CREDIT RATING

FINAL PROJECT REPORT ON

“CREDIT RATING IN INDIA”

1

CREDIT RATING

------------------------------------------------------------------------------------------UNDER THE GUIDANCE OF

DIPTI PERIWALSUBMITTED BY

(NAME OF THE CANDIDATE)(ROLL NO: B3)

(NAME OF THE DEGREE)(BATCH)

_______________________________________________________

2

CREDIT RATING

TO

THE UNIVERSITY OF MUMBAIIN PARTIAL FULFILMENT OF TWO YEAR FULL TIME

DEGREE OF

( MASTERS IN MANAGEMENT STUDIES)

GURU NANAK INSTITUTE OF MANAGEMENT STUDIESMATUNGA, MUMBAI 400 019.

3

CREDIT RATING

4

CREDIT RATING

Table of Contents

EXECUTIVE SUMMARY...............................................................................................6

INTRODUCTION..............................................................................................................7

EVOLUTION...................................................................................................................11

TYPES OF RATING.......................................................................................................13

BENEFITS OF CREDIT RATING................................................................................14

BENEFITS TO INVESTORS..................................................................................................14

BENEFITS OF RATING TO THE COMPANY...................................................................17

BENEFITS TO BROKERS AND FINANCIAL INTERMEDIARIES...............................18

CREDIT RATING AGENCY.........................................................................................19

USES OF RATINGS BY CREDIT RATING AGENCIES...................................................19

FUNCTIONS OF A CREDIT RATING AGENCY...............................................................20

CREDIT RATING IN INDIA.........................................................................................22

CRISIL..................................................................................................................................24

ICRA.....................................................................................................................................35

ONICRA CREDIT RATING AGENCY OF INDIA.........................................................47

CREDIT ANALYSIS & RESEARCH LTD. (CARE).......................................................49

MOODY'S INVESTOR SERVICE.....................................................................................56

DISADVANTAGES OF CREDIT RATING.................................................................66

IPO GRADING................................................................................................................69 CRISIL IPO GRADING.....................................................................................................69

CONCLUSION................................................................................................................73

BIBLIOGRAPHY............................................................................................................74

5

CREDIT RATING

EXECUTIVE SUMMARY

The project entitled “Credit Rating” gives you an insight to the most important concept in any

industry, be it service oriented or a manufacturing firm i.e. working capital.

Credit rating is a qualified assessment and formal evaluation of company’s credit history and

capability of repaying obligations. It measures the default probability of the borrower, and its

ability to repay fully and timely its financial debt obligations.

The main purpose of credit rating is to provide investors with comparable information on credit

risk based on standard rating scale, regardless of specifics of companies, separate sector of the

economy and country as a whole.

Credit rating has proven itself to be effective instrument of risk assessment in countries with

advanced economy since it demonstrates transparency of an enterprise. Credit rating reflects

financial, sectoral, operational, legal and organizational sides of companies, which characterize

ability and willingness duly and in full amount to repay obligations.

In world practice, credit rating can be assigned to sovereign governments, regional and local

executive bodies, corporations, financial organizations and etc.

Different Types of Credit Rating are explained in this project. Functions of Credit Rating are

highlighted.

Various advantages and limitation to Credit Rating are highlighted.

This project has also covered the Rating Process, Rating Symbols for short term debentures n

long term bonds, Rating Methodology, of various rating agencies like CRISIL, ICRA, SMERA,

ONICRA, CARE and International Rating Agency.

IPO Grading has also been included in this project.

6

CREDIT RATING

INTRODUCTION

Definition

CREDIT RATING

The evaluation of a people or businesses' ability and past performance in paying debts. A credit

rating is generally established by a credit bureau and used by merchants, suppliers, and bankers

to determine whether a loan should be granted or credit extended.

“A rating is an opinion on the future ability and legal obligation of the issuer to make timely

payments of principal and interest on a specific fixed income security. The rating measures

the probability that the issuer will default on the security over its life, which depending on the

instrument may be a matter of days to 30 years or more. In addition, long term ratings

incorporate an assessment of the expected monetary loss should a default occur."

"Credit ratings help investors by providing an easily recognizable, simple tool that couples a

possibly unknown issuer with an informative and meaningful symbol of credit quality."

Standard and Poor’s

Ratings, usually expressed in alphabetical or alphanumeric symbols, are a simple and easily

understood tool enabling the investor to differentiate between debt instruments based on their

underlying credit quality. The credit rating is thus a symbolic indicator of the current opinion

of the relative capability of the issuer to service its debt obligation in a timely fashion, with

specific reference to the instrument being rated. It is focused on communicating to the

investors, the relative ranking of the default loss probability for a given fixed income

investment, in comparison with other rated instruments.

7

CREDIT RATING

In fact, the rating is an opinion on the future ability and legal obligation of the issuer to make

timely payments of principal and interest on a specific fixed income security. The rating

measures the probability that the issuer will default on the security over its life, which

depending on the instrument may be a matter of days to 30 years or more. In addition, long-

term rating incorporates an assessment of the expected monetary loss should a default occur.

Credit rating helps investors by providing an easily recognizable, simple tool that couples a

possible unknown issuer with an informative and meaningful symbol of credit quality. Credit

rating can be defined as an expression, through use of symbols, of the opinion about credit

quality of the issuer of security/instrument. Credit rating does not amount to any

recommendation to purchase, sell or hold that security. It is concerned with an act of

assigning values by estimating worth or reputation of solvency, and honesty to repose trust in

a person's ability and intention to repay.

The ratings assigned are generally regarded in the investment community as an objective

evaluation of the probability that a borrower will default on a given security issue. Default

occurs whenever a security issuer is late in making one or more payments that it is legally

obligated to make. In the case of a bond, when any interest or principal payment falls due and

is not made on time, the bond is legally in default. While many defaulted bonds ultimately

resume the payment of principal and interest, others never do, and the issuing company winds

up in bankruptcy proceedings. In most instances, holders of bonds issued by a bankrupt

company receive only a part amount on his investments, invested, once the company's assets

are sold at auction. Thus, the investor who holds title to bankrupt bonds typically loses both

principal and interest. It is no wonder, then, that security ratings are so closely followed by

investors. In fact, many investors accept the ratings assigned by credit agencies as a substitute

for their own investigation of a security's investment quality.

8

CREDIT RATING

Credit Rating Function

1) Credit rating plays an important role in developed and developing capital markets

throughout the world.

2) The use of ratings fosters growth in local and international markets, and streamlines their

functioning.

3) Capital markets currently include bonds and other bond-like instruments guaranteeing a

fixed income amounting to an aggregate total of over $80 trillion.

4) Ratings serve a wide array of players in the capital market.

5) The service is designed first and foremost to provide reliable ratings to fulfill the needs of

investors interested in obtaining a reliable, independent estimate of a company’s credit risk,

of issuers and borrowers seeking flexible sources of financing on the capital market and

brokering entities enjoying this service namely: savers, governments, economists, the

financial media and other observers.

Clients for Credit Rating

Clients comprise manufacturing companies, non-banking finance companies, nationalized and

private banks, financial institutions, public sector units, utilities, real estate developers, state

governments, municipal corporations, stock brokers and others.

9

CREDIT RATING

EVOLUTION OF CREDIT RATING AGENCIES

The origins of credit rating can be traced to the 1840's. Following the financial crisis of 1837,

Louis Tappan established the first mercantile credit agency in New York in 1841. The agency

rated the ability of merchants to pay their financial obligations. Robert Dun subsequently

acquired it and its first rating guide was published in 1859. John Bradstreet set up another

similar agency in 1849, which published a rating book in 1857. These two agencies were

merged together to form Dun and Bradstreet in 1933, which became the owner of Moody's

Investors Service in 1962.

The history of Moody's itself goes back about 100 years. John Moody (1868 - 1958) was a

self-taught reformer who had a strong entrepreneurial drive and a firm belief about the needs

of the investment community - as well as considerable journalistic talent. Relying on his

assessment of the market’s needs, John Moody and Company published Moody’s Manual of

Industrial and Miscellaneous Securities in 1900, the company’s founding year. The manual

provided information and statistics on stocks and bonds of financial institutions, government

agencies, manufacturing, mining, utilities, and food companies. Within two months, the

publication had sold out. By 1903, circulation had exploded, and Moody’s Manual was

known from coast to coast.

When the stock market crashed in 1907, Moody’s company did not have adequate capital to

survive, and he was forced to sell his manual business. Moody returned to the financial

market in 1909 with a new idea. Instead of simply collecting information on the property,

capitalization, and management of companies, he now offered investors an analysis of

security values. His company would publish a book that analyzed the railroads and their

outstanding securities. It offered concise conclusions about their relative investment quality.

He expressed his conclusions using letter-rating symbols adopted from the mercantile and

credit rating system that had been used by the credit-reporting firms since the late 1800s.

10

CREDIT RATING

Moody had now entered the business of analyzing the stocks and bonds of America’s

railroads, and with this endeavor, he became the first to rate public market securities. In 1909,

Moody’s Analyses of Railroad Investments described for readers the analytic principles that

Moody used to assess a railroad’s operations, management, and finance. The new manual

quickly found a place in investors’ hands. In 1913, he expanded his base of analyzed

companies, launching his evaluation of industrial companies and utilities. By that time, the

"Moody's ratings" had become a factor in the bond market. On July 1, 1914, Moody's

Investors Service was incorporated. That same year, Moody began expanding rating coverage

to bonds issued by US cities and other municipalities.

Further expansion of the credit rating industry took place in 1916, when the Poor's Publishing

Company published its first rating followed by the Standard Statistics Company in 1922, and

Fitch Publishing Company in 1924. The Standard Statistics Company merged in 1941 to form

Standard and Poor's, which was subsequently taken, over by McGraw Hill in 1966. For

almost 50 years, since the setting up of Fitch Publishing in 1924, there were no major new

entrants in the field of credit rating and then in the 1970s, a number of credit rating agencies

commenced operations all over the world. These included the Canadian Bond Rating Service

(1972), Thomson Bankwatch (1974), Japanese Bond Rating Institute (1975), McCarthy

Crisani and Maffei (1975 acquired by Duff and Phelps in 1991), Dominican Bond Rating

Service (1997), IBCA Limited (1978), and Duff and Phelps Credit Rating Company (1980).

There are credit rating agencies in operation in many other countries such as Malaysia,

Philippines, Mexico, Indonesia, Pakistan, Cyprus, Korea, Thailand and Australia.

In India, the Credit Rating and Information Services of India Ltd. (CRISIL) was set up as the

first rating agency in 1987, followed by ICRA Ltd. (formerly known as Investment

Information and Credit Rating Agency of India Limited) in 1991, and Credit Analysis and

Research Ltd. (CARE) in 1994. The ownership pattern of all the three agencies is

institutional. Duff and Phelps has tied up with two Indian NBFCs to set up Duff and Phelps

Credit Rating India (P) Limited in 1996.

11

CREDIT RATING

TYPES OF RATING

Following are the different kinds of rating:

(1) Bond/Debenture Rating

Rating the debentures/ bonds issued by corporates, government etc. is called debenture

or bond rating.

(2) Equity Rating

Rating of equity shares issued by a company is called equity rating.

(3) Preference Share Rating

Rating of preference share issued by a company is called preference share rating.

(4) Commercial Paper Rating

Commercial papers are instruments used for short-term borrowing. Commercial

papers are issued by manufacturing companies, finance companies, banks and

financial institutions and rating of these instruments is called commercial paper rating.

(5) Fixed Deposits Rating

Fixed deposits programmes are medium term unsecured borrowings. Rating of such

programmes is called as fixed deposits rating.

12

CREDIT RATING

(6) Borrowers Rating

Rating of borrowers is referred as borrower rating.

(7) Individuals Rating

Rating of individuals is called as individual's credit rating.

(8) Structured Obligation Rating

Structured obligations are also debt obligations and are different from debenture or

bond or fixed deposit programmes and commercial papers. Structured obligation is

generally asset-backed security. Credit rating agencies assessed the risk associated

with the transaction with the main trust on cash flows emerging from the asset would

be sufficient to meet committed payments, to the investors in worst case scenario.

(9) Sovereign Rating

Is a rating of a country, which is being considered whenever a loan is to be extended,

or some major investment is envisaged in a country.

13

CREDIT RATING

BENEFITS OF CREDIT RATING`

For different classes of persons different benefits accrue from the use of rated instruments.

The benefits directly accruing to investors through rated instruments are:

(A) BENEFITS TO INVESTORS

Investors are benefited in many ways if the corporate security in which they intend to invest

their saving has been rated. Some of the benefits are:

(1) Safeguards Against Bankruptcy

Credit rating of an instrument done by a credit rating agency gives an idea to the investors

about the degree of financial strength of the issuing company, which enables him to decide

about the investment. A highly rated instrument of a company gives an assurance to the

investors of the safety of that instrument and a minimum risk of bankruptcy.

(2) Recognition Of Risk

Credit rating provides investors with rating symbols that carry information in easily

recognizable manner for the benefit of investors to perceive the risk involved in the

investment. It becomes easier for the investors by looking at the symbol to understand the

worth of the issuing company. The rating symbol gives them the idea about the risk involved

or the expected advantages from the investment.

(3) Credibility Of Issuer

Rating gives a clue about the credibility of the issuing company. The rating agency is quite

independent of the issuer company and has no business connections or any relationship with it

14

CREDIT RATING

or its Board of Directors, etc. Absence of business links between the rater and the rated firm

establishes ground for credibility and attract investors.

(4) Easy Understandability Of Investment Proposal

An investor needs no analytical knowledge on his part and can understand the rating symbol.

The investor can take quick decisions about the investment to be made in any particular rated

security of a company.

(5) Saving Of Resources

Investors rely upon credit rating. This relieves investors from the hassle of acquiring

knowledge about the fundamentals of a company, its actual strength, financial standing,

management details, etc. The quality of credit rating done by professional experts of the credit

rating agency repose confidence in him to rely upon the rating for taking investment

decisions.

(6) Independence Of Investment Decisions

For making investment decisions, investors have to seek advice of financial intermediaries,

the stockbrokers, merchant bankers, the portfolio managers etc. about the good investment

proposal. For rated instruments, investors need not depend upon the advice of these financial

intermediaries as the rating symbol assigned to a particular instrument suggests the credit

worthiness of the instrument and indicates the degree of risk involved in it.

(7) Choice Of Investments

Several alternative credit rating instruments are available at a particular point of time for

investing in the capital market and the investors can make choice depending upon their own

risk profile and diversification plan.

15

CREDIT RATING

(8) Benefits Of Rating Surveillance

Investors get the benefit of the credit rating agency's on-going surveillance of the rating and

rated instruments of different companies. The credit rating agency downgrades the rating of

any instrument if subsequently the company's financial strength declines or any event takes

place, which necessitates consequent dissemination of information on its position to the

investors.

(9) Other Advantages

The investor can quickly understand the credit instrument and weigh the ratings with

advantages from instruments; and make quick decisions to invest or sell or buy securities to

take advantages of market conditions; or, perceiving of default risk by the company.

16

CREDIT RATING

(B) BENEFITS OF RATING TO THE COMPANY

Company which had its credit instrument or security rated by a credit rating agency is

benefited in many ways as summarized below:

(1) Lower Cost Of Borrowing

A company with highly rated instrument has the opportunity to reduce the cost of borrowing

from the public by quoting lesser interest on fixed deposits or debentures or bonds as the

investors with low risk preference would come forward to invest in safe securities though

yielding marginally lower rate of return.

(2) Wider Audience For Borrowing

A company with a highly rated instrument can approach the investors extensively for the

resource mobilization using the press media. Investors in different strata of the society could

be attracted by higher rated instrument, as the investors understand the degree of certainty

about timely payment of interest and principal on a debt instrument with better rating.

(3) Rating As Marketing Tool

Companies with rated instruments improve their own image and avail of the rating as a

marketing tool to create better image in dealing with its customers feel confident in the utility

products manufactured by the companies carrying higher rating for their credit instruments.

(4) Reduction Of Cost In Public Issues

A company with higher rated instrument is able to attract the investors and with least efforts

can raise funds. Thus, the rated company can economize and minimize cost of public issues

17

CREDIT RATING

by controlling expenses on media coverage, conferences and other publicity stunts and

gimmicks. Rating facilitates best pricing and timing of issues.

(5) Motivation For Growth

Rating provides motivation to the company for growth as the promoters feel confident in

their own efforts and are encouraged to undertake expansion of their operations or new

projects. With better image created though higher credit rating the company can mobilize

funds from public and instructions or banks from self-assessment of its own status, which is

subject to self-discipline and self-improvement, it can perceive and avoid sickness.

(6) Unknown Issuer

Credit rating provides recognition to a relatively unknown issuer while entering into the

market through wider investor base who rely on rating grade rather than on 'name

recognition'.

(C) BENEFITS TO BROKERS AND FINANCIAL INTERMEDIARIES

Rating is a useful tool for merchant bankers and other capital market intermediaries in the

process of planning, pricing, underwriting and placement of issues. The intermediaries, like

brokers and dealers in securities, could use rating as an input for their monitoring of risk

exposures. The merchant bankers are also using credit ratings for pre-packing of issues by

way of securitisation/ structured obligations. Highly rated instruments put the brokers at an

advantage to make less efforts in studying the company's credit position to convince their

clients to select an investment proposal. This enables brokers and other financial

intermediaries to save time, energy, costs and manpower in convincing their clients about

investment in any particular instrument.

18

CREDIT RATING

CREDIT RATING AGENCY

A credit rating agency (CRA) is a company that assigns credit ratings for issuers of certain types

of debt obligations. In most cases, these issuers are companies, cities, non-profit organizations,

or national governments issuing debt-like securities that can be traded on a secondary market. A

credit rating measures credit worthiness, the ability to pay back a loan, and affects the interest

rate applied to loans. (A company that issues credit scores for individual credit-worthiness is

generally called a credit bureau or consumer credit reporting agency.)

Interest rates are not the same for everyone, but instead are based on risk-based pricing, a form

of price discrimination based on the different expected costs of different borrowers, as set out in

their credit rating. There exist more than 100 rating agencies worldwide.

USES OF RATINGS BY CREDIT RATING AGENCIES

Credit ratings are used by investors, issuers, investment banks, broker-dealers, and by

governments. For investors, credit rating agencies increase the range of investment alternatives

and provide independent, easy-to-use measurements of relative credit risk; this generally

increases the efficiency of the market, lowering costs for both borrowers and lenders. This in

turn increases the total supply of risk capital in the economy, leading to stronger growth. It also

opens the capital markets to categories of borrower who might otherwise be shut out altogether:

small governments, startup companies, hospitals and universities.

19

CREDIT RATING

FUNCTIONS OF A CREDIT RATING AGENCY

Credit rating serves the following functions:

(1) Provides Superior Information:

It provides superior information on credit risk for three reasons:

(i) It is an independent rating agency, and is likely to provide an unbiased opinion;

unlike brokers, financial intermediaries and underwriters who have a vested interest in the

issue,

(ii) Due to professional and highly trained staff, their ability to assess risk is better,

and finally,

(iii) The rating firm has access to a lot of information, which may not be publicly available.

(2) Low Cost Information

A rating firm gathers, analyses, interprets and summarizes complex information in a simple

and readily understood formal manner. It is highly welcome by most investors who find it

prohibitively expensive and simply impossible to do such credit evaluation of their own.

20

CREDIT RATING

(3) Basis For A Proper Risk And Return

If an instrument is rated by a credit rating agency, then such instrument enjoys higher

confidence from investors. Investors have some idea as to what is the risk that he/she is likely

to take, if investment is done in that security.

(4) Healthy Discipline On Corporate Borrowers

Higher credit rating to any credit investment tends to enhance the corporate image and

visibility and hence it induces a healthy discipline on corporates.

(5) Greater Credence To Financial And Other Representation

When a credit rating agency rates a security, its own reputation is at stake.

Therefore, it seeks high quality financial and other information. As the issue complies with

the demands of the credit rating agency on a continuing basis, its financial and other

representations acquire greater credibility.

(6) Formation Of Public Policy

Public policy guidelines on what kinds of securities are eligible for inclusions in different

kinds of institutional portfolios can be developed with greater confidence if debt securities are

rated professionally.

21

CREDIT RATING

CREDIT RATING IN INDIA

In the Indian context, the scope of credit rating is limited generally to debt, commercial paper,

fixed deposits, mutual funds and of late IPO’s as well. Therefore, it is the instrument, which is

rated, and not the company. In other words, credit quality is not general evaluation of issuing

organization, i.e. if debt of company XYZ is rated AAA and debt of company ABC is rated

BBB, then it does not mean firm XYZ is better than firm ABC. However, the issuer company

gets strength and credibility with the grade of rating awarded to the credit instrument it

intends to issue to the public to raise funds. Rating, in a way, reflects the issuer's strength and

soundness of operations and management. It expresses a view on its prospective composite

performance and the organizational behaviour based on the study of past results.

Further, the rating will differ for different instruments to be issued by the same company,

within the same time span. For example, credit rating for a debenture issue will differ from

that of a commercial paper or certificate of deposit for the same company because the nature

of obligation is different in each case. Credit rating has been made mandatory for issuance of

the following instruments

(1) As per the regulations of Securities and Exchange Board of India (SEBI) public issue of

debentures and bonds convertible/ redeemable beyond a period of 18 months need credit

rating.

(2) As per the guidelines of Reserve Bank Of India (RBI), one of the conditions for issuance

of Commercial Paper in India is that the issue must have a rating not below the P2 grade from

CRISIL/A2 grade from ICRA/PR2 from CARE.

22

CREDIT RATING

(3) As per the guidelines of Reserve Bank of India (RBI), Non

Banking Finance Companies (NBFCs) having net owned funds of more than Rs.2 core must

get their fixed deposit programmes rated. The minimum rating required by the NBFCs to be

eligible to raise fixed deposits are FA (-) from CRISIL/ MA (-) from ICRA/BBB from CARE.

Similar regulations have been introduced by National Housing Bank (NHB) for housing

finance companies also

(4) As per the regulations of the Ministry of Petroleum, the parallel marketers of Liquefied

Petroleum Gas (LPG) and Superior Kerosene Oil (SKO) in India are also subjected to

mandatory rating. The three rating agencies have a common approach for such rating and the

dealers are categorized into four grades between 1 to 4 indicating good, satisfactory, low risk

and high risk

(5) There is a proposal for making the rating of fixed deposit programmes of limited

companies, other than NBFCs also mandatory, by amendment of the companies Act 1956.

CRAs registered with SEBI.

Name of the CRA Year of commencement of Operations

CRISIL 1988

ICRA 1991

CARE 1993

Fitch India 1996

Brickworks 2008

23

CREDIT RATING

CRISIL

Credit Rating Information Services Of India Limited (CRISIL) has been promoted by

Industrial Credit and Investment Corporation of India Ltd. (ICICI) and Unit Trust of India

Ltd. (UTI) as a public limited company with its headquarters at Mumbai. CRISIL,

incorporated in 1987, pioneered the concept of credit rating in India and developed the

methodology for rating of debt in the context of India's financial, monetary and regulatory

system. It was the first rating agency to rate Commercial Paper Programme in 1989, debt

instruments of financial institutions and banks in 1992 and asset-backed securities in 1992.

The main objective of CRISIL has been to rate debt obligation of Indian companies. Its rating

provides a guide to the investors as to the risk of timely payment of interest and principal on a

particular debt instrument. Its rating creates awareness of the concept of credit rating amongst

corporations, merchant bankers, brokers, regulatory authorities, and helps in creating

environment that facilitates the debt rating.

CRISIL provides rating and risk assessment services to manufacturing companies, banks,

non-banking financial companies, financial institutions, housing finance companies,

municipal bodies and companies in the infrastructure sector.

CRISIL's comprehensive offerings include ratings for long-term instruments such as

debentures/bonds and preference shares, structured obligations (including asset-backed

securities) and fixed deposits; it also rates short-term instruments such as commercial paper

24

CREDIT RATING

programmes and short-term deposits. As part of bank loan ratings, CRISIL also rates credit

facilities extended to borrowers by banks. In addition, CRISIL undertakes credit assessments

of various entities including state governments. CRISIL also assigns financial strength ratings

to insurance companies.

25

CREDIT RATING

CRISIL through the years has continued to innovate and play the role of a pioneer in the

development of the Indian debt market. CRISIL has pioneered the rating of subsidiaries and

joint ventures of multinationals in India and has rated several multinational entities, both start-

up entities as well as players with a well established track record in India. Over the years,

CRISIL has also developed several structured ratings for multinational entities based on

Guarantees from the parent as well as Standby Letter of Credit arrangements from bankers.

The rating agency has also developed a methodology for credit enhancement of corporate

borrowing programmes through the use of partial guarantees. In essence, CRISIL is uniquely

placed in its experience in understanding the extent of credit enhancement arising out of such

structures.

CRISIL's Rating Process

CRISIL'S Ratings Processes In As Given Below:

(1) Request Of The Company

The rating process beings at the request of a company desirous of having its issue obligations

under proposed instrument rated by CRISIL.

(2) Assignment To Analytical Team

On receipt of the above request, CRISIL assigns the job to an analytical team that will be

responsible for carrying out the rating assignment.

(3) Obtaining And Processing Of Data

The analytical team, which generally contains two experts, obtains requisite information from

the client company and analyses the same. To obtain clarification and better understanding of

the client's operations, the team meets and interacts with company's executives.

26

CREDIT RATING

(4) Findings Presentation

The findings of the team completion of investigation process are presented to Rating

committee (which comprises some directors not connected with any CRISIL shareholder)

which then decides on the rating.

(5) Communication Of Decision

The decision of the Rating committee is communicated to the client company with remarks

that the company, if it so likes, may present some additional information for reconsideration

of rating grade assigned to the instrument. In case the company has nothing to produce as

additional fact, the rating grade is formally confirmed to the company by CRISIL.

(6) Monitoring Of Change Of Rating

Once the company has decides to use the rating, CRISIL is obliged to monitor the rating, over

the life of the instrument. Depending upon new information, or developments concerning the

company, CRISIL may change the rating. Any change, so effected, is made public by

CRISIL.

27

CREDIT RATING

CRISIL'S Rating Methodology

CRISIL analyses five factors while assessing the instrument. These five factors are as follows:

(1) Business Analysis

All the relevant information concerning the business is covered under the following sub-

heads.

(a) Industry Risk

CRISIL evaluates the industry risk by taking into consideration various factors like nature and

basis of competition, key success factors, demand and supply position, structure of industry,

government policies etc. Industry strength is evaluated within the economy considering

factors like inflation, energy requirements and availability, international competitive situation

and socio-political scenario; demand projection growth stages and maturity of markets; cost

structure of industry in domestic and international scenario; or, the government policies

toward industry. Industry risk analysis may set an upper limit on rating.

(b) Market Position Of The Company Within The Industry

Market position of the company within the industry is evaluated form different angles, i.e.

„ market share and stability of market share; competitive advantage through marketing and

distribution strength and weakness; marketing/support service infrastructure; diversity of

products and customers base; research and development and its linkage to product

obsolescence; quality important programme; as finally, the long term sales contract, strong

marketing position of the company within the industry attracts better grade rating.

28

CREDIT RATING

(c) Operating Efficiency

Operating efficiency of the company is assessed vis-à-vis competitors' comparison. For

instance, the pricing or cost advantage; availability, cost, quality of raw material; availability

of labour and labour relations; integration of manufacturing operations and cost effectiveness

of plant and equipments; level of capital employed and productivity; energy cost; or finally,

the compliance to pollution control requirement on taken into consideration.

(d) Legal Position

Legal position of issue of debt instrument is assessed by letter of offer; terms of debenture

trust deed, trustees and their responsibilities; system of timely payment of interest and

principal; or protection of forgery and fraud. Thus, business covers all relevant aspects as

related to business operations of the client company to assess the creditworthiness of the

company.

(2) Financial Analysis

Under financial analysis, all relevant aspects connected with the business and financial

position of the company is assessed in the following four important segments. Firstly the

accounting finally is seen as qualifications of auditors; focus on determining extent to which

performance is overstated; method of income recognition; depreciation policies and inventory

calculations; Under Valued/Over Valuing of assets; or off balance sheet liabilities.

Secondly, the Earning Potential return to long term earning potential under varying conditions

is assessed. Key consideration is: Profitability ratios; pretax coverage ratios; earnings on

assets/capital employed; source of future earnings; or ability to finance growth internally.

Thirdly, the adequacy of the Cash Flows is appraised in relation to debt and fixed and

working capital requirements of the company. Main focus of analysis is on variability of

future cash flows; capital spending flexibility; cash flows to fixed and working capital

29

CREDIT RATING

requirements; or Working Capital management. Fourthly, the Financial Flexibility is assessed

through financial plans in times of stress and their reliability; ability to attract capital; capital

spending flexibility; asset redeployment potential; or the debt service schedule.

(3) Management Evaluation

The track record of management is evaluated by observing:

the goals and philosophies;

strategies and ability to overcome adverse situations;

judgment of management performance based on past operating and financial results;

planning and control systems;

conservatism or aggressiveness with reference to financial risk;

depths of managerial, talents and succession plans;

shareholding pattern and constitution/ of Board of Directors;

relationship with shareholders;

or mergers and acquisition considerations.

(4) Regulatory And Competitive Environment

CRISIL evaluates structure and regulatory framework of the financial system in which it

works. Trends in regulation/ deregulation and their impact on the company are evaluated.

30

CREDIT RATING

(5) Fundamental Analysis

It covers aspects on liquidity management; assets quality; profitability and financial position;

and interest and tax sensitively. Liquidity management includes aspects on capital structure,

matching of assets and liabilities; or policy on liquid asset in relation to financing

commitments and maturing deposits. Asset Quality includes aspects concerning quality of

company's credit risk management, system for monitoring credit, sector risk, exposure of

individual borrowers, or management of problem credits. Profitability and Financial Position

includes aspects on historic profits, spreads on fund deployment, revenues on non fund-based

services, and accretion to reserves. Interest or Tax Sensitivity includes aspects dealing with

exposure to interest rate changes, revenues on non-fund based activities, and accretion to

reserves.

Factors listed above at serial number 1,2,3, are evaluated for manufacturing companies but for

finance companies, emphasis is laid in addition to above factors at serial number 4 and 5.

31

CREDIT RATING

CRISIL’S RATING SYMBOLS FOR LONG TERM

INSTRUMENTS

Investment Grade Ratings:

AAA

(Triple A) Highest Safety

Instruments rated 'AAA' are judged to offer the highest degree of safety with regard to timely

payment of financial obligations. Any adverse changes in circumstances are most unlikely to

affect the payments on the instrument

AA

(Double A) High Safety

Instruments rated 'AA' are judged to offer a high degree of safety with regard to timely

payment of financial obligations. They differ only marginally in safety from `AAA' issues.

A

Adequate Safety

Instruments rated 'A' are judged to offer an adequate degree of safety with regard to timely

payment of financial obligations. However, changes in circumstances can adversely affect

such issues more than those in the higher rating categories

32

CREDIT RATING

BBB

(Triple B) Moderate Safety

Instruments rated 'BBB' are judged to offer a moderate safety with regard to timely payment of

financial obligations for the present; however, changing circumstances are more likely to lead to

a weakened capacity to pay interest and repay principal than for instruments in higher rating

categories.

Speculative Grade Ratings:

BB

(Double B) Inadequate Safety

Instruments rated 'BB' are judged to carry inadequate safety with regard to timely payment of

financial obligations; they are less likely to default in the immediate future than other speculative

grade instruments, but an adverse change in circumstances could lead to inadequate capacity to

make payment on financial obligations.

B

High Risk

Instruments rated 'B' are judged to have greater likelihood of default; while currently financial

obligations are met, adverse business or economic conditions would lead to lack of ability or

willingness to pay interest or principal.

C

Substantial Risk

Instruments rated 'C' are judged to have factors present that make them vulnerable to default;

timely payment of financial obligations is possible only if favourable circumstances continue.

33

CREDIT RATING

D

Default

Instruments rated 'D' are in default or are expected to default on scheduled payment dates. Such

instruments are extremely speculative and returns from these instruments may be realized only

on reorganisation or liquidation.

NM

Not Meaningful

Instruments rated 'N.M' have factors present in them, which render the rating outstanding

meaningless. These include reorganisation or liquidation of the issuer, the obligation is under

dispute in a court of law or before a statutory authority etc.

34

CREDIT RATING

RATING SYMBOL FOR SHORT TERM INSTRUMENT

P-1 This rating indicates that the degree of safety regarding timely payment on the instrument is

very strong.

P-2 This rating indicates that the degree of safety regarding timely payment on the instrument is

strong; however, the relative degree of safety is lower than that for instruments rated 'P-1'.

P-3 - This rating indicates that the degree of safety regarding timely payment on the instrument

is adequate; however, the instrument is more vulnerable to the adverse effects of changing

circumstances than an instrument rated in the two higher categories.

P-4 - This rating indicates that the degree of safety regarding timely payment on the instrument

is minimal and it is likely to be adversely affected by short-term adversity or less favourable

conditions.

P-5 - This rating indicates that the instrument is expected to be in default on maturity or is in

default.

NM - Instruments rated 'N.M' have factors present in them, which render the rating outstanding

meaningless. These include reorganisation or liquidation of the issuer, the obligation is under

dispute in a court of law or before a statutory authority etc.

Not Meaningful

35

CREDIT RATING

ICRA

ICRA Limited (an Associate of Moody's Investors Service) was incorporated in 1991 as an

independent and professional company. ICRA is a leading provider of investment information

and credit rating services in India. ICRA’s major shareholders include Moody's Investors Service

and leading Indian financial institutions and banks. With the growth and globalization of the

Indian capital markets leading to an exponential surge in demand for professional credit risk

analysis, ICRA has been proactive in widening its service offerings, executing assignments

including credit ratings, equity gradings, specialized performance grading and mandated studies

spanning diverse industrial sectors. In addition to being a leading credit rating agency with

expertise in virtually every sector of the Indian economy, ICRA has broad-based its services for

the corporate and financial sectors, both in India and overseas, and currently offers its services

under the following banners:

ICRA Limited (an Associate of Moody's Investors Service) was incorporated in 1991 as an

independent and professional company. ICRA is a leading provider of investment information

and credit rating services in India. ICRA’s major shareholders include Moody's Investors Service

and leading Indian financial institutions and banks. With the growth and globalisation of the

Indian capital markets leading to an exponential surge in demand for professional credit risk

analysis, ICRA has been proactive in widening its service offerings, executing assignments

including credit ratings, equity gradings, specialised performance gradings and mandated studies

36

CREDIT RATING

spanning diverse industrial sectors. In addition to being a leading credit rating agency with

expertise in virtually every sector of the Indian economy, ICRA has broad-based its services for

the corporate and financial sectors, both in India and overseas, and currently offers its services

under the following banners:

  Rating Services   Information,   Grading and Reasearch Services   Advisory Services  

Economic Research   Outsourcing

37

CREDIT RATING

ICRA'S Rating Process

The Rating Process Follows:

Rating Process

Rating is an interactive process with a prospective approach. It involves series of steps. The

main points are described as below:

(A) Rating Request

Ratings in India are initiated by a formal request (or mandate) from the prospective issuer .

This mandate spells out the terms of the rating assignment. Important issues that are covered

include, binding the credit rating agency to maintain confidentiality, the right to the issuer to

accept or not to accept the rating and binds the issuer to provide information required by the

credit rating agency for rating and subsequent surveillance.

(B) Rating Team

The team usually comprises two members. The composition of the team is based on the

expertise and skills required for evaluating the business of the issuer.

(C) Information Requirements

Issuers are provided a list of information requirements and the broad framework for

discussions. These requirements are derived from the experience of the issuers business and

broadly conform to all the aspects, which have a bearing on the rating. These factors have

been discussed in detail under rating framework.

38

CREDIT RATING

(D) Secondary Information

The credit rating agency also draws on the secondary sources of information including its own

research division. The credit rating agency also has a panel of industry experts who provide

guidance on specific issues to the rating team. The secondary sources generally provide data

and trends including policies about the industry.

(E) Management Meetings And Plant Visits

Rating involves assessment of number of qualitative factors with a view to estimate the future

earnings of the issuer. This requires intensive interactions with the issuer’s management

specifically relating to plans, outlook, and competitive position and funding policies.

Plan visits facilitate understanding of the production process, assess the state of equipment

and main facilities , evaluate the quality of technical personnel and form an opinion on the

key variables that influence level , quality and cost of production. These visits also help in

assessing the progress of projects under implementation.

(F) Preview Meeting :

After completing the analysis , the findings are discussed at length in the internal committee ,

comprising senior analysts of the credit rating agency. All the issues having a bearing on the

rating are identified. At this stage, an opinion on the rating is also formed.

39

CREDIT RATING

(G)Rating Committee Meeting

This is the final authority for assigning ratings. A brief presentation about the issuers business

and the management is made by the rating team. All the issues identified during discussions in

the internal committee are discussed. The rating committee also considers the

recommendation of the internal committee for the rating. Finally , a rating is assigned and all

the issues, which influence the rating, are clearly spelt out.

(H)Rating Communication

The assigned rating along with the key issues is communicated to the issuer’s top

management for acceptance. The ratings, which are not accepted, are either rejected or

reviewed. The rejected ratings are not disclosed and complete confidentiality is maintained.

(I) Rating Reviews

If the rating is not acceptable to the issuer , he has a right to appeal for a review of the rating .

These reviews are usually taken up only if the issuer provides fresh inputs on the issues that

were considered for assigning the rating . Issuer's response is presented to the Rating

Committee. If the inputs are convincing, the Committee can revise the initial rating decision.

(J) Surveillance

It is obligatory on the part of the credit rating agency to monitor the accepted ratings over the

tenure of the rated instrument. As has been mentioned earlier, the issuer is bound by the

mandate letter to provide information to the credit rating agency. The ratings are generally

reviewed every year, unless the circumstances of the case warrant an early review. In a

surveillance review, the initial rating could be retained or revised (upgrade or downgrade).

The various factors that are evaluated in assigning the ratings have been explained under

rating framework.

40

CREDIT RATING

Rating Scale of ICRA

Long Term — Including Debentures Bonds, Preference Shares

LAAA: Highest Safety:

It indicates fundamentally strong position. Risk factors are negligible. There may be

circumstances adversely affecting the degree of safety but such circumstances, as may

visualized, are not likely to affect the timely payment of principal and interest as per times.

LAA+,LAA, LAA- : High Safety:

Risk factors are modest and may vary slightly. The protective factors are strong and the

prospect of timely payment of principal and interest as per terms and interest under adverse

circumstances, as may be visualized, differs from LAAA only marginally.

LA+,LA, LA- :Adequate Safety:

The risk factors are more variable and grater in periods of economic stress. The protective

factors any averse change in circumstances, as may be visualized, may alter the fundamental

strength and effect the timely payment of principal and interest as per terms.

LBBB+,LBBB,LBBB- Moderate Safety:

Considerable variability in risk factors. The protective factors are below average. Adverse

changes in business/economic circumstances, are likely to affect the timely payment of

principal and interest as per terms.

41

CREDIT RATING

LBB+, LBB, LBB-Inadequate Safety:

The timely payment of interest and principal are more likely to be affected by present or

prospective changes in business/economic circumstances. The protective factors fluctuate in

case of changes in economy/business conditions.

LBB+, LB, LB- Risk Prone:

Risk factors indicate that obligation may not be met when due. The protective factors are

narrow. Adverse changes in economic/business conditions could result in

inability/unwillingness to service debts on time as per terms.

LC+,LC,LC- Substantially Risk:

There are inherent elements of risk and timely servicing of debts/obligations could be possible

only in case of continued existence of favourable circumstances.

LD Default. Extremely Speculative:

Either already in default in payment of interest and/or principal as per terms or expected to

default. Recovery is likely only on liquidation or reorganization.

42

CREDIT RATING

Medium Term - including Certificates of Deposits and Fixed Deposits

Programmes

MAAA: Highest Safety

The prospect of timely servicing of interest and principal as per terms is the best.

MAA+, MAA, MAA- High Safety

The prospect of timely servicing of interest and principal as per terms is high, but not as high

as in MAAA rating.

MA+, MA, MA-: Adequate Safety

The prospect of timely serving interest and principal is adequate. However, debt servicing

may be affected by adverse changes in the business/economic conditions.

MB+, MB, MB-: Inadequate Safety

The timely payment of interest and principal are more likely to be affected by future

uncertainties.

Mc+, Mc, Mc- Risk Prone

Susceptibility to default high. Adverse changes in the business/economic conditions could

result in inability/unwillingness to service debts on time as per terms.

Md Default

Either already in default or expected to default.

Short Term - including Commercial Papers

43

CREDIT RATING

Al+, A1 Highest Safety

The prospect of timely payment of debt/obligation is the best.

A2+, A1 High Safety

The relative safety is marginally lower than A1

A3+, A3 Adequate Safety

The prospect of timely payment of interest and installment is adequate, but any adverse

changes in business/economic conditions may affect the fundamental

strength.

A4+, A4 Risk Prone

The degree of safety is low. Likely to default in case of adverse changes in

business/economic conditions.

A5 Default

Either already in default or expected to default. Inadequate capacity.

44

CREDIT RATING

Short-Term Ratings

ICRA assigns short-term ratings with symbols from A1 through to A5 to debt instruments with

original maturity up to one year. ICRA’s short-term ratings measure the probability of default on

the rated debt securities over their entire tenure. A suffix of “+” may be attached to the rating

symbols of A1 through to A4 to indicate the relative position of the issuer within the rating

category. While the short-term rating of A1 indicates that the rated debt issuance has the highest

credit quality, A5 indicates that the rated debt is either in default or is expected to default on its

repayment obligations.

ICRA assigns short-term ratings to instruments such as commercial paper, certificates of deposit,

short-term debentures, and other money market related instruments maturing within one year

from the date of issuance.

45

CREDIT RATING

Linkage Between Long-Term And Short-Term Ratings

Although ICRA ratings are specific to the rated instruments, the short-term ratings in general

have a linkage with the assigned or implicit long-term ratings of the issuers concerned.

Besides the fact that short-term instruments like commercial paper are usually on-going

programmes, thus warranting a longer-term rating view, in ICRA’s opinion, refinancing risk or

an issuer’s access to other sources of funding, is also largely influenced by the issuer’s longer-

term credit profile.

Thus, apart from focusing on short-term factors like near-term business risk drivers and liquidity

position of the issuers, ICRA also factors in an issuer’s long-term credit profile while assigning

short-term ratings to debt instruments issued by it. The following table presents a broad guidance

to the linkage between ICRA’s short-term and long-term ratings.

46

CREDIT RATING

ONICRA CREDIT RATING AGENCY OF INDIA

ONICRA CREDIT RATING AGENCY OF INDIA Ltd. is recognised as the pioneers of the

concept of individual Credit rating in India. After being the first to introduce the concept, Onicra

has been continuously conducting in-depth research into all aspects of the behaviour of credit

seekers and has developed a comprehensive rating system for various types of credit extensions.

Onicra provides a platform to credit seekers and granters build long lasting relationship.

Credit Rating

With the advance of credit, the principal has an increased level of exposure in the market. So, a

mandatory check is done to assess the credentials of the individual in question before extending a

loan or advance. We assess the financial visibility and look into all related aspects. We have an

in-house developed credit rating module which is customized to suit various customer

requirements.

Associate Rating

We provide an objective assessment of existing and potential associates of our clients, with

reference to infrastructure, resources, adherence to defined system and processes and

commitment to their customers. This evaluation helps our clients understand the value their

associates bring to their business relationships.

47

CREDIT RATING

Employment Background Screening

This service provides our clients with authenticated and validated data on employee’s which

includes but is not limited to the Physical Address, qualification both educational and

professional, criminal record check and other pertinent information.

SSI/SME Rating

We help Small Scale Industries that are looking for loans and financial assistance to get assessed

on their credit worthiness, financial viability and performance. This helps their cause to get

unbiased analysis in a funding situation.

48

CREDIT RATING

CARE

Credit Analysis & Research Ltd. (CARE), incorporated in April 1993, is a credit rating,

information and advisory services company promoted by Industrial Development Bank of India

(IDBI), Canara Bank, Unit Trust of India (UTI) and other leading banks and financial services

companies. In all CARE has 14 shareholders.

CARE assigned its first rating in November 1993, and up to March 31, 2006, had completed

3175 rating assignments for an aggregate value of about Rs 5231 billion. CARE's ratings are

recognized by the Government of India and all regulatory authorities including the Reserve Bank

of India (RBI), and the Securities and Exchange Board of India (SEBI). CARE has been granted

registration by SEBI under the Securities & Exchange Board of India (Credit Rating Agencies)

Regulations, 1999.

The rating coverage has extended beyond industrial companies, to include public utilities,

financial institutions, infrastructure projects, special purpose vehicles, state governments and

municipal bodies. CARE's clients include some of the largest private sector manufacturing and

financial services companies’ as well financial institutions of India. CARE is well equipped to

rate all types of debt instruments like Commercial Paper, Fixed Deposit, Bonds, Debentures and

Structured Obligations.

CARE's Information and Advisory services group prepares credit reports on specific requests

from banks or business partners, conducts sector studies and provides advisory services in the

areas of financial restructuring, valuation and credit appraisal systems. CARE was retained by

the Disinvestment Commission, Government of India, for assistance in equity valuation of a

number of state owned companies and for suggesting divestment strategies for these companies.

49

CREDIT RATING

CARE'S Rating Process

The process involves:

(i) Client gives request for rating and submits information and details schedules;

(ii) CARE assigns rating team and team analyses the information;

(iii) The team interacts with the clients, undertakes site visits;

(iv) The client interacts with the Team respond to queries raised and provides any additional

data necessary for the analyses;

(v) The team analyses the data submitted by the Client and put up to Internal Committee of

CARE for previews analyses;

(vi) Rating Committee of CARE awards rating to the Client;

(vii) Client may ask for review of the rating assigned and furnish additional information for

the purpose. Client has the option not to accept the final rating in which case CARE will not

publish the rating or monitor it; and, finally,

(viii) If the rating is accepted by the client, CARE gives it for notification and a periodic

surveillance is undertaken by CARE.

50

CREDIT RATING

RATING SYMBOLS OF CARE

A. Long-Term And Medium Term Instrument

CARE AAA (FD)/(CD)/(SO)

Instruments carrying this rating are considered to be of the best quality, carrying negligible

investment risk. Debt service payments are protected by stable cash flows with good margin.

While the underlying assumptions may change, such changes as can be visualized are most

unlikely to impair the strong position of such instruments.

CARE AA (FD)/(CD)/(SO)

Instruments carrying this rating are judged to be of high quality by all standards. They are

also classified as high investment grade. They are rated lower than CARE AAA securities

because of somewhat lower margins of protection. Changes in assumptions may have a

greater impact on the long-term risks may be somewhat larger. Overall, the difference with

CARE AAA rated securities is marginal.

CARE A (FD)/(CD)/(SO)

Instruments with this rating are considered upper medium grade instruments and have many

favourable investment attributes. Safety for principal and interest are considered adequate.

Assumptions that do not materialize may have a greater impact as compared to the

instruments rated higher.

51

CREDIT RATING

CARE BBB (FD)/(CD)/(SO)

Such instruments are considered to be of investment grade. They indicate sufficient safety for

payment of interest and principal, at the time of rating. However, adverse changes in

assumptions are more likely to weaken the debt servicing capability compared to the higher

rated instruments.

CARE BB (FD)/(CD)/(SO)

Such instruments are considered to be speculative, with inadequate protection for interest and

principal payments.

CARE B (FD)/(CD)/(SO)

Instruments with such rating are generally classified susceptible to default. While interest and

principal payments are being met, adverse changes in business conditions are likely to lead to

default.

CARE C (FD)/(CD)/(SO)

Such instruments carry high investment risk with likelihood of default in the payment of

interest and principal.

CARE D (FD)/(CD)/(SO)

Such instruments are of the lowest category. They either are in default or are likely to be in

default soon.

52

CREDIT RATING

B. Short-Term Instruments

Instruments with maturities of one year or less are classified in this category. These include:

CP - Commercial Paper and ICD - Inter-Corporate Deposits

PR-1

Instruments would have superior capacity for repayment of short-term promissory obligation.

Issuers of such PR-instruments will normally be characterized by leading market position in

established industries, high rates of return on funds employed etc.

PR-2

Instruments would have strong capacity for repayment of short-term promissory obligations.

Issuers would have most of the characteristics as for those with PR1 instruments but to a

lesser degree.

PR-3

Instruments have an adequate capacity for repayment of short-term promissory obligations.

The effect of industry characteristics and market composition may be more pronounced.

Variability in earning and profitability may result in change in the level of debt protection.

PR-4

Instruments have minimal degree of safety regarding timely payment of short-term

promissory obligations and safety is likely to be adversely affected by short-term adversity or

less favourable conditions.

53

CREDIT RATING

PR-5

The instrument is in default or is likely to be in default on maturity.

SME Rating Agency of India Limited (SMERA) is a joint initiative by SIDBI

(http://www.sidbi.in/), Dun & Bradstreet Information Services India Private Limited (D&B)

(http://www.dnb.co.in/), Credit Information Bureau (India) Limited (CIBIL)

(http://www.cibil.com/) and several leading banks in the country. SMERA is the country's first

rating agency that focuses primarily on the Indian SME segment.

SMERA's primary objective is to provide ratings that are comprehensive, transparent and

reliable. This would facilitate greater and easier flow of credit from the banking sector to SMEs.

Rating Process Simplified -

Based on receipt of application form, applicable rating fees and documents from the

SME, SMERA will begin its process of evaluation.

A Questionnaire, seeking information on financial and qualitative factors, would be sent

to the SME and would need to be filled by an authorised representative of the SME.

A SMERA correspondent will contact the SME to collect a duly filled questionnaire to

facilitate the rating process.

The correspondent would also conduct a site visit as part of the evaluation process.

SMERA shall complete the evaluation exercise and provide SMERA rating within 15

business days of receipt of all documents from the SME.

 

54

CREDIT RATING

55

CREDIT RATING

Moody's Investor Service

Today, Moody's Investor Service rates thousands of issues of corporate and municipal bonds,

commercial paper, short-term municipal notes, and preferred stock. These security ratings are

reported in Moody's Bond Record, which is published monthly. In addition to assigning issue

ratings, Moody's also notes for its subscribers the essential terms on each security issue; dates

when interest, principal or dividend payments are due; call provisions (if any); registration

status; bid and asked price quotations; yield to maturity; tax status; coverage; and amount of

securities outstanding.

Moody's Corporate Bond Ratings

The credit ratings assigned by Moody's to corporate bonds are listed below with the

definitions of each rating category:

AAA

Bonds, which are rated Aaa, are judged to be of the best quality. They carry the smallest

degree of investment risk and are generally referred to as "gilt edge". Interest payments are

protected by a large or by an exceptionally stable margin and principal is secure. While the

56

CREDIT RATING

various protective elements are likely to change, such changes as can be visualized are most

likely to impair the fundamentally strong position of such issues.

AA

Bonds, which are rated Aa, are judged to be of high quality by all standards. Together with

the AAA group they comprise what are generally known as high-grade bonds. They are rated

lower than the best bonds because margins of protection may not be as large as in Aaa

securities or fluctuation of protective elements may be of greater amplitude or there may be

other elements present which make the long-term risks appear somewhat larger than in Aaa

securities.

A

Bonds, which are rated A, possess many favourable investment attributes and are to be

considered as upper medium-grade obligations. Factors giving security to principal and

interest are considered adequate but elements may be present which suggest a susceptibility to

impairment sometime in the future.

BAA

Bonds, which are rated Baa, are considered as medium-grade obligations, i.e., they are neither

highly protected nor poorly secured. Interest payments and principal security appear adequate

for the present but certain protective elements may be lacking or may be characteristically

unreliable over any great length of time. Such bonds lack outstanding investment

characteristics and, in fact, have speculative characteristics as well.

BA

Bonds, which are rated Ba, are judged to have speculative elements; their future cannot be

considered as well assured. Often the protection of interest and principal payments may be

57

CREDIT RATING

moderate and thereby not well safeguarded during both good and bad times over the future.

Uncertainty of position characterizes bonds in this class.

B

Bonds, which are rated B generally, lack characteristics of a desirable investment. Assurance

of interest and principal payments or of maintenance of other terms of the contract over any

long period of time may be small.

CAA

Bonds, which are rated Caa, are of poor standing. Such issues may be in default and there

may be present elements of danger with respect to principal or interest.

CA

Bonds, which are rated Ca, represent obligations, which are speculative in some degree. Such

issues are often in default or have other marked shortcomings.

C

Bonds, which are rated C, are the lowest rated class of bonds and issues so rated are to be

regarded as having extremely poor prospects of ever attaining any real investment standing.

Moody's Commercial Paper Ratings

58

CREDIT RATING

Promissory notes sold in the open market by large corporations and having an original

maturity of nine months or less are known as commercial paper. Moody's assigns those

commercial notes it is willing to rate to one of three quality categories:

Prime-1 (or P-l) - Highest quality

Prime-2 (or P-2) - Higher quality

Prime-3 (or P-3) -High quality

59

CREDIT RATING

Moody's Ratings of Short-Term Municipal Notes

Short-term securities issued by states, cities, counties, and other local governments are rated

by Moody's as to their investment quality. For these short-term issues Moody's uses the rating

symbol MIG, meaning Moody's Investment Grade. As shown below, only four rating

categories are used and speculative issues or those for which adequate information is not

available are not rated. The rating categories are as follows:

MIG I

Loans bearing this designation are of the best quality, enjoying strong protection from

established cash flows of funds for their servicing or from established and broad-based access

to the market for refinancing, or both.

MIG2

Loans bearing this designation are of high quality, with margins of protection ample though

not so large as in the preceding group.

MIG3

Loans bearing this designation are of favourable quality, with all security elements accounted

for but lacking the undeniable strength of the preceding grades. Market access for refinancing,

in particular, is likely to be less well established.

MIG4

Loans bearing this designation are of adequate quality, carrying specific risk but having

protection commonly regarded as required of an investment security and not distinctly or

predominantly

60

CREDIT RATING

International Scale Ratings

International foreign currency ratings effectively benchmark credit quality off US Government

risk, and measure the ability of an organization to service foreign currency obligations. In this

regard, typically no organization or debt issue in a country can be rated higher than the country's

“sovereign risk rating” on the basis that, regardless of a company's stand-alone strength, the

government can “block” any organization within its jurisdiction from obtaining/disbursing

foreign currency. Exceptions can arise in the case of structured finance transactions (if there is an

opportunity to pierce the sovereign cap, e.g. by trapping foreign currency offshore).

National Scale Ratings

The domestic local currency ratings assigned by GCR are tiered against an assumed “best

possible” (usually central government) rating of ‘AAA' in each country and, therefore, do not

incorporate the sovereign risks of a country. Such ratings are designed to give an indication of

the relative risks only within a specific country and are not comparable across different

countries. Accordingly, a Zimbabwe Dollar rating accorded to a Zimbabwean organisation is not

comparable to a South African Rand rating accorded to a South African organisation.

The rating methodologies and rating scales utilised in the accordance of both types of ratings are

very similar, but the key difference is that one scale measures the probability of default on

FOREIGN CURRENCY obligations (taking into account all sovereign risk and currency

conversion considerations), while the other measures the probability of default on LOCAL

CURRENCY obligations. It stands to reason that, particularly in emerging markets such as

Africa, there is a far higher probability of default with regards to the former.

61

CREDIT RATING

Short Term Debt Rating Scale:

GCR's Rating Symbols and Definitions Summary

A short term debt rating rates an organisation's general unsecured creditworthiness over the short

term (i.e. over a 12 month period). Such a rating provides an indication of the probability of

default on any unsecured short term debt obligations, including commercial paper, bank

borrowings, BA's and NCD's.

High Grade

A1+

Highest certainty of timely payment. Short-term liquidity, including internal operating

factors and/or access to alternative sources of funds is outstanding, and safety is just

below that of risk-free treasury bills.

A1Very high certainty of timely payment. Liquidity factors are excellent and supported by

good fundamental protection factors. Risk factors are minor.

A1-High certainty of timely payment. Liquidity factors are strong and supported by good

fundamental protection factors. Risk factors are very small.

62

CREDIT RATING

Good Grade

A2

Good certainty of timely payment. Liquidity factors and company fundamentals are

sound. Although ongoing funding needs may enlarge total financing requirements, access

to capital markets is good. Risk factors are small.

Satisfactory Grade

A3Satisfactory liquidity and other protection factors qualify issues as to investment grade.

However, risk factors are larger and subject to more variation.

Non-Investment Grade

B

Speculative investment characteristics. Liquidity is not sufficient to insure against

disruption in debt service. Operating factors and market access may be subject to a high

degree of variation.

Default

C Issuer failed to meet scheduled principal or interest payments.

Long Term Debt Rating Scale:

GCR's Rating Symbols and Definitions Summary

A long term debt rating rates the probability of default on specific long term debt instruments

over the life of the issue. It is possible that different issues by a single issuer could be accorded

different ratings, depending on the underlying characteristics of each issue (e.g. is it a senior or a

subordinated debt instrument, is it secured or unsecured and, if secured, what is the nature of the

security).

63

CREDIT RATING

Investment Grade

AAA Highest credit quality. The risk factors are negligible, being only slightly more than for

risk free government bonds.

AA+

AA

AA-

Very high credit quality. Protection factors are very strong. Adverse changes in

business, economic or financial conditions would increase investment risk although

not significantly.

A+

A

A-

High credit quality. Protection factors are good. However, risk factors are more

variable and greater in periods of economic stress.

BBB+

BBB

BBB-

Adequate protection factors and considered sufficient for prudent investment.

However, there is considerable variability in risk during economic cycles.

Non - Investment Grade

BB+

BB

BB-

Below investment grade but capacity for timely repayment exists. Present or

prospective financial protection factors fluctuate according to industry conditions or

company fortunes. Overall quality may move up or down frequently within this

category.

B+

B

B-

Below investment grade and possessing risk that obligations will not be met when due.

Financial protection factors will fluctuate widely according to economic cycles,

industry conditions and/or company fortunes.

CCC Well below investment grade securities. Considerable uncertainty exists as to timely

64

CREDIT RATING

payment of principal or interest. Protection factors are narrow and risk can be

substantial with unfavourable economic/industry conditions, and/or with unfavourable

company developments.

DD Defaulted debt obligations. Issuer failed to meet scheduled principal and/or Interest

payments.

GCR's Rating Symbols and Definitions Summary

Such ratings are exclusively accorded to insurance/reinsurance companies and rate the

probability of timeously honouring policyholder obligations over the medium term (i.e. over the

next 2 to 3 years)

AAA Highest claims paying ability. The risk factors are negligible.

AA+

AA

AA-

Very high claims paying ability. Protection factors are strong. Risk is modest, but may

vary slightly over time due to economic and/or underwriting conditions. 

A+

A

A-

High claims paying ability. Protection factors are above average although there is an

expectation of variability in risk over time due to economic and/or underwriting

conditions.

BBB+

BBB

BBB-

Adequate claims paying ability. Protection factors are adequate although there is

considerable variability in risk over time due to economic and/or underwriting

conditions.

BB+

BB

BB-

Moderate claims paying ability. The ability of these organisations to discharge

obligations is considered moderate and thereby not well safeguarded in the event of

adverse future changes in economic and/or underwriting conditions.

65

CREDIT RATING

B+

B

B-

Possessing substantial risk that policyholder and contract-holder obligations will not

be paid when due. Judged to be speculative to a high degree.

CCC Company has been, or is likely to be, placed under an order of the court.

DISADVANTAGES OF CREDIT RATING

(1) Biased Rating And Misrepresentations

In the absence of quality rating, credit rating is a curse for the capital market industry,

carrying out detailed analysis of the company, should have no links with the company or the

persons interested in the company so that their reports impartial and judicious

recommendations for rating committee. The companies having lower grade rating do not

advertise or use the rating while raising funds from the public. In such cases, the investor

cannot get information about the riskiness of instrument and hence is at loss.

(2) Static Study

Rating is done on the present and the past historic data of the company and this is only a static

study. Prediction of the company's health through rating is momentary and anything can

happen after assignment of rating symbols to the company. Dependence for future results on

the rating, therefore defeats the very purpose of risk indicative ness of rating. Many changes

take place in economic environment, political situation, government policy framework, which

directly affect the working of a company.

66

CREDIT RATING

(3) Concealment Of Material Information

Rating company might conceal material information from the investigating team of the credit

rating company. In such cases, quality of rating suffers and renders the rating unreliable.

(4) Rating Is No Guarantee For Soundness Of Company

Rating is done for a particular instrument to assess the credit risk but it should not be

construed as a certificate for the matching quality of the company or its management.

Independent views should be formed by the public using the rating symbol.

(5) Human Bias

Findings of the investigation team, at times, may suffer with human bias for unavoidable

personal weakness of the staff and might affect the rating.

(6) Reflection Of Temporary Adverse Conditions

Time factor affects rating. Sometimes, misleading conclusions are derived. For example,

company in a particular industry might be temporarily in adverse condition but it is given a

low rating. This adversely affects the company's interest

(7) Down Grade

67

CREDIT RATING

Once a company has been rated and if it is not able to maintain its working results and

performance, credit rating agencies would review the grade and down grade the rating

resulting into impairing the image of the company.

68

CREDIT RATING

(8) Difference In Rating Of Two Agencies

Rating done by the two different credit rating agencies for the same instrument of the same

issuer company in many cases would not be identical. Such differences are likely to occur

because of value judgment differences on qualitative aspects of the analysis in two different

agencies.

(9) Conservative Rating

Default by an investment-grade firm is seen as the most costly error for the agency. In order

to preserve their reputation by avoiding the failure of any investment-grade firm, rating

agencies downgrade even "good" firms in response to higher global risk. The downgrades

may look self-fulfilling, but in fact, investors rationally ignore them, as they actually convey

no information about the relative quality of firms

69

CREDIT RATING

IPO GRADING

IPO grading (initial public offering grading) is a service aimed at facilitating the assessment

of equity issues offered to public. The grade assigned to any individual issue represents a

relative assessment of the 'fundamentals' of that issue in relation to the universe of other listed

equity securities in India. Such grading is assigned on a five-point point scale with a higher

score indicating stronger fundamentals.

IPO Grading Is Different From An Investment Recommendation

Investment recommendations are expressed as 'buy', 'hold' or 'sell' and are based on a security

specific comparison of its assessed 'fundamentals factors' (business prospects, financial position

etc.) and 'market factors' (liquidity, demand supply etc.) to its price.

On the other hand, IPO grading is expressed on a five-point scale and is a relative comparison of

the assessed fundamentals of the graded issue to other listed equity securities in India.

As the IPO grading does not take cognizance of the price of the security, it is not an investment

recommendation. Rather, it is one of the inputs to the investor to aiding in the decision making

process.

All other things remaining equal, a security with stronger fundamentals would command a higher

market price.

How Long Would The Assigned Grade Be Valid?

The assigned grade would be a one time assessment done at the time of the IPO and meant to aid

investors who are interested in investing in the IPO. The grade will not have any ongoing

validity.

70

CREDIT RATING

Main features of SEBI decision

The important features of SEBI's decision on IPO grading are as follows:

The grading exercise will exclude the issue price from its scope;

It will be carried out by recognised credit rating agencies;

The grading will be on a 5-point scale, the lowest grade to be indicated by 1 and the

highest by 5; and

The issuing company will be allowed to choose the rating agency for grading its IPO.

CRISIL IPO Grading

CRISIL, the originator of this concept, has been at the forefront of developing the

IPO grading model into a usable form. The views and feedback of the regulator,

Market participants, investors and investor forums have been core inputs in the

development of this product. Therefore, CRISIL has a uniquely evolved

understanding of this globally revolutionary idea.

CRISIL believes that IPO grading provided by an independent agency would be free

from bias and add structure to the tools available at present for assessing the

Investment attractiveness of an equity security.

The IPO grading will be based on CRISIL’s proprietary framework that has been

developed to help investors arrive at their own judgment on factors that drive

Equities as an asset class.

The debt market has benefited immensely from the availability of such an assessment

in the form of credit rating - a representation of a relative assessment of the

fundamentals of the debt security i.e., likelihood of timely repayment of interest

71

CREDIT RATING

and principal.

The IPO grading product of CRISIL, is a relative assessment of the fundamentals of

the equity security.

Investment decisions for IPO are at present based on voluminous and complex

disclosure documents, which pose a challenge to investors to arrive at informed

decisions. The focus, in these documents is meeting regulatory guidelines on disclosures.

Though seemingly there is a lot of information available on IPOs through free

research on websites, media and other sources, investors often look for structured,

consistent and unbiased analysis to aid their investment decisions.

Moreover, information available on new companies varies with the size of the issue,

the market conditions and the industry that the issuing company belongs to. CRISIL

IPO grading aims to bridge this gap and facilitate more informed investment decisions.

Contents Of The CRISIL IPO Grading Report

The report for each CRISIL IPO grading will contain a summary and a detailed report.

Summary- One-page report highlighting the key elements of analysis

Detailed report- Comprehensive commentary on the assessment parameters.

This report will be a one-time assessment based on the information disclosed in the

draft prospectus filed with Securities Exchange Board of India (SEBI); our

understanding of the industry and company fundamentals; and interactions with

the issuer management and other stakeholders.

The report will comprise our assessment on the following parameters:

Management quality

Business prospects: Industry and company

Financial performance

Corporate governance

Project related factors

Other factors:

- Compliance track record

72

CREDIT RATING

- Litigation history

- Capital history.

A comprehensive assessment that aids investment decisions of both -

Institutional and retail investors.

CRISIL IPO Grading: Assessment Scale

The assessment is an ‘overall assessment of fundamentals’ on a five-point scale.

The companies assessed highest will be scored 5/5 and the lowest score will be 1/5.

Gradings are assigned to various parameters and then aggregated.

CRISIL IPO grading is not to be construed to mean

A valuation of the equity offering; present or future

A comment on the issue price or the likely price on listing

An assessment of the market risk associated with equity investments

An audit or a recommendation to invest

A forensic exercise that can detect fraud.

CRISIL IPO Grading - Scale

CRISIL IPO Grade Assessment

5/5 Strong fundamentals

4/5 Above average fundamentals

3/5 Average fundamentals

2/5 Below average fundamentals

1/5 Poor fundamentals

73

CREDIT RATING

CONCLUSION

Thus we can say that Credit rating is a qualified assessment and formal evaluation of company’s

credit history and capability of repaying obligations. It measures the default probability of the

borrower, and its ability to repay fully and timely its financial debt obligations.

The main purpose of credit rating is to provide investors with comparable information on credit

risk based on standard rating scale, regardless of specifics of companies, separate sector of the

economy and country as a whole.

Credit rating has proven itself to be effective instrument of risk assessment in countries with

advanced economy since it demonstrates transparency of an enterprise. Credit rating reflects

financial, sectorial, operational, legal and organizational sides of companies, which characterize

ability and willingness duly and in full amount to repay obligations

In world practice, credit rating can be assigned to sovereign governments, regional and local

executive bodies, corporations, financial organizations and etc.

74

CREDIT RATING

BIBLIOGRAPHY

www.crisil.com

www.stretcher.com

www.careratings.com

www.onicra.com

www.care.org

www.careratings.com

www.smera.in

www.sebi.gov.in

www.hindubusiness.com

www.wikipedia.org

75