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Appendix 16.1

CRISL ADVISORY, RESEARCH AND INFORMATION, INDEX AND TRAININGSERVICES

The CRISIL Advisory Services (CAS)

The CAS offers consultancy services that aim at identifying and mitigating risk and formulating and

executing strategies for the same. The main focus of these services is transaction and policy level assignmentsin the areas of energy, transport and urban structures, banking and finance, and disinvestment, privatisationand valuation. The CRISIL has a pact with National Economic Research Associates (NERA), USA tostrengthen its research advisory services.

These services are rendered in the form of consultancy to various State Governments in the selectionof private sector participation in infrastructure development; to the Disinvestment Commission of theGovernment of India, on disinvestment plans for public sector enterprises and also as expert assistance inthe privatisation process of State Governments, major port authorities, state electricity boards and so on.

The other clients availing advisory services from the CRISIL are public sector enterprises, banks, financialinstitutions, infrastructure project developers and so on.

Energy Group Services The energy group basically offers advisory services to entities engaged inthe energy sector, that is, power, coal, oil and gas. These entities could be classified into three groups:

(1) Central and state government sponsored concerns/organisations/agencies engaged in the energy sector. Assistance is provided at two levels, that is, the policy level and the transaction level.(2) Private sectorconcerns engaged as developers, to help them in project structuring, joint venture partner s selection,financial viable study.(3) Project financiers like banks, financial institutions or multilateral funding agencies,to increase their capabilities, to understand the project, analyse project contracts and design security packages.

Policy Level Assignments Policy level assignments cover the following aspects:

Sector Reforms and Structuring This covers defining the objectives of undertaking reforms in thesector and their translation into a specific, time-bound action plan; identifying the desired sector structurein terms of the players and their roles, the structure of relationships between the players, nature of competition, and nature of the regulatory framework; identifying the need for coordination with otherrelated sectors and various infrastructure development agencies of the state so that the integrated

development plan links with the overall development of the state s economy; defining the future role of the government in the sector and identifying the corresponding state initiatives that would be required. There would be a need to divorce the regulatory function of the state from its role as owner and operatorof the existing facilities; evaluate the different approaches to privatisation, which would include an assessmentof various ownership and operational alternatives such as leasing, management contracts, outright sale of assets, Build-Own-Operate-Transfer (BOT and its variants) and so on and select the optimum model of reform given the objectives and the constraints. The model defines the roles to be played by the publicsector and private sector players, and the manner in which the changes are to be brought in.

BAPPENDIX 16

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16.2 Financial Services

Regulatory Framework This broadly covers defining a regulatory framework that promotes competitivemarket dynamics and addresses concerns relating to the quality of service and environment; developmentof methodologies for setting/regulating tariffs, service standards, and so on; defining the role of theregulator; defining the nature of the regulatory body so as to ensure autonomy in operations, and, thereby,being acceptable to all the players.

Privatisation For inducting private sector capital and management into public sector organisations, theCRISIL provides expert assistance in careful planning, and a step-by-step approach through a diagnosticstudy of the business, organisation and the environment; valuation, under various scenarios, and identificationof the optimal process; organisational restructuring and capital restructuring; corporatisation; managing theprocess of sale/management contracts and so on.

BOT Policy The CRISIL helps the state authorities in formulating BOOT/BOT/R & M policy, so as toprotect the objectives and concerns of the state; structure the Government s financial/commercial policy on the nature of tariffs, royalties payable to the Government, performance guarantees and define the risk sharing pattern between the Government, the private sector and financiers.

Corporate Plan The CRISIL provides expert guidance in developing corporate plans for state authoritiesto enable them to take decisions in the matter of providing greater autonomy to entities like electricity boards, coal companies and for the purpose of assessing the need for their restructuring. In this regard, theCRISIL renders the following services: conducting diagnostic studies of business areas; developing astrategy in line with the roles to be played by the entity; engineering an appropriate structure for theorganisation; identifying the need for systems and development of processes; identifying skill developmentrequirements and recommending capital restructuring, financial strategies and resource mobilisation forensuring financial autonomy.

Fuel Related Services Different fuels have different benefits and risks, concomitant with their uses.

A right blend of the usage of the various fuels would have to be achieved to minimise excessive dependenceon a single fuel and the resultant adverse impact. The factors that would affect the choice of a fuel wouldinclude: domestic availability versus need for import; price volatility and the impact of foreign exchangefluctuation in case of import; ease of transportation; availability of infrastructure for storage andtransportation; efficiency of operations, achieved by the technology involved and impact on the environment.

The CRISIL provides expert reports on these related aspects, facilitating formulation of the desired policy framework.

Transaction Level Assignment The implementation of the policies, once laid down, becomesimportant. The CRISIL provides expert assistance, for this purpose, covering the following aspects:

Project Scoping and Structuring Project structuring includes the following aspects: (i) Defining theproject parameters in terms of technology and size; (ii) Fuel option analysis; (iii) Identifying skill/strength

requirements; (iv) Selection of appropriate project participants to assemble the skill pool and (v) Sharing of responsibilities and risk among the participants.

Bid Process Management The CRISIL renders all related services required to achieving the goal,namely, invitation of tenders and management of the entire bid process on a competitive bidding basis.

The services cover preparation of the bid document; drafting model agreements, such as power purchaseagreement (PPA), concession and the state support agreement, which will serve as a basis for furthernegotiations; evaluation of bidders on managerial, financial and technical competence; evaluation of a

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Appendix 16.3

detailed bid on a common risk platform, through the use of financial modelling techniques; negotiation of terms; negotiations on issues of risk sharing (project contracts) with the successful bidder.

Financial Viability Analysis of Projects The financial model would determine the attractiveness of ~projects to different parties. For example, the model would compute the tariff for the purchaser (the stateelectricity boards in the case of power generation projects); IRR, for the project promoter and other equity investors and debt-service coverage, for lenders to the project. The analysis would also be useful inidentifying the measures required to make the project viable, and in arriving at an equitable sharing of risk and responsibilities. The analysis would, inter-alia, cover the magnitude of capital investment; financing plan and duration of the concession period/BOT/BOOT contract.

Risk Identification and Analysis and Structuring of Project Contracts Infrastructure projects arecharacterised by a number of contracts which crystallise risk sharing among various project participants.

The CRISIL advises on the concession agreement; power purchase agreement; state support agreement;fuel supply contract and so on.

Security Package Structuring and Analysis Considering the unsatisfactory credit quality of mostof the state electricity boards (SEBs) in India, payment mechanisms are being sought to assure the project scash inflows. The mechanisms being discussed typically include a letter of credit, escrow account, andguarantees by the State government and/or Central government. Assistance under this head would include:diagnostic analysis of the SEB s financial position; analysis of their receivables; evaluation of variousescrow positions, and recommendation of the most optimal mechanism; detailing the operation of theescrow mechanism; assistance in the allocation of receivables to different initial power providers (IPPs)and assessing the degree of security that the envisaged mechanism provides.

Transport and Urban Infrastructure Group Services The CRISIL provides financial advisory services to the transports and infrastructure service providers on the lines of energy groups. The main

users of these services are (1) Central and State governments, for example, the Ministry of Surface Transport (MOST), major ports and (2) Private sector developers intending to invest in the transportsector. These services cover both policy level and transaction level aspects.

Policy Level Assignments Major areas covered by the CRISIL are the following:

Advice on the Transport Sector Privatisation Policy of the State/Major Ports The advice coversdefining the objectives of privatisation and its translation into a specific, time bound action plan; identifying the areas to be privatised (at existing/greenfield sites) and the criteria for privatisation; and evaluating thedifferent approaches to privatisation, which would include an assessment of the various options of ownershipand operational alternatives such as leasing, management contracts, outright sale of assets and so on.

Development of the BOT Principle/Risk Identification and Allocation The task to be executedcovers identification of the BOT variant to be used, and formulation of the terms and conditions so as toprotect the objectives and concerns of the state; structure the Government s financial/commercial policy on the nature of tariffs, royalties payable, performance guarantees and revenue assurances and define therisk sharing pattern between the Government, the private sector, financiers and users of the transportfacilities.

Long-Term Sector Plan and State Role The CRISIL has initiated a study on the long-term transportsector development requirements of the state. The study involves coordination between the various

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infrastructure development agencies of the state so that the integrated transport development plan linksthe future transport facilities to the overall development of the state s economy, defining the future role of the government in the sector and identifying the corresponding state initiatives that would be required.

There would be a need to divorce the regulatory function of the state from its role as owner and operatorof existing transport facilities, and define a regulatory framework that promotes competitive market dynamicsand protects the state s concerns relating to safety, security and environment.

Restructuring of Major Ports Greater autonomy of port trusts is now being actively considered and,in the medium-term, major port trusts are likely to undergo a structural metamorphosis. In line with theinternational experience, the two routes being considered are corporatisation and restructuring. In eacharea, the CRISIL would evolve a policy framework. The corporatisation would involve: a diagnostic study of the port trust; preparation of a business plan; recommended capital structuring and financing strategiesand a corporatisation plan. Restructuring of the port management under the landlord concept would

involve: identification of areas for involvement of the private sector and formulating appropriate termsand conditions for private sector participation.

Transaction Level Assignments The approach pursued by the CRISIL in providing advisory servicesfor completing transactions by the client would cover the following aspects, with different treatment ascompared to the approach followed by the energy group.

Financial Viability Analysis The financial analysis of the transport project would follow the financialmodel designed by the CRISIL and take into consideration the following factors: inputs from trafficstudies; nature and flexibility of tariff structures; estimated revenues and associated costs under variousoperating assumptions; magnitude of capital investment; financing plan; duration of the concession period.

The financial model would determine the financial attractiveness of the project. The analysis would also beuseful in identifying the measures required to make the project viable.

Project Structuring Developing transport projects is a complex exercise since it involves bringing togethera number of players who would play an important role in financing, constructing, operating, using andregulating the transport. The structuring of a transport project implies defining the role of each of theseplayers, and clearly identifying the risk and responsibilities they will bear in the project and the corresponding rights and benefits they can expect. The output of the project structuring exercise, for the transportproject, would include: the mode and degree of investment by the different players; the mode of sharing of facilities between them; the tariff structure that will be applicable to the promoters; sharing, investmentand usage related risks; the mode of operation of the facilities and the revenue streams that will beavailable to the transport facility.

Bid Process Management The bid process management involves activities beginning from invitationof tenders to the management of the entire bid process on a competitive bidding basis. It covers twophases, namely, the development phase and the privatisation phase. In the development phase , the main task involved is the selection of maritime consultants to undertake various economic and site-specific technicalstudies. In the privatisation phase , selection of the most competent private developer, offering the mostcompetitive BOT terms, is taken up. The services offered would include: preparation of the bid document,drawing upon policy level inputs (the state s privatisation objective and BOT principles) in framing theterms of references for all the contracts; assistance in drafting a model concession agreement, which willserve as a basis for further negotiations; evaluation of bidders on managerial, financial and technicalcompetence and evaluation of detailed bids on a common/comparable risk platform, through the use of financial modelling techniques.

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Appendix 16.5

Negotiation of Terms with the Successful Bidder The CRISIL will attend to the following tasks:negotiations on issues of risk sharing and other terms of concession specific to the development; constructionand operational phases of the BOT project and assistance in negotiation of key contracts such as management/lease contracts for privatisation of port services at existing ports.

Privatisation and Disinvestment Group This group renders advisory services to central/stategovernments, public sector enterprises, apex bodies mandated with public sector reforms and privatesector entities interested in participating in the privatisation programme. These services cover three basicaspects: (i) policy level;(ii) enterprise level and (iii) reforms and restructuring.

Policy Level Services These services broadly include the formulation of policy guidelines forprivatisation and divestiture of public enterprises; developing a framework and design for an overall publicenterprise divestiture programme; planning an organisation for overseeing the privatisation/disinvestmentprocess and process management of the disinvestment programme.

Enterprise Level Services These services include a diagnostic study of the enterprises, prior toprivatisation; evaluation of privatisation alternatives; enterprise valuation; enterprise restructuring for valuesenhancement; sales design; structuring approaches to attract private financing; selection of party fordisinvestment and bidding process management.

Reform and Restructuring The group renders restructuring exercises. Various distortions in thefunctioning of public sector undertakings have led to inefficiencies that often necessitate restructuring of the enterprise for it to continue to function effectively. The CRISIL s focus has been to ensure that thesectoral reforms and the restructuring of public sector enterprises results in making them viable entitiesthat can function in a liberalised and competitive environment. These services in the reform restructuring of individual enterprises include: restructuring of the regulatory framework; financial restructuring;restructuring of business and strategy and legal restructuring.

Banking and Finance Group The CRISIL offers a wide range of services covering restructuring/business re-engineering, credit management, investment management and portfolio insurance, equity valuation,resource mobilisation studies and financial feasibility assignments. These services are aimed at benefitting banks, financial institutions, state governments, public sector units, international development agencies,infrastructure projects developers and corporate clients. A brief account of coverage under each of theabove services is given below:

Restructuring/Business Re-Engineering The CRISIL carries out diagnostic studies that would enablean organisation to reassess and reconstruct its business corporate and organisational so as to enable itto successfully cope up with the changing environment. This service benefits banks, financial institutions,state level agencies and other government bodies. The emerging financial sector scenario with higherdisclosure and stricter norms, has revealed the poor financial health of many agencies. To help these

bodies begin afresh, the CRISIL carries out financial restructuring exercises. It uses comprehensive financialmodels to evaluate the impact and attractiveness of various options and suggest the most appropriateoption.

Credit Management The CRISIL undertakes exercises to assist banks and institutions gear up theircredit management systems, specifically in the areas of sanction, disbursement, monitoring and recovery.

As a part of the credit management exercise, it also offers training programmes in credit evaluation forexecutives of institutions. It also offers risk management services to financial institutions, banks, NBFCs

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and corporates. It has developed a credit decision support system called RAM (Risk Assessment Model)that is a risk evaluation software, which enables lenders to evaluate the credit risk of borrowers. The RAMalso identifies focal areas for risk mitigation and surveillance.

Investment Management and Portfolio Insurance The CRISIL offers to develop the investmentmanagement strategy in line with the business strategy of the company and redesign decision systems forthe investments department, in line with the recommended strategy. This would, additionally, involvedesigning an appropriate management information system (MIS) format for efficient and effectivemonitoring and control of investment decision and portfolio by senior management. The CRISIL alsoremodels cash management systems for optimum movement of funds across various collection and paymentcentres.

Portfolio insurance refers to a strategy aimed towards limiting the downside risk of a portfolio in theevent of a bearish trend in the market. The best tool for implementing portfolio insurance, the put option,

is not available for most scrips even in developed markets. Hence, put options have to be replicated by trading in either the index futures or the scrips in the portfolio. The CRISIL offers to study the equity of the fund and develop a software based tool for the fund manager. It is strongly positioned to apply theportfolio insurance theory in the Indian conditions and, specifically, to the concerned portfolio, using itsunderstanding of the Indian capital markets and the financial sector reforms.

Equity Valuation Studies The CRISIL undertakes comprehensive diagnostic study and makes anassessment of the key areas of strength and concern. An objective valuation, using suitable approaches, isundertaken while restructuring measures leading to value enhancement are identified and evaluated. Thefinancial and direct business implications of each option are considered in detail.

Resource Mobilisation Studies The CRISIL undertakes resource mobilisation studies for financialinstitutions, government bodies and nodal agencies. It evaluates the various funding options in the contextof the emerging financial sector scenario. The implications of each funding option, with regard to the easeof availability, tenure, cost, legal clearance and so on, are evaluated on an independent platform. Theoptimal option is then identified and suggested to the client.

Financial Feasibility Studies The CRISIL offers financial feasibility studies to corporates andentrepreneurs to examine feasibility of new projects and enable judicious investment decisions. Specificinputs include development of a customised computerised financial model to evaluate various scenariosand identify the optimal scenario. It assists in identifying key risk areas and also suggests suitable mechanismsto mitigate the same with funding and structuring alternatives for enhancing returns and minimising costs.

The CRISIL has, under this head of services, rendered the services to SFCs, PIs, joint ventures, banks,SEBs and so on, without naming the real beneficiaries.

Rating Opinion on Industry Status The CRISIL has undertaken giving opinion on the industry status. This is a significant opening to help entrepreneurs in the decision making process to establish a unit in aparticular industry classification, modernise the existing unit or to close down the non-profitable units. Theopinion is based on the conclusions arrived at while evaluating the risk profile of the rated players.

CRISIL Research and Information Services (CRIS)

The CRISIL Research and Information Services (CRIS) disseminates value-added research and undertakescustomised studies in four areas, namely: Indian economy, Indian capital markets, Indian industries and the

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Appendix 16.7

Indian corporate sector. It has a large client base, both in India and overseas, comprising institutionalinvestors, investment bankers, commercial banks, financial institutions, corporate planners, mutual fundsand asset management companies. The services rendered earlier by the CRISIL as the CRISIL CardServices and CRISIL Economic Services have been reorganised and assimilated under the CRIS. It now covers, inter-alia, the following set of services:(1) CRISIL sectorwise, (2) CRISIL view, (3) Internationalinformation vending and (4) CRISIL index services. It also provides marketing support to all the productsand services of the operating units of in India, S&P Financial Information Services, a subsidiary of Standard & Poor (S&PFIS) S&P MMS and S&P Platt.

CRISIL Sectorwise The CRISIL Sectorwise is an in-depth analysis of the important and potentialgrowth industries in India. The contents of the CRISIL Sectorwise include the following: (i) A brief of history of the industry; (ii) Structure of the industry, and its characteristics; (iii) An analysis of thedifferent projects in the industry, based on factors like product specifications, cost structure, capacities,

technology, sector use; (iv) Demand supply analysis, both present and future; (v) An analysis of the majorplayers in the industry; (vi) Government policies; (vii) Industry risks/constraints; (viii) Internationalcompetitiveness; (ix) Key factors and (x) the CRISIL s outlook on the industry.

CRISILVIEW It provides an analysis of, and opinion on, the business and financial outlook of a company,based on which investors can take decisions with regard to individual risk preferences. It also provides auseful basis for fund managers in their portfolio allocation decisions. Medium term lenders can use thesereports to benchmark their exposure limits. The CRISILVIEW is based on the CRISIL s in-depthunderstanding of the industry in which the company operates, as well as its understanding of the relevantqualitative and quantitative factors affecting the company s performance. It presents a powerful report onlisted corporates in India, serving as a comprehensive and interactive tool for business managers, investors,creditors and corporate decision makers.

The product has been structured specifically to cater to the information needs of a decision maker. It

starts with a brief introduction to the company, gives an overview of the industry in which the company operates, analyses the business and financial outlook, and deals with detailed financials both actuals tilldate and projections in the medium term. Financial projections are for two years in the future and arebased on certain assumptions and underlying logic, all of which are outlined.

Online ServicesInternational Information Vending To make the CRISIL s research availableto its international clients as well as to reach a wider potential client base, its research and analysis is alsoavailable via the Bloomberg (Please Type ). The menus that it offers cover the rating and advisory assignments carried out as well as research undertaken in the three divisions of the CRISIL. The Bloomberg carries extensive research and analysis in the following areas: Indian economy, Indian capital markets, key industries and Indian corporates.

In addition, the CRISIL also has tie-ups with all the other leading international information vendors likeReuters Inc., Knight-Ridder Information Inc (The Dialog Corporation), Internet Securities Inc and MatrixService Pvt Ltd to disseminate its research and analysis worldwide.

CRISIL MarketWire The CRISIL MarketWire, established in October 2001, is the leading source of news and commentary on India s fixed-income market. With about 20 experienced journalists, the newsservice provides a blow-by-blow account of developments in all segments of this market. It is a part of theCRIS-Risk and Information Solutions Company Ltd (CRIS-RISC, formerly CRISIL.Com Ltd), a wholly-owned subsidiary of CRISIL.

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Capital Markets Group The Capital Markets Group at the CRISIL provides customised researchand advisory assistance to meet specific transactional and strategic requirements of clients. The Group issupported by the CRISIL Research and Information Services, which continuously tracks over 50 sectorsand 500 corporates.

1. Diagnostic Evaluation for Valuation of the Indian Partner of a Foreign Asset ManagementCompany The CRISIL was mandated by a leading private sector AMC to submit a proposal for adiagnostic evaluation of the AMC, with a view to determine the benchmark valuation for negotiations withits foreign partner. It conducted a prognosis of the Indian economy, with a view to determining the likely flow of household savings into different investment avenues, including the Indian mutual fund industry over a 10-year time horizon. A SWOT analysis of the Indian AMC was carried out in the context of theeconomy outlook as well as the likely evolution of the Indian mutual fund industry, taking cognsiance of opportunities being offered by alternative investment avenues, product offerings to Indian investors and

threats from global entrants. Based on the above analysis, key issues were identified for the AMC s futurebusiness strategy and a detailed projected revenue statement was drawn up as the basis for arriving at thebenchmark valuation.

2. Technical Assistance to the Association of Mutual Funds in India (AMFI) for IntroducingBest Practices in the Mutual Fund Industry The CRISIL has been working closely with AMFI onpolicy level issues, for the mutual fund industry, with a view to introducing best practices in the industry.

The scope to an assignment that they have been very actively working on, over the past three years, hasbeen the development of a uniform methodology for the valuation of non-traded debt securities. Thismethodology has since been mandated by the SEBI, to be implemented by all the domestic mutual funds.

The approach for valuing non-traded debt involved identifying a suitable riskfree benchmark rate andassigning spreads over this riskfree rate for the various risk parameters inherent on a portfolio. The risk parameters considered were the credit risk, as measured by the credit rating assigned to the security;interest rate risk, as measured by the duration of the security and the illiquidity risk. The CRIS evolved the

valuation matrix a credit risk-duration matrix, which assigns spreads over gilt securities in the variousduration buckets, in the different credit risk categories. The yield derived from the Valuation Matrix isadjusted for issue specific risks, according to defined criteria, and then used to price the non-tradedsecurity by discounting all the future cash flows of the security. The CRISIL was mandated by the AMFIto develop software CRISIL Bond Valuer for enabling the mutual fund industry to implement theabove methodology on a uniform basis. The CRISIL has installed the software at all mutual funds in India,and provides the industry with the Valuation Matrix, every week.

3. Performance Evaluation and Portfolio Analysis for Strategy by a Leading Mutual Fund TheCRISIL was mandated by a leading AMC to evaluate the credit risk and maturity risk profile of theschemes of their mutual fund and draw a comparison of the same with peer group schemes in the mutual

fund industry, with a view to evolving suitable investment strategies. The methodology adopted involved analysing the risk profile of the portfolio and evaluating theperformance of the various schemes vis--vis peer group schemes and vis--vis market benchmarks. Thecomponents of the study included an analysis of the credit risk of the fixed income portfolio; analysis of the interest risk of the portfolio, as measured by the modified duration of the portfolio; Value at Risk (VaR) of the portfolio, which was quantified at a certain probability level; analysis of the maturity profileof the asset vis--vis the projected maturity profile of the liability of the scheme, to enable determinationof the liquidity profile of the portfolio.

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Appendix 16.9

4. CRISIL Composite Performance Ranking Service of Domestic Mutual Fund In line with itsobjective of increasing investor awareness as well as enhancing the transaction capabilities of the industry players, the CRISIL recently launched an independently designed and computed ranking of the compositeperformance of mutual funds.

The key characteristics of the CRISIL s methodology is to view performance, not only in terms of totalreturns but in conjunction with the risk factors associated with performance, such as diversification risk,liquidity risk and volatility risk in returns. It has developed this methodology with support and inputs frommarket practitioners in the mutual fund industry as well as incorporated the underlying concepts usedinternationally. The CRISIL Mutual Fund Ranking is a relative Composite Performance Rank (CPR) of the mutual funds schemes vis--vis their respective peer group in each scheme category. The CPR is basedon the following criteria: (i) Risk adjusted return of the scheme portfolio; (ii) Diversification of thescheme portfolio; (iii) Liquidity of the scheme portfolio and (iv) the Asset size of the scheme. TheCRISIL has also introduced a Mutual Fund Research Service that provides analytical insights into theindustry. It is also available on a customised arrangement.

5. Assistance to the Government of India on the Roadmap for the Development of IndiasFinancial Sector The CRISIL was mandated by the Committee set up by the Government of India toadvise the Government on the key developments required, and the modalities thereof, for developing thecountry s financial sector. It made a detailed analysis of the segments constituting India s financial sector,namely, equity markets, debt markets, banking sector, non-banking financial services, mutual funds, housing finance and so on. This involved a detailed review of the constraints policy and/or transaction related and evolve a roadmap for addressing the key issues identified.

6. DATABASE and DATA Products The CRISIL has been tracking the Indian capital markets. Itsanalysis is based on a strong understanding of the Indian capital markets, supported by a comprehensivedatabase developed in-house. It has also been in the forefront of the development of products for capital

markets in India and for global clients. These include:(a) Comprehensive Database on the Indian Debt Markets The CRISIL is the bond correspondentin India for IFC Washington, and the sole provider of Indian debt data to Reuters, globally.

(b) CRISIL DebtBase and GiltBase It is a comprehensive database querying software covering allgilts and corporate debt securities in the Indian debt markets. The database comprises over 300 debtsecurities, their basic features and historic price and yield information.

(c) CRISIL Debt Indices The CRISIL has been providing benchmarks for the markets to allow investorsto track the performance of individual market participants. The CRISIL gilt Index is the index of alloutstanding gilt securities with over 1 year residual tenor, with liquidity criteria of over 75 per cent trading frequency. The CRISIL has also launched the country s only AAA Corporate Bond Index. Both Indices aremarket cap-weighted.

(d) Calculating Agent for Bond Issues The CRISIL has been appointed the calculating agent for thefloating rate issuances of leading corporate/state agencies like ICICI, Reliance, Bharat Petroleum, MaharashtraState Road Development Corporation and so on.

(e) CRISIL Mutual Fund Indices These are the country s first indices for the mutual fund industry,serving as benchmarks for performance comparison. The index is weighted by the unit capital of eachconstituent and is computed daily on the basis of the NAV movement.

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(f) CRISIL Equity Indices The country s first non-stock exchange computed equity indices. The indexbusiness has since been transferred to a joint venture company with the National Stock Exchange. Standard& Poor s, the leading global index services agency, has licensed the use of its brand name to these indices.

Fixed Income and Money Market CRISIL.COM s Fixed Income Research Division providesinformation services and analytical solutions to corporate and capital market players. This practice leverageson CRISIL s understanding of capital markets and various economic sectors and extensive experience inrisk identification and assessment. The dedicated team of experienced analysts, supported by the largestindependent research group in India (CRIS) and a comprehensive database, enables the CRISIL to providehigh quality of research and analysis. The available products are: the CRISIL DebtBase, the CRISIL Debt-

View, the CRISIL Bond Valuer, the CRISIL GiltBase Interactive, the CRISIL BondYield Calculator-Interactive and Bond Valuation Matrix.

Crisil DebtBase Crisil DebtBase is a computerised, comprehensive database of over 2000 IndianGovernment and corporate debt securities, including private and public issuances. The data is classifiedinto more than 100 fields, with easy to use data files and has the facility to track portfolios and createcustomised reports. That data is updated daily via Bulletin Board/Internet email.

CRISIL DebtView CRISIL DebtView is a weekly update of the fixed income and money markets inIndia, covering money markets, forex markets, gilt markets, the CRISIL s benchmark yields for gilts bondmarkets domestic and international. It provides a commentary on the developments in these markets.

CRISIL Bond Valuer CRISIL Bond Valuer is primarily targeted at fixed income portfolio managersand mutual funds to assist them in pricing non-traded debt securities in their portfolios. A traded risk freeyield curve forms the benchmark for the model.

CRISIL GiltBase Interactive CRISIL GiltBase Interactive presents online information on the G-Secmarkets in India. Nine frequently asked questions are answered with just one click. These queries areengined by the CRISIL s comprehensive and unique database on the debt markets: the CRISIL DebtBaseand the CRISIL GiltBase.

Crisil BondYield Calculator-Interactive Crisil BondYield Calculator-Interactive is an online web toolthat enables calculation of a price for any debt security for a given yield and the yield for a given price. Thedatasets have been segregated into government and non-government debt securities and the valuationmodules are also different for these, although the basic underlying logic remains the same.

CRISIL Bond Valuation Matrix CRISIL Bond Valuation Matrix gives the yield of gilt and the spreadof yield over gilt for the different categories of ratings, for all duration buckets. The matrix incorporates7 duration buckets. This matrix is supplied by the CRISIL on a weekly basis. The CRISIL BondValueraccepts a valuation matrix comprising the benchmark yields and rating spreads.

Mutual Funds Services [MFS] The CRIS-RISC is a dominant player in the mutual fund rankingsand research services arena. The rankings provided by CRISIL.com are the industry standard in the Indianmarket and are closely tracked by fund houses, fund distributors and investors. The CRISIL valuations forilliquid corporate bonds and government securities are mandated by a market regulator, the SEBI, for thedaily valuations of illiquid securities by fund houses. Various benchmarks developed by the CRISIL havealso been mandated by the SEBI to be used by funds for benchmarking performance.

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Appendix 16.11

Industry Analysis This is a comprehensive service that seeks to keep clients informed of the currentand future state of the industry and its key players. It contains detailed information about the evolutionand current performance of the industry. It also contains assessment of the long-tem performance outlook of the industry and includes information content on production processes, regulatory environment, coststructure, raw material, capacities, production, imports, exports, operational efficiencies and financialperformance.

Business Intelligence Service This service is available if the information needs are vast and encompassa thorough understanding and monitoring of a large number of companies, the industries they operate inand the economy. It would provide:

CRISIL ECOVIEW CRISIL INFAC Industry Information Service on 37 industries

CRISIL INFAC Research Reports CRISIL VIEWS Impact Analysis: Assessment of the policy changes/announcements such as the Union budget,

credit policy, exim policy Training: Tailor made training programmes for clients on a variety of aspects, throughout the year,

on how to analyse industries and companies, risk analysis and forecasting of earnings. Presentations: Presentations on the impact of major policy announcements such as the Union

budget and its impact on Indian industries and companies.

Economic Analysis A monthly analysis of various economic parameters and their impact on theIndian economy, providing an in-depth understanding of the trends in the Indian economy and internationaltrade, alongwith CRISIL s outlook on the economy in particular.

Company Research Analysis of the business of a company, financial and future outlook and detailedearnings estimates. Division-wise information on plant size and technology, production and capacity utilisationtrends, major raw material costs, other key costs like power costs, conversion margin analysis, sales volumesand realisations, domestic and export sales, market share, major customers and the distribution network.

The document contains an earnings forecast, including detailed earnings estimates for the next two years projected balance sheet, profit and loss account, ratios and cash flow statement. The logic and the assumptionsused are also listed. It grades the company on parameters such as industry prospects, market position,operating efficiency and financial performance.

CRISIL Index Services

The CRISIL offers, inter-alia, the following index services, which are available online also. It has joinedhands with the National Stock Exchange (NSE) to develop, construct and maintain a whole series of equity indices that serve as useful market performance benchmarks and are the underlying indices for derivativestrading. The joint venture subsidiary is titled IISL. It has also entered into a licensing agreement withStandard & Poors for licensing its trademark to the IISL indices.

CRISIL-500 Equity Index The CRISIL-500 Equity Index is a broad-based, market-value weightedindex, comprising 500 companies across 79 industries and represents about 74 per cent of the market

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capitalisation and more than 95 per cent of the turnover on the Mumbai Stock Exchange (BSE). The mainobjective of the CRISIL-500 is to provide the investment community with a more accurate reflection of the stock market movement. The index is responsive to market developments. It is computed daily anddaily historical values are available from 1991 onwards.

CRISIL MidCap 200 Equity Index The CRISIL MidCap 200 Equity Index is a benchmark for themidcap segment of the market, comprising 200 midcap stocks, listed on the BSE. It represents 74 per centand 84 per cent of the turnover of medium capitalised segment of the market computed daily; historical

values of the index are available from 1993 onwards.

CRISIL Industry Indices With a view to providing regulators, investors, fund managers and marketintermediaries with a better perspective of the relative stock market performance of the various segmentsin the corporate sector, the CR1SIL has developed three segment benchmark indices:

(a) CRISIL MNC Index This is a market capitalisation weighted index comprising 50 MNCs listed onthe BSE.

(b) CRISIL Indian Business Group Index This comprises 250 listed companies on the BSE,representing 107 Indian business groups.

(c) CRISIL PSE Index This is a market capitalisation weighted index comprising 20 PSE stocks listedon the BSE.

Customised Indices The CRISIL s Customised Indices emphasises the scientific methodology of index construction. Dynamic index maintenance is recognised by the market and the CRISIL has receivedrequests for developing benchmarks as well as customised indices. It undertakes development, computationand maintenance of customised indices for clients as well as offers consultancy services for developing indices.

CRISIL Index Bulletin The CRISIL Index Bulletin is a monthly market activity update and coversthe market performance of constituents of CRISIL indices.

CRISIL Training Services

The CRISIL is the only rating agency in the country that provides technical assistance and training to theMalaysian Rating Agency (RAM) and Israeli Securities Rating Agency (MAALOT).

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Appendix 16.13

ICRA INFORMATION, ADVISORY AND GRADING SERVICES

Information Services

The information services division of the ICRA focuses on providing authentic data and value-addedproducts used by intermediaries, financial institutions, banks, assets managers, institutional and individualinvestors and others. Value-added services include corporate reports, equity assessment, mandate based

studies (customised research) and sector/ industry specific publications.Investment Information Publications The Information Services Division of the ICRA, since1993, has been bringing out investment information publications. These publications appear in two series.

The first, the ICRA Sector Focus Series , aims to present an in-depth analysis of different sectors/industries, focusing on specific issues. It is oriented towards all those who are interested in contemporary developments in the Indian economy and in the specific industries being covered. It is useful to researchers,academics, practitioners in the financial services sector and corporate managers in industry .The second,titled the ICRA Industry Watch Series , has a distinct corporate orientation. It is a useful information andanalytical tool for investment and portfolio managers. The key elements that govern the business environmentof the industry the likely future direction, and the performance of the major corporate entities form thesubstance of the series. These reports are primarily based on information that is publicly available, such ascompany annual reports, newspaper items, publications of government, private and public bodies, proceedingsof conferences/seminars, as also interactions with industry leaders and specialists in specific areas.

Corporate Review The ICRA Corporate Review (ICR) is a comprehensive document that providesappropriate information and insightful commentary on the universe of Indian corporates. Designedspecifically with equity investors in mind, the objective is to provide credible information in one place. The

variety of value-added information provides a clear picture of the key issues facing a corporate entity.

Money and Finance The ICRA has built up a research programme to analyse contemporary developments that characterise the Indian money and finance world, the ultimate objective being to developanalytical models that can explain the interrelative movements of the principal macro-variables that definethe monetary and fiscal sector of the Indian economy. Money and Finance is a quarterly publicationdirected towards individuals interested in understanding the reasons underlying policy initiatives and theiroutcome.

Rating Profile A quarterly source of reference, it features (1) rating in use, (2) rationale for rating assigned and (3) rating symbols and implications.

Customised Research The ICRA undertakes mandate based exercises that are customised to addressthe unique needs and requirements of individual clients. The assignments include (1) due diligence studies,(2) equity assessment/valuation, (3) group assessment, (4) industry analysis and (5) market study.

CAPPENDIX 16

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Corporate Reports To facilitate investment decisions of large investors and information, anotherimportant landmark in providing information to investors are corporate reports, which provide exhaustiveand reliable information and analysis by the research analysts on select corporates, covering all areas of company background, industry background, financial performance, operational analysis and prospects.

The reports have regular updates to cover the implications due to changes in business and economicconditions, for corporates.

Grading Services

The grading services offered by the ICRA s Information Services Division includes grading of constructionentities, real estate developers and projects, equity and mutual fund schemes.

Advisory Services The Advisory Services Division of the ICRA offers wide ranging management advisory services. Underthe umbrella of advisory services, the ICRA seeks to share its understanding of the business processes andrelevant organisational issues with different players of financial markets such as investors, issuers, regulators,intermediaries and the media. To acquire expertise and bring international experience and practices to theIndian capital market, the ICRA signed an agreement with Financial Performs Inc. (FPI), a Moody company.

The advisory services range in under (1) strategic consulting/strategy practice, (2) risk management practice,(3) regulatory practice,(4) transaction practice and (5) content. The client segment focus is on the following sectors, based on the needs of different organisations: (i) banking and financial services,(ii) infrastructuresector, (iii) manufacturing and services sector and (iv) government, regulatory authorities and municipalities.

Strategic Consulting Strategy practice focuses on improving an organisation s competitiveness across

its value chain. The major elements in strategy consulting are formulation of goals and objectives, improving competitiveness and profitability, entry strategy, including mergers/acquisitions and growth strategies,improving organisational capabilities, organisational restructuring and financial strategy and systems. Strategy planning and implementation spans the following areas:

(A) Functional areas, namely, (i) Business planning, (ii) Corporate finance, (iii) Cost reduction, (iv) Alliances, (v) Operations improvement, (vi) Organisation design, (vii) Process re-engineering, (viii) Corporaterestructuring, (ix) Business valuation and due diligence, (x) Turnaround management, (xi) Marketing strategy,(xii) Information system design, (xiii) Mergers and acquisitions, (xiv) E-Commerce and (xv) Human resourcemanagement; (B) Sectors, that is; (i) Banking/Financial services/Insurance, (ii) Consumer goods, (iii)Commodities, (iv) Metals, (v) Construction and real estate, (vi) Tourism and hospitality, (vii) Informationtechnology, (viii) Oil and gas (ix), Infrastructure, (x) Cement, (xi) Textiles, (xii) Pharmaceuticals, (xiii)Healthcare, (xiv) Automobiles/Ancillaries, (xv) Food and beverage, (xvi) Retailing, (xvii) Paper, (xviii)

Telecommunication, (xix) Government, (xx) Petrochemicals, (xxi) Consumer durable/White goods, (xxii)Media, (xxiii) Chemicals, (xxiv) Engineering and capital goods and (xxv) Mining.

Risk Management Area Risk management area of advisory services advises clients on efficientmanagement of credit risk, market risk and operational risk. It includes assessing project risk for investors/developers/lenders, project structuring and financial modelling, structuring payment mechanisms, building organisational skills in credit risk management for banks/lenders and risk audit studies. The ICRA has been

working with Moody s Risk Management Services for extending sophisticated and state-of-the-art technology in credit risk management.

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Appendix 16.15

The clients include commercial banks, financial institutions, multilateral agencies, non-banking financecompanies, project financiers, equity investors, venture capital firms, insurance firms and manufacturing firms. For manufacturing and service companies, the ICRA Advisory offers consultancy in risk management,planning and control. The coverage includes:

(A) Credit Risk: (1) Regulatory compliance, (2) Processes/systems for credit risk management, (3) Internalrisk rating systems, (4) Credit monitoring systems (including MIS), (5) Moody s software for creditrisk management, (6) Organisation design for risk management, (7) Portfolio management, (8) Industry and corporate reports and (9) Credit risk culture assessment.

(B) Market Risk: (1) Regulatory compliance, (2) Asset liability management, (3) Risk quantification, (4)Interest rate/liquidity/currency risks, (5) Gap/VaR analysis, (6) Hedging strategies, (7) Transferpricing, (8) Software for ALM and (9) Integrating ALM with overall planning.

(C) Training for Risk Management: (1) Analysing financial statements basic/advanced, (2) Credit risk management middle/senior executives, (3) Understanding ALM and (4) Customised training forbankers.

(D) Operations Risk: (1) Diagnostic analysis of risk for a company, (2) Systems for risk measurement(3) Risk mitigation strategies and (4) Internal control and corporate governance.

Counterparty Risk Assessment The ICRA Advisory has developed the Counter Party Risk Assessment (CPRA) to assess risks that counterparties are exposed to in the course of buying and selling of goods and services in all kinds of marketplaces. The CPRA is a relative measure of a counterparty sability to honour the terms of trade. The ICRA Advisory offers the CPRA as an online plug-and-play model for e-marketplaces/Virtual Private Networks and as an offline facility for organisations desiring toassess counterparty risks of buyers/dealers and suppliers.

Regulatory Practice It advises the Government, regulatory authorities and municipalities dealing with formulation of economic and financial policies. It also advises corporate entities in formulating their

strategies while dealing with regulatory issues. The focus is on economic issues pertaining to regulationssuch as pricing of goods, competition, efficient market making mechanism, consumer protection, fairtrade practices, policies towards subsidies and public/private partnership structures. The ICRA Advisory Services has worked on several consulting projects concerning regulatory issues in the areas of Power,

Water, Public sector, Banking, and Urban Infrastructure. For instance, in the Power sector, the ICRA hasprovided consulting services in the regulatory process, to various stakeholders, such as Regulatory Commissions, Independent Power Project Developers, State Governments, State Electricity Boards andLicensees on various issues related to the sector. The services offered by the ICRA Advisory in differentfunctional areas relate to: (1) Tariff setting for public goods and services, (2) Economic development, (3)Development of regulations, (4) Fiscal management policies, (5) Privatisation policies, (6) Institutionalstrengthening, (7) Determination of subsidies and (8) Evaluation of contracts and agreements.

Transaction Practices It focuses on providing consulting services at the transaction level (vis--vispolicy consulting services) to infrastructure projects in areas such as power, telecommunications, gas,airports and urban infrastructure. The services include financial modelling, risk assessment and mitigation,designing security mechanisms, formulating bidding strategies, drafting concession agreements and structuring solutions. The services offered by the ICRA Advisory cover the following functional areas: (1) Risk assessment of infrastructure projects, (2) Conducting feasibility studies for infrastructure projects, (3)

Assessment of project sponsors and/or JV (joint venture) partners, (4) Assessment of incumbent utility/government entity, (5) Financial modelling for projects, (6) Project/contract structuring for financial

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closure, (7) Designing security mechanism for projects, (8) Assistance in preparing FRQ/RFP documents,bid process management and (9) Designing concession agreements.

Information/Content Services The ICRA Advisory has set up a vast research base for tracking theperformance of industries/companies/State Governments/financial markets. It makes available customisedresearch and diagnostic reports for the Government, investors, banks, financial organisations, projectdevelopers, corporates, e-commerce websites and market places and regulations on pre-decided terms of reference. Clients typically use the information reports for formulating investing decisions, joint venture/alliance formation, strategic planning and finalising commercial agreements. The services include:

Corporate Research The research reports cover leading corporates in various sectors. A typical corporatereport includes analysis of product mix, markets, cost structure, profitability, financial structure, working capital structure and outlook.

Industry Research The ICRA Advisory provides research reports on several industries. The coverageof the reports includes an analysis of the major players in the industry, capacity, demand-supply, pricetrends, technological issues, cost structure, regulatory issues, risk analysis and outlook for the industry.

States Research The ICRA Advisory researches States from an investment viewpoint, focusing onthe structure of the State economy, Government policies, industrial performance, infrastructure, Statefinances and investment climate.

Fixed Income Money Markets It provides weekly and fortnightly reports analysing the developmentsin fixed income markets, including movements in call/repo market gilts, non-SLR bonds, commercialpapers, foreign exchange market and money market liquidity positions. It also provides financial analyticsand tools, such as, empirical/synthetic yield curves for various classes of securities, bond indices andinputs for pricing fixed income instruments. It also carries out analysis of important policy events like theUnion budget and monetary policy.

Customised Reports It undertakes customised studies on mutually agreed terms of reference thatmay include primary and secondary data collection and analysis.

Banking and Financial Services In the context of globalisation of the Indian economy, theincreasing volatility in the financial sector, and the increase in competition, most Indian banks are having are-look at their organisations. The Government of India (as the principal shareholder in most public sectorbanks) and the Reserve Bank of India (as the principal regulator of the Indian banking system) areassessing the banking and financial sector organisations from their own perspectives, with regard to macro-issues that have sector-wide implications, as well as micro-issues that pertain to specific banks andorganisations. Faced with rapid changes in the competitive and regulatory landscape in India s increasingly globalising economy, Indian banks are focused on some or all of the following initiatives: re-jigging strategicplans, increasing customer focus and product development efforts, introducing portfolio managementtechniques for the credit function, installing asset-liability management system, reducing non-performing assets by adopting proactive strategies, Reducing the cost of funds, Increasing the share of fee income,Improving the quality of human resource and their management, Restructuring the branches and theorganisation, Improving overall governance and management control, and increasing the use of informationtechnology to improve customer service and enable better MIS reporting. A broad overview of theservices that the ICRA Advisory provides to banks, financial service players and insurance companies ispresented below. Over the past few years, the ICRA Advisory has been rendering consultancy services to

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Appendix 16.17

several State-owned and private banks and other organisations in the Indian financial services sector, bothat the behest of the Reserve Bank of India and on the request of individual clients. Several organisationsin the banking and financial sector have retained the ICRA as advisors in a wide variety of assignments.Specifically, it offers the following services to the banking and financial sector:

Formulating Credit Strategy/Policy It assists banks in formulating credit strategies that fit well withtheir overall business strategy and the prevailing economic environment. Its analysis helps clients in putting in place the building blocks of credit strategy, such as, the focus segments, risk tolerance limits, growthrates, credit marketing strategies, norms for exposure, client service policy, delivery methods and thenecessary organisation design. It also factors in regulatory requirements while fine tuning the credit policy.

Designing Lending Policy Guidelines It helps banks evolve their lending policy guidelines for differentindustry segments. Lending policy guidelines cover the norms that each bank determines as appropriate forits credit officers to make judgements on credit risk components, such as debt-equity ratio, debt servicecoverage, working capital, profitability indicators and so on. The lending policies tend to be bank-specific,in line with management s appetite and tolerance for risk the ability of the bank to take risks and thepeculiarities of the different industries that the bank seeks to lend to. Increasingly, over the past few years,lending policy guidelines have moved away from being regulation-driven to becoming bank-specific andbank-determined standards. In a competitive banking environment, the correct fixing of lending policy guidelines is a key to building and maintaining the health of the credit portfolio.

Diagnostic Audit of Credit Portfolio There is strong empirical evidence on credit failures being thesingle largest cause of banking crisis. Senior management in banks desire to conduct an independent andobjective review of their credit portfolios (particularly large and marginal credits), from time to time, toassure themselves, the shareholders, and regulators that the credit risks are under control. The ICRA

Advisory has one of the finest capabilities and experience in analysing credit portfolios (both performing and non-performing assets) while focusing on key parameters such as, distribution pattern, risk profile,segment-wise profitability, risk concentration, interest rate sensitivity, asset quality, potential performancein terms of slippage, diversity of income and other parameters that the bank may like to cover.

Improving the Credit Appraisal Process Bank management is seeking to improve the quality of their credit portfolios by focusing on the underlying business processes and the skill sets of human resourcesin the credit function. The ICRA Advisory offers expert consulting services to banks to improve thequality of the appraisal process across the entire credit value chain. It has extensive experience and expertisein designing processes governing loan origination, risk definition and quantification, loan structuring, pricing,loan covenants and the like. It studies the credit process and evaluates the comprehensiveness of the creditappraisal system, the extent of compliance and the quality of analysis. Based on its analysis, it suggestsimprovement in credit processes, appraisal forms and training needs.

Designing a Credit Monitoring Process The rate of generation of NPAs in many Indian banks isunacceptably high, and both bank management and regulators are keen on improving their capabilities inthis area. The ICRA Advisory, perhaps, has the widest experience of having analysed NPAs in the Indianbanking sector at the individual loan level (about 20 per cent of aggregate NPAs), and is uniquely positionedto recommend bank-specific monitoring systems to minimise slippage. Its focus, in such exercises, is onanalysing the individual factors (skills and motivation levels) and organisational factors (processes, systems,and HR processes) in banks, which lead to NPA generation, besides examining the external economicenvironment. It also assists banks in designing the requisite MIS and the appropriate organisation structurefor executing the recommended action points.

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Installing Calibrated and Validated Internal Risk Rating Models According to the proposed Baselnorms, banks have a big economic incentive to evolve internal risk rating systems for credit and marketrisks. The ICRA Advisory has developed capabilities to design and implement risk management systemsfor quantifying credit risk in the corporate, trade, retail, agriculture and banking segments, which arerelevant in the Indian context. For corporate credit (including small scale industries), the ICRA Advisory helps banks implement software solutions for credit risk, using software developed by Moody s Risk Management Systems, with appropriate customisation for the Indian context. It also works with the banksown internally developed risk rating models and helps them calibrate and validate the models. The modelsare caliberated and validated to the bank s individual data and are useful tools for quantifying credit risk ina bank loan portfolio, pricing loans and monitoring the health of the credit portfolio.

Risk Based Pricing Indian banks are increasingly moving towards scientific pricing of risks. Based onrisk scoring models, credits can be segregated into various risk categories. By analysing the default distribution

and loss estimates for a given default, the ICRA Advisory assists banks in arriving at an appropriate pricemodel. As the market is getting increasingly competitive, for full pricing of risks, it assists banks in building capabilities for loan structuring, to reduce the facility risk when the overall borrower risk may be higherthan desired.

Designing Loan Review Mechanism The ICRA Advisory assists banks in designing loan review mechanisms, which helps them predict default in advance. This provides opportunities to banks to take aproactive action to minimise losses, and to undertake portfolio management.

Capital Allocation Model It assists banks in determining the economic capital required to provide forexpected and unexpected losses. The expected loss is a function of a bank s exposure to its borrower, theprobability of default associated with the risk rating of the borrower, and the expected loss given default.

The unexpected loss is the variance of actual losses around the expected loss. These unforeseen lossescould occur because of portfolio concentration in exposures (such as to industries and groups) and theircorrelation, or due to the correlation between credit risk and the underlying economic factors. Such exercisesare data intensive, but the rewards are wroth the effort, as senior bank management are able to get a betterhandle on the embedded risks in their portfolio, besides being able to provide the right level of capital tocover these risks.

Software for Credit Risk Management The ICRA, in partnership with Moody s Risk ManagementServices (MRMS), provides Indian banks with a world-class system and software for credit risk management.

The system has been modified to suit Indian requirements. Currently, 4,000-plus banks, including severalIndian banks, are using the products and services of MRMS.

Developing Strategies for Management of NPA It assists banks in designing appropriate strategiesfor improving recovery from non-performing assets. It studies the underlying obligor, reasons for accountsturning non-performing, the actual and potential recovery patterns, the security details and other factors tosuggest the best possible recovery options so as to maximise recovery or improve the rehabilitation successrate.

Asset-Liability Management The ICRA Advisory offers comprehensive consulting services to banksand financial institutions to manage market risks, covering diagnostic studies, risk mitigation strategies andimplementation. The diagnostic studies would typically include constructing a risk profile of the balancesheet covering the salient risks, such as interest rate risk, liquidity risk, yield curve risk, foreign exchange

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Appendix 16.19

risk and the like. It also recommends appropriate risk mitigation strategies, organisation structures tomanage these risks and MIS for monitoring and controlling risks.

Designing an Organisation Structure It assists banks in designing organisation structure(s) in line with their business strategies. It ensures that the designed organisation structure also conforms to risk management principles. It assists banks in defining the roles and responsibilities of key functions, besidesidentifying different committees, their responsibilities, their composition and their specific roles.

Branch Restructuring It assists banks in organising and restructuring their branch networks in line with their business strategy and the opportunities provided by the external environment.

Restructuring/Turnaround Exercises It designs turnaround strategies for financial institutionsperforming below their potential. The exercise involves a detailed diagnostic to understand the reasons forthe weakened financial position and subsequently arriving at realistic stretch-targets to improve performance.

If required, it quantifies the amount of re-capitalisation required under various scenario analyses.Economic Valuation and Strategies for Mergers/De-mergers, Restructuring Equity Capital Itundertakes economic valuations and formulates merger/de-merger strategies for banks and financialinstitutions. The scope of work extends to evaluating the strategic reasons for a merger/de-merger,undertaking economic valuations, evaluating technological constraints and HR issues and so on.

Industry/Corporate Reports The ICRA Advisory tracks 30 key industries on a continual basis andoffers industry updates in electronic/conventional formats to banks who wish to have access to anindependent and objective view of credit risks. The focus of the industry reports is on identifying the key success factors in the industries concerned, and on providing an outlook from a credit perspective. It alsotracks about 500 corporates and provides updates on their performance and prospects. Besides, it undertakescustomised research on industries/corporates, to meet the specific needs of banks and financial institutions.

Benchmark Data It provides peer data on important parameters, measuring the performance of industries. Currently, it is tracking the performance of 92 industries in India. Banks find this benchmark data a sort of ready reckoner for the performance comparisons of individual accounts in their creditportfolios.

Manufacturing and Service Sector The ICRA s advisory services cover the following aspects.

Strategy Formulation The rapid changes being ushered in the Indian economy over the past few yearshave necessitated a shift in the strategic thinking of Indian businesses. The need to remain profitable hasbrought to the forefront the concept of focusing on one s core competencies, and the need to hone one scompetitive strengths. By virtue of its insights into different sectors and businesses, specifically keeping inmind the ground realities in the Indian context, the ICRA Advisory offers strategic consulting services toorganisations in the manufacturing and services sectors. In specific cases, it also associates itself with the

organisation in implementation. Its research and analytical capabilities, in select sectors, enable prospectiveclients to gain access to a wide variety of management concepts and tools for analysing myriad businessissues, and evolving cogent strategies.

Improving Competitive Strengths and Organisational Capabilities The ICRA Advisory helpsclients compete more effectively through the creation of new strategies and new organisational structures,for enhancing effectiveness. Enhancing competitiveness can be achieved in many ways, such as, costreduction, superior product portfolio management, improved financial strategies, leveraging knowledge/

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technology management, improved working capital management, better demand forecasting, improving financial internal control systems, and superior management of new ventures. The ICRA Advisory associates

with organisations in diagnosing barriers to superior performance, and implementing effective solutions ina variety of functions.

Turnaround and Restructuring Studies The ICRA Advisory offers its services to managements andstakeholders of loss-making organisations to conduct diagnostic studies, with a view to evaluating theoptions and resources required to make them financially viable. Its strengths in this area principally arisefrom its expertise in analysing the causes of sickness, arriving at appropriate benchmarks, and working through the organisational imperatives for framing a turnaround plan that addresses the legitimate demandsof various stakeholders.

Economic and Business Valuation as a Prelude to Mergers/Acquisitions The increasing competition in most sectors of the Indian economy has led to increasing realisation among Indian corporatesregarding the need for reorganising their businesses. For any form of business restructuring, an independentand objective valuation of the business, brands, marketing/distribution strengths, or manufacturing capabilitiesis an imperative, both for the seller and the acquirer. The ICRA Advisory is well placed to conduct aneconomic valuation of a wide variety of businesses, by virtue of its strong research base and understanding of economic transactions, broking deals or business negotiators for any of its clients.

Financial Strategy and Systems Indian organisations, across different industries and sectors, arerealising the value that good financial strategy and appropriate financial systems contribute to overallcompetitiveness. By virtue of its strong research into the competitiveness of various industries, the ICRA

Advisory offers consulting services in the areas of:

Formulating financial strategies that complement the chosen business strategies,

Financial restructuring to enhance overall shareholder value, Improving working capital management, Recommending strategies to reduce costs of funds and Recommending financial systems that aid organisations in the areas of (1) building competitiveness,

(2) regulatory compliance and (3) internal control.

Demand Estimation The 1990s have been a decade that opened India s economy like never before, with the result that the, hitherto, secular and predictable growth in demand and supply for most sectorschanged abruptly. Many of the companies that have downed shutters or projects that have become unviableowe their plight principally to unscientific methods of estimation of demand and supply. For most sectors,

while there is a lot of financial data, there is little organised information available pertaining to key driversof growth and evolution of the industry. There is little clarity in the actual pattern of data-shifts, theunderlying determinants of demand of various products and services from different consumer groupsand how they would change in the future. With a view to addressing this information gap, the ICRA

Advisory offers expert services in demand estimation and forecasting to facilitate more informed businessdecision making for the industry and for investors/lenders. Depending on the nature and scope of work,it may commission a reputed market research agency for collection of ground level data. It brings to thetable a high level of economic research and financial modelling skills that are needed for accurate demandestimation.

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Appendix 16.21

Government, Regulatory Authorities and Municipalities The ICRA Advisory services relate, inter-alia, to the following:

Diagnostic studies as a prelude to corporatisation, privatisation and deregulation; Assistance in policy formulation on issues such as pricing, subsidiaries, concessions, guarantees and

fiscal management; Assistance in preparation of licence and PFQ/PFR documents for large projects, and in evaluating

bid documents; Formulating strategies for improving financial position and performance and Formulating perspective and strategic plans.

Power Sector Creation of the regulatory institution has been the major milestone in the power sectorreforms, in recent years, in India. The first regulatory commission was established in the State of Orissa,under the Orissa Electricity Reforms Act 1995. Subsequently, the Government of India enacted theElectricity Regulatory Commissions Act in 1998. More than 14 states have established regulatory commissions since then. The ICRA Advisory Services has been at the forefront of these developments,and has successfully completed many consulting engagements, assisting the various stakeholders in theregulatory process, all over India. The ICRA has also assisted Independent Power Producers, StateGovernments, State Electricity Boards, Licensees on various issues related to the power sector. The variousservices offered by the ICRA Advisory are described below.

Independent Assessment of Project Risks Infrastructure projects involve large outlays of funds,besides the prospect of uncertainty of regulatory risks, environment risks, operating risks, commercialrisks and construction risks. Since the gestation period of most infrastructure projects is over three years,the risks tend to get magnified and usually devolve over an extended period, when it might be very

expensive to make corrections or withdraw from commitments already made. The ICRA has one of thebest knowledge bases in India for analysing project risks, built up in the course of evaluating project risks.It offers diagnostics and advisory services to project sponsors, developers, regulators, financiers and otherinterested parties by making a comprehensive analysis of project risks. It derives its credibility in making such assessments by virtue of the fact that it does not associate itself with the project in any manner thatmight compromise its objectivity or independence in making such assessments available.

Structuring Solutions to Address Payment Risk and Other Risks Many governments have cededtheir dominant roles in the implementation of infrastructure projects to the private sector. However, thesize of these projects calls for resources that are beyond the capacity of any individual entity, whichincreases the number of project participants multifold. But the involvement of several entities introducesa number of new risks. There are several instances of infrastructure projects, where the sponsor or lenderbears the risk of a dominant consumer, or the extant regulation is relatively inadequate to protect the

interests of investors. The ICRA has developed a strong knowledge base and a refined analytical capability to assess the capacity of each project participant, be it a lender, the government or a bank, to meet thecontractual commitments that provide the supporting matrix for the project. Many projects offer a fairdegree of leeway to structure the cash flows and roles of different stakeholders, to allow risks to beapportioned to the entity best positioned to absorb the same. Such solutions require the active participationof an entity that is looked upon as credible and neutral by the stakeholders and project participants. Itoffers advisory services in structuring infrastructure projects and addressing risk allocation in a transparentand optimal manner.

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Financial Modelling for Investment Decisions Project finance involves a high degree of financialanalysis and risk taking with lenders having limited or no recources to the balance sheet of the developer,in the event of the project failing to generate the anticipated cash flows. Hence, it is essential that thelenders subject the project cash flows to scenario analysis, stress testing and also goal-seek analyses. Thequality of strategic decision depends on the quality and timeliness of inputs made available to the teamanalysing the project. The high degree of complexity and uncertainty associated with infrastructure projectscalls for sophisticated models for simulating the operations and cash flows of large projects. The ICRAconsultants are adept for designing comprehensive financial models that capture all kinds of project risks,

which can be used for preparing project forecasts during various stages of a project, such as flexibility,negotiation with stakeholders (EPC, O&M, fuel suppliers, and so on), financial closure, sale of stake toother equity holders etc.

Regulatory Consulting Formation of independent regulatory institutions to regulate the various aspects

of naturally monopolistic industries is a relatively recent phenomenon in India. The ICRA has developedexpertise in assisting several regulatory institutions, utilities, and other organisations on regulatory issuesranging from licensing to tariff regulations. Its focus is predominantly on economic regulation (rather thantechnology, environment or social issues).

Assistance During Tariff Determination The ICRA has gained experience in assisting the regulatory commissions in determination of tariffs for various types of utilities like State Electricity Board (SEBs),Licensees and Sanction holders. As part of these engagements, it has developed complex tariff models thattake into account various factors like consumer mix, fuel mix, cross-subsidy policies and subventionscommitted by the Government. It also provides assistance to the utilities in approaching the regulators fortariff determination and other issues.

Diagnostic Studies It has carried out several diagnostic studies to determine the nominal values for theoperating/financial parameters of the utility.

Evaluation of Contracts and Agreements It provides assistance to the regulatory commissions inanalysing the contracts for generation and transmission capacity. This involves analysis of the contractstaking into account macro issues like state objectives, reforms agenda, tariff policy, demand forecast andthe like.

Development of Regulations The ICRA has assisted Regulatory Commissions in developing theregulations covering tariff, conduct of business regulations, quality of supply and the like, for differentindustries.

Privatisation The ICRA assists governments and government organisations in identifying the changesrequired in regulatory and legal framework for implementing corporatisation/privatisation programmes.

The ICRA also has substantial expertise in business and financial restructuring, which can enhance valuations.

It also offers post-corporatisation assistance by way of hand-holding the entity in redefining corporateobjectives and installing governance models.

Assessment of Project Sponsors and JV Partners Since the investment required in power projectsis large, project developers seek co-sponsors who aspire to participate in such projects. Such investors aretypically international lending institutions, insurance companies, mutual funds, banks and even privateparties. Many such investors seek an independent assessment of the project sponsors before committing their funds. The ICRA offers its services to prospective investors to carry out an independent assessment

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Appendix 16.23

of the project sponsors on mutually acceptable terms of engagement. Such due diligence exercises by theICRA typically cover the capability of the sponsor to manage similar projects, the ability to raise therequired financial and non-financial resources, track record in executing similar projects and an analysis of the business and financial history of the sponsor.

Assessment of State Governments and Electricity Boards Any contract is only as strong as thecontracting parties. In India, the State Electricity Boards (SEBs) and State Governments are parties to key contracts like Power Purchase Agreement and Implementation Agreement. While the SEBs are very oftenthe sole customer for an IPP, the SEB s payments are often backed by a State Government guarantee. Theability of the state government to honour the guarantee depends on its financial health and its commitments.It is, therefore, important for developers to assess the ability of these two entities to meet their obligations.

The ICRA maintains ongoing research on the operational and financial status of SEBs/State Governments,and has developed strong analytical capabilities to evaluate the investment risks associated with SEBs/State

Governments. Its assessment methodology for State Governments, inter-alia, looks at the State s incomeand economic structure, the growth prospects for its economy, price stability, its fiscal performance,financing requirements and contingent liabilities. The credit quality of a SEB is assessed by looking themarket structure, growth in market segments, operational performance, tariff policy, tariff flexibility,financial performance and future prospects.

Restructuring of Utilities The financial health of most SEBs has been impaired by their regulatory regimes and operating environment. Budgetary support from the State Governments, which would havehelped mitigate the problem, is also no longer easily forthcoming. This has forced many SEBs to approachother sources of finance for funding their capital expenditure programmes. Unlike governments, lendershave a greater commercial orientation and are interested in securing the funds advanced. Considering theimportance of a vibrant power sector in ensuring economic growth, most state governments are looking toreforming and restructuring their respective electricity sectors. The ICRA s involvement with and assessment

of several SEBs has allowed it to gain insights into the intricacies of SEBs and the sources of theirmanifold problems. It offers analytical skills for unbundling of SEBs, structuring unbundled entities and

valuing the assets of these individual corporations, to deriving

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