SEBI Sets New Guidelines -Uniform Transaction Fees

Market Regulator SEBI has issues guidelines from time to time for investor protection, maintain integrity of the securities market, promote transparency and also regulate and supervise the functioning of various entities involved in securities market which includes stock exchanges, brokers, mutual funds and other intermediaries. The regulator has now issued new guidelines to streamline operations and enhance the ease of doing business for credit rating agencies. The circular specifies timelines for dealing with appeals made by companies regarding rating actions carried out during periodic surveillance of ratings. These modifications will be applicable with effect from August 1^st 2024.

Key aspects of the guidelines include:

1. Timelines for Appeals: CRAs must communicate ratings to companies within one working day of the rating committee meeting. Companies have three working days to request a review or appeal of the rating decision. The dissemination of the press release on the CRA’s website and intimation to the stock exchange or debenture trustee must occur within seven working days of the rating committee meeting
2. Record Maintenance and Disclosure: CRAs are required to maintain records related to these disclosures for ten years, and these records may be shared with debenture trustees upon request. Additionally, daily updates on a list of non-cooperative issuers must be provided to ensure stakeholders are promptly informed about entities that fail to cooperate with rating agencies. Information on ratings not accepted by issuers must be maintained for twelve months​
3. Compliance and Monitoring: The new guidelines will be monitored through half-yearly internal audits of credit rating agencies as mandated under CRA norms. This aims to uphold investor protection and foster the development and regulation of the securities market.
4. Timelines for disclosures: SEBI has also outlined specific timelines for certain types of disclosures, such as a list of non-cooperative issuers that should be updated daily, ensuring that stakeholders are promptly informed about issuers who fail to cooperate with rating agencies. For disclosures regarding ratings that have not been accepted by issuers, CRAs are required to maintain this information for 12 months.
   
   

Impact of SEBI Guidelines on Credit Rating Agencies 2024

SEBI’s new guidelines for credit rating agencies (CRAs) in 2024 are expected to have several significant impacts on the operations and functioning of these agencies. Here are some key impacts:

1. Increased Transparency and Accountability: The new guidelines require CRAs to adhere to strict timelines for communicating ratings, handling appeals, and disclosing information. This will enhance transparency and accountability, as stakeholders will have timely access to crucial information regarding ratings and any subsequent appeals.
2. Improved Efficiency: By standardizing the timelines for various processes, including the dissemination of ratings and handling of appeals, the guidelines aim to streamline the operations of CRAs. This will likely lead to improved efficiency and faster resolution of issues, benefiting both the agencies and the companies they rate.
3. Enhanced Record-Keeping: The requirement for CRAs to maintain records of disclosures for ten years and to update the list of non-cooperative issuers daily ensures that there is a robust audit trail. This can aid in regulatory compliance and in addressing any disputes or issues that may arise in the future.
4. Greater Investor Confidence: With more stringent disclosure norms and the assurance of timely updates, investors are likely to have greater confidence in the ratings provided by CRAs. This can lead to increased participation in the securities market, as investors feel more secure in their investment decisions.
5. Operational Challenges: Implementing these guidelines may initially pose operational challenges for CRAs, as they will need to upgrade their systems and processes to comply with the new requirements. This could involve additional costs and resources.
6. Regulatory Scrutiny: The half-yearly internal audits mandated by SEBI will ensure continuous monitoring of CRAs’ compliance with the guidelines. This heightened regulatory scrutiny is expected to improve the overall quality and reliability of credit ratings.

Why SEBI introduced guidelines for credit rating agencies operations in 2024??

SEBI introduced new guidelines for the operations of credit rating agencies (CRAs) in 2024 to address several key issues and to enhance the overall effectiveness, transparency, and reliability of the credit rating process. Here are the main reasons behind this regulatory move:

1. Improving Transparency and Accountability: The guidelines are designed to ensure that CRAs provide timely and transparent disclosures regarding their rating decisions. By setting specific timelines for communicating ratings and handling appeals, SEBI aims to make the rating process more predictable and transparent for all stakeholders​
2. Enhancing Investor Confidence: SEBI’s objective is to bolster investor confidence in the ratings provided by CRAs. Transparent processes and timely updates can help investors make more informed decisions, thereby fostering greater trust in the securities market​
3. Standardizing Operations: By introducing uniform timelines and procedures for handling appeals and disclosures, SEBI aims to standardize the operations of CRAs. This helps in reducing discrepancies and ensures that all CRAs follow a consistent approach, making it easier for companies and investors to understand and rely on credit ratings​
4. Mitigating Conflicts of Interest: The guidelines also focus on maintaining records and disclosing information about non-cooperative issuers and unaccepted ratings. This can help in identifying potential conflicts of interest and ensuring that CRAs operate with greater independence and objectivity​
5. Strengthening Regulatory Oversight: The introduction of half-yearly internal audits and other compliance measures aims to strengthen regulatory oversight over CRAs. This ensures that CRAs adhere to high standards of governance and operational integrity, reducing the risk of malpractices and enhancing the overall quality of credit ratings​
6. Facilitating Ease of Doing Business: The guidelines aim to streamline CRA operations and make it easier for businesses to understand and navigate the credit rating process. By simplifying and clarifying procedures, SEBI seeks to promote a more efficient and business-friendly environment​

 Uniform Transaction Fees

• Starting October 1, 2024, the Securities and Exchange Board of India (SEBI) will implement a uniform transaction fee structure for market infrastructure institutions (MIIs) like stock exchanges, clearing corporations, and depositories. This new mandate will standardize charges across all market participants, eliminating the current volume-based, slab-wise fee structure that benefits brokers with higher trading volumes.
• The uniform fee structure aims to enhance transparency and fairness in the market. Previously, brokers could charge clients higher fees while paying lower slab rates to exchanges, creating discrepancies and potential misrepresentations. The move is intended to protect small investors, ensuring they are not disproportionately affected by higher charges under the old system.
• The directive has had significant impacts on brokerage firms. Shares of major brokerages, including Angel One, Motilal Oswal, and IIFL Securities, dropped sharply following the announcement, with declines ranging from 3% to 10.3%. This is because the uniform fees will eliminate a significant revenue stream for these firms, which previously benefited from the spread between what they charged clients and what they paid to exchanges.
• The new fee structure will likely prompt brokerages to adjust their pricing models, potentially increasing fees for certain services to compensate for the lost revenue​.This change represents a substantial shift in the brokerage industry, pushing towards more equitable treatment of all market participants and increased market access for smaller investors​.

Impact of Uniform Transaction Fees

The implementation of uniform transaction fees by SEBI from October 1, 2024, is expected to have several significant impacts on the financial markets and brokerage industry:

1. Transparency and Fairness:

   • The move aims to create a more transparent and equitable fee structure across all market participants. By eliminating the volume-based, slab-wise fee structure, SEBI seeks to ensure that smaller brokers and investors are not disadvantaged compared to their larger counterparts​.

2. Impact on Brokerage Revenues:

   • Brokerages that previously benefited from the spread between client charges and exchange fees will see a reduction in this revenue stream. Discount brokerages, which often rely on these spreads for a substantial portion of their income, will be particularly affected​.
   • Firms like Angel One, which derived a significant portion of their revenues from these spreads, may see a notable impact on their financials. For example, it was reported that such revenues contributed to about 8% of Angel One’s total revenues and a material 20% of their pre-tax profits.