SEBI introduces colour-coded ‘Credit Risk-o-Meter’ for debt securities

Markets regulator SEBI has introduced a mandatory colour-coded ‘Credit Risk-o-Meter’ for debt securities to help investors assess credit risk before investing.

The new disclosure mechanism will be required in offer documents, abridged prospectuses, private placement memorandums, advertisements by issuers and online bond platform providers (OBPPs), as well as on the web and mobile platforms of OBPPs, according to a circular issued on Wednesday.

The move is aimed at helping investors assess credit risk through a visual representation before investing.

SEBI said it has decided to introduce the Credit Risk-o-Meter as a “mandatory component” of specified disclosures.

The framework will apply to all listed and proposed-to-be-listed non-convertible securities, commercial papers, securitised debt instruments, security receipts and structured debt/market-linked debentures, whether issued through public issue or private placement.

Under the framework, issuers and OBPPs will display the credit risk of a debt security through a pictorial meter that “shall appropriately depict the level of credit risk” associated with the security.

SEBI has mapped existing credit ratings ranging from AAA to D into six risk categories, each with a corresponding colour.

AAA-rated securities will fall under “Lowest credit risk”, while AA+, AA and AA- will be classified as “Very low credit risk”.

Ratings of A+, A and A- will represent “Low credit risk”, while BBB+, BBB and BBB- will fall under “Moderate credit risk”.

BB+, BB and BB- will be categorised as “Moderate risk of default”, while ratings ranging from B+ to D will be placed in the “High to Very high risk of Default” category.

The colour scheme will range from green for the lowest risk to red for the highest risk.

SEBI has specified the same colour scheme for digital and polychrome printed promotional material relating to debt securities.

The regulator has also mandated that the name of the credit rating agency and the actual credit rating must be displayed below the meter.

In the case of unsecured debt instruments, the word “unsecured” must be displayed in bold red text.

Where a debt security has ratings from multiple credit rating agencies, the Credit Risk-o-Meter will reflect the lowest rating, even as all ratings can be disclosed alongside the meter.