The Securities and Exchange Board of India (Sebi) has proposed a visual risk meter for debt securities, mapping credit ratings to six colour-coded risk levels to make credit risk easier for investors, particularly retail investors, to understand.
In a consultation paper issued on Thursday, the market regulator said conventional credit ratings such as AAA, AA+ and BBB- may not be easily understood by investors. Under the proposal, existing ratings would be mapped to six risk levels, each represented by a different colour.
AAA-rated securities would be classified as having the “lowest credit risk” and carry the colour “Irish Green”, while AA+, AA and AA- securities would be classified as having “very low credit risk” and carry the colour “Chartreuse”. The same mapping would apply across the remaining ratings.
The proposed “Credit Risk-o-Meter” would have to be displayed in offer documents, abridged prospectuses, private placement memorandums and advertisements, as well as on the web and mobile platforms of online bond platform providers (OBPPs).
The market regulator has invited feedback on the proposal until 3 September.
Lowest rating counts
Sebi also wants the actual credit rating and the name of the credit rating agency to be displayed below the meter. Where a security has ratings from more than one agency, the meter would be based on the lowest rating, while all ratings would have to be disclosed.
For unsecured debt instruments, the word “unsecured” would have to be displayed prominently in red.
The regulator stressed that the meter would indicate only credit risk and would not amount to investment advice. Debt securities would continue to carry market and liquidity risks. Sebi has also proposed a separate warning for unsecured perpetual bonds such as AT1 bonds, which may carry the risk of total loss of invested capital.
For online bond platforms, any change in the Credit Risk-o-Meter would have to be communicated immediately. Platforms would also have to update the meter within 24 hours of receiving information about a rating change and would not be allowed to manually override the classification.
