The Securities and Exchange Board of India (“SEBI”), in powers conferred under Section 11(1) of Securities and Exchange Board of India Act, 1992, read with the provisions of Regulation 20 of CRA Regulations, vide Circular No. SEBI/HO/DDHS/DDHS-PoD-2/P/CIR/2025/70,[1] dated May 15, 2025, permitted Credit Rating Agencies (“CRAs”) to use the Expected Loss (“EL”) based Rating Scale for municipal bonds, in addition to the standardized rating scale. The provisions of the said circular shall come into effect immediately.
This development follows Para 5.6.1 of the Master Circular for CRAs dated May 16, 2024, which provides that CRAs may use an EL-based rating scale for projects or instruments associated with the infrastructure sector.
Following deliberations with various stakeholders, including the Corporate Bonds and Securitisation Advisory Committee (CoBoSAC), it was observed that the EL rating scale, when used along with the standardized rating scale or Probability of Default (PD) rating, can better reflect the recovery prospects of municipal bonds.
Given that Urban Local Bodies (ULBs) and municipalities primarily issue bonds for the creation and development of infrastructure, it has been decided that CRAs may extend the EL-based Rating Scale to such municipal bonds issued for financing infrastructure assets.
[1] https://www.sebi.gov.in/legal/circulars/may-2025/rating-of-municipal-bonds-on-the-expected-loss-el-based-rating-scale_93945.html