Sebi Introduces New Rating Scale for Municipal Bonds

Sebi has extended the 'expected loss-based rating scale' for municipal bonds, complementing the standardised rating scale. This move aims to enhance the reflection of recovery prospects. Credit rating agencies can now apply EL-based Rating alongside standardised scales to better assess municipal bond risks, effective immediately.

Securities and Exchange Board of India (Sebi) has expanded its rating methodology by extending the 'expected loss-based rating scale' for municipal bonds. According to a fresh circular, this addition aims to complement existing standardized scales in offering a clearer perspective on bond recovery prospects.

Credit rating agencies previously employed expected loss ratings for projects related to infrastructure, paired with standard scales. Recognizing their value, Sebi now allows these ratings for municipal bonds, predominantly issued for infrastructure development by urban local bodies.

Effective immediately, this new framework combines default probabilities and loss-given defaults, refining risk assessment. Sebi introduced the proposal last month and encouraged public feedback, underscoring its commitment to transparent regulation enhancements in financial markets.

(With inputs from agencies.)