of their investors.
If the ERP rules are introduced, such in-house work may violate Sebi rules, market participants said.
Meanwhile, according to market participants, some of the Indian listed companies have been unhappy with international ERPs since they use the same metrics to assess companies across the world.
There are many specifics about Indian markets that cannot be compared with global peers, they said.
For instance, ERPs don’t view high promoter shareholding positively since it leads to concertation of power. “In a market like the US where most of the big companies are institutionally owned, this approach works fine,” said one of the persons cited above. “However, back in India, promoter shareholdings are relatively higher but that itself doesn’t mean governance has been compromised.”