Sebi Proposes Mandatory Colour-Coded Credit Risk-O-Meter for Debt Securities

New Delhi: Markets regulator Sebi on Thursday proposed introducing a mandatory colour-coded ‘Credit Risk-o-Meter’ for debt securities, to help investors assess credit risk more easily before investing.

Inspired by the risk-o-meter framework for mutual funds, the proposed tool will use a standardised, colour-coded scale to depict the credit risk associated with a debt security.

The move is aimed at simplifying complex credit ratings, enabling investors to assess and compare debt securities more easily and align their investments with their risk appetite, Sebi said in a consultation paper.

Under the proposal, issuers and online bond platform providers (OBPPs) will be required to display the Credit Risk-o-Meter in offer documents, abridged prospectuses, private placement memorandums, advertisements and on their web and mobile platforms.

The meter will have six colour-coded risk levels, ranging from Irish Green for the lowest credit risk to Red for high to very high risk of default.

The other categories are Chartreuse for very low risk, Neon Yellow for low risk, Caramel for moderate risk and Dark Orange for moderate risk of default.

“By simplifying risk evaluation, this tool enhances market transparency, improves investor understanding while supporting regulatory goals of investor protection and market development,” Sebi said.

The regulator has also proposed that issuers and OBPPs clearly disclose that the Credit Risk-o-Meter represents only the credit risk associated with the debt security.

The name of the credit rating agency (CRA) and the actual credit rating of the security will have to be disclosed in text immediately below the Credit Risk-o-Meter.

In cases where a debt security has ratings from multiple CRAs, the meter will be based on the lowest rating, while all ratings will have to be disclosed alongside it.

For unsecured debt instruments, issuers will have to prominently disclose the same in bold red text below the Credit Risk-o-Meter.

OBPPs will also be required to immediately communicate any change in the Credit Risk-o-Meter of a debt security on their platforms.

The Securities and Exchange Board of India (Sebi) has sought public comments till September 3 on the proposal.

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