THESIS Role of SEBI in Regulation of Indian Capital Market

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A

Project Work

On

ANALYSIS OF CREDIT RATING AGENCIES AND

THEIR POTENTIAL IMPACT ON DEVELOPING COUNTRIES

WITH REFERENCE TO

INDIA AND WITH SPECIAL REFERENCE TO

MUMBAI

By

MOGRADIA JAVED

15

Submitted to the

FACULTY OF MUMBAI UNIVERSITY

In partial fulfillment for the award of the degree

Of

BACHELOR OF MANAGEMENT STUDIES

HABIB COLLEGE OF COMMERCE AND ECONOMICS

January, 2012



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Certificate

Cer tified that the Pr oject repor t titled analysis of credit rating agencies and

their poteial impact on developing countries with reference to india and with

special reference to mumbai. is the bonafide work of Mr. MOGRADIA JAVED - 15

who carr ied out the work under my su pervision. Cer tified fur ther that to the best of

my k nowledge the work repor ted herein does not for m par t of any other pr oject repor t

or disser tation on the basis of which a degree or award was conf erred on an ear lier

occasion on this or any other candidate.

Signature of Supervisor Signature of HOD

Submitted to Project Viva Voce held on ««««««.

Internal Examiner External Examiner



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Declaration

I here by declare that the pr oject work entitled ³analysis of credit rating

agencies and their poteial impact on developing countries with reference to india

and with special reference to mumbai´ submitted in par tial fulfillment of the

requirement of the BMS pr ogram of Mumbai University is my or iginal work and the

pr oject is not submitted as a pr oject previously to any institution for the award of any

degree, associate shi p, f ellowshi p or any other similar titles.

Place: Signature of the Student

Padma jak anta Mishra

Date:



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Acknowledgement

Fir stly, I would like to thank almighty for hel ping me thr oughout my lif e s pecially in mak ing

this pr oject

Secondly, I would like to express my deep and sincere gratitude to my Pr inci pal Ms. Nasim

Shaikh and my Co-ordinator pr of . Ms. Khan Gulf am jaha for his constant encouragement

and motivation which was ver y positive and f r uitful for shaping u p my idea of research. His

su ppor t and guidance have been of great value in my study.

Thirdly, I am inde bted to my guide pr of . Ms. Khan Gulf am jaha for his valua ble guidance

and co o peration extended to me directly and indirectly dur ing preparation of my pr oject

repor t . His patience and continuous encouragement and su ppor t have acted as a source of

strength and motivation to per use my disser tation work successfully. His vast k nowledge and

clar ity, exceptionally ins pired and enr iched my gr owth as a student and researcher. I am

grateful for his detailed review, constr uctive cr iticism and excellent advice dur ing the

preparation of this disser tation.

Four thly, I am thank ful to my f amily for constantly encouraging and su ppor ting me dur ing

my endeavor. I am grateful and extremely for tunate to receive valua ble advice and guidance

f r om my f ather mohd. hanif . His a bundance k nowledge in diver se areas has benefited me

always. Word f ail me to express my appreciation and a bsolute inde btedness to my mother

sufya m. hanif for her continuous patience, tolerance, tremendous hel p and unconditional

love.

Fifthly, I owe collective and individual ack nowledgement to all my colleagues. A s pecial

thank s to my f r iend who have constantly assisted me in numer ous ways.



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Finally, It gives me extreme pleasure to all those who have hel ped me a lot in com pleting this

R esearch pr oject repor t. I would like to thank s all those who have s pent their valua ble time to

contr ibute the required infor mation to me and gave me su ppor t while prepar ing this

disser tation. I would like to express my sincere thank s to ever yone who hel ped me in

successful realization of this disser tation.

Place: Mumbai

Date: MOGRADIA JAVED

Table of Contents

Page No.

List of Tables 8

List of Abbreviations 9



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Chapter 1: Introduction 10-13

Chapter 2: Theoretical Perspective 14-32

Chapter 3: Organization Profile 33-36

Chapter 4: Rules and Regulations of SEBI

Followed by Gandhi Securities 37-51

Chapter 5: Regulatory Functions of SEBI for the 52-58

Financial Year 2007-08 With Reference to

Gandhi Securities and Investment Pvt. Ltd.

Chapter 6: Ma jor Findings Based on the Study 59-60

Chapter 7: Questions and Answers used for

Data Collection during the Interview 61-68

Chapter 8: Conclusion of the Study 69-70

Bibliography 71

List of Tables

Page No.

Table1: Departments of SEBI 21

Table 2: Mutual funds registered with SEBI 53

Table 3: Inspection of stock Brokers 54



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Table 4: Investigations by SEBI 56

Table 5: Nature of investigations completed by SEBI 56

Table 6: Type of regulatory actions taken by SEBI 57

Table 7; Redressel of Governance 58

List of Abbreviat ions

CRA¶s : Credit R ating Agencies

GSI; Gandhi Securities and Investment Pvt. Ltd.

MIRD: Market Intermediaries Registration and Supervision Department

MRD: Market Regulation Department



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DNPD: Derivatives and New Products Department

FCD: Fully convertible Debenture

PCD: Partly convertible Debenture

NCD: Non-convertible Debenture

DRR: Debenture Redemption Reserve

IPO: Initial Public Offerings

PMS: Portfolio Management Software

CDSL: Central Depository Services Limited

NAV: Net Asset Value

AMC: Asset Management Company

SRO: Self Regulatory Organizations

Chapter 1

Introduct ion

introduction

Objective of the Study



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Scope and need of the Study

Research Methodology

Limitations of the Study

Executive Summary

Credit R ating Agencies fir st emerged in 1940¶s following the financial cr isis of 1937

in New York. Louis Tappan esta blished the fir st mercantile credit agency in New York in

1841. The agency rated the a bility of merchants to pay their financial obligations. It was

subsequently acquired by Rober t Kun and its fir st rating guide was published in

1859.Another similar agency was set u p by John Bradstreet in 1849, which published a rating

book in 1857. These two agencies were merged together to for m Dun and Bradstreet in 1933,

which became the owner of Moody¶s Investor s Service in 1962. The histor y of Moody¶s

itself goes back a bout 100 year s. In 1900 Joyn Moody founded Moody¶s Investor s Service,

and in 1909 published his Manual of R ailr oad Secur ities¶. This was followed by the rating of

utility and industr ial bonds in 1914, and the rating of bonds issued by U.S. cities and other

munici palities in the ear ly 1920s.



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Fur ther expansion of the credit rating industr y took place in 1919, when the Poor ¶s

Publishing Com pany published its fir st rating followed by the Standard Statistics Com pany in

1922, and Fitch Publishing Com pany in 1924. The Standard Statistics Com pany merged in

1941 to for m standard and poor ¶s which was subsequently taken over by McGraw Hill in

1966. F

or almost 50 year s, since the setting u p of F

itch Publishing in 1924, there were noma jor new entrants in the field of credit rating and then in the 1970s, a number of credit

rating agencies commenced o perations all over the wor ld. These included the Canadian Bond

R ating Service (1972), Thomson Bank watch (1974), Japanese Bond R ating Institute (1975),

Dominican Bond R ating Service (1997), IBCA Limited (1978), and Duff and Phel ps Credit

R ating Com pany (1980).There are credit rating agencies in o peration in many other countr ies

such as Malaysia, Phili ppins, Mexico, Indonesia, Pak istan, Cy pr us, Korea, Thailand and

Australia.

In India, the concept of Credit rating came u p when Credit rating and infor mation

Services of India Ltd. (CRISIL) was set u p as the fir st rating agency in 1987, As the

sco pe of credit rating widened ICRA (for mer ly k nown as Investment Infor mation and

Credit R ating Agency of India Limited) was set u p in 1991, and Credit Analysis and

R esearch Ltd. (CARE) was set u p in 1994. The owner shi p patter n of all the three

agencies is institutional. The fir st pr ivate sector credit rating institution was Duff and

Phel ps credit rating India Pvt. Ltd. For med in 1995(After merger with DCR it¶s

k nown as Fitch India Ltd. John Knowles Fitch founded the Fitch Publishing Com pany

in 1913. Fitch published financial statistics for use in the investment industr y via "The

Fitch Stock and Bond Manual" and "The Fitch Bond Book." In 1924, Fitch intr oduced

the AAA thr ough D rating system that has become the basis for ratings thr oughout the

industr y

In this pr oject we have discussed some of the Im pact of Credit R ating Agencies on

the Develo ping Countr ies with R elation to India and with S pecial ref erence Mumbai.

WE have also analyzed the accepta bility of these rating agencies as a measur ing tool

for investment r isk as per the answer s of the clients of this concer n.

Objective the Study

Since this is a pr oject on a to pic of Finance with less mathematical

applications after much discussion with my mentor I have for mulated the following

objectives for the Study.

1. To give an investor s necessar y ideas a bout the im pact of rating agencies on India

or develo ping countr ies.



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2. Today much of the common men are not well infor med a bout the sco pes in the

investment market for ear ning purposes and even if they k now, they cannot invest

because of f ear of losing money due to uncer tainties in the capital market. So my

pr oject aims to make them f eel secure while involving in the trading and investing

activities with the necessar y tool which is credit rating agencies.

3. To make them under stand what is the a bility of a fir m to pay its de bt.

4. To hel p the investor s who may be a common man or a business concer n in mak ing

a r ight decision while investing in one of the globally pr oven trading and investing

fir m by credit rating agency with this point of view this pr oject is mainly designed

for the peo ple who want to invest and trade in the stock market.

5. To encourage peo ple to invest with limited r isk by pr oviding them an o ption of

selecting fir m thr ough rating.

Need of the Study

There is not any sco pe of argument if it is said that today¶s wor ld is the wor ld

of commerce. Even a layman who has no access to the capital market should be aware

of the trends of the secur ities market now-a-days. It is ver y cer tain that those trends

and the movement of capital market are full of uncer tainties. But since it represents

the overall economical state of the countr y we should k now the r ises and f alls in the

trends of the market. Besides that it pr ovides an am ple sco pe of money mak ing

thr ough investment and trading. But with today¶s new scam are mak ing it tough for

peo ple to invest. Anyone who is r ich or poor cannot want his money got loss.

To fulfill all those purposes we need to be well acquainted with the rating

scale, and work of credit rating agency. In order to f eel secure an investor or a trader must k now what the com panies position is. We should get the k nowledge of all the

com panies and their rating. R ating shows their a bility to pay the de bt. In sim ple to

give the investor ¶s money back. My main aim was to fulfill this common goal for the

general investor s and this is also the need of the pr oject.

Scope of the Study

The study here has been limited to the analysis of credit rating agencies and

their im pact on Indian markets, their work ing, need for CRA¶s.the function of CRA¶s

in develo ping countr ies, thr ough the data collected f r om financial consultants,

investor s, etc. In the pr ocess of analysis only theoretical interpretations of the ta bles

and pie char ts have been used.


The research methodology involves of data f r om the financial consultants, as

well as investor s and analyzing them theoretically with the hel p of pie char ts and

ta bles. The data collected for the pr oject is basically f r om two sources, they are: -



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1. Pr imar y sources: Pr imar y data was collected thr ough Actual interview of the

finance consultant. I also surveyed the investor s thr ough questions and

answer s.

2. Secondar y sources: collection of data f r om inter net, book s, var ious research

paper s and annual repor ts


In s pite of much of hard work some limitations of the study can be found out

in this research activity. The limitations are listed below.

1) The study is based mainly on the basis of secondar y data availa ble f r om

var ious book s, research paper s, we bsites etc. because pr imar y data was not

possible to be collected in many cases.

2) The study only pr ovides the advantages of CRA¶s but does not focuses on

scam relating to CRA.

3) The study only relates to the Mumbai but does not tell much a bout the whole

capital market of India.

Chapter 2

Theoret ical Perspect ive

Understanding Financial Market of India

Necessities for Setting up of SEBI

Objectives of SEBI

Functions of SEBI

Powers for SEBI

Organizations

SEBI and the Central Govt.

SEBI Guidelines For

Secondary Market



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Foreign Institutional Investors

Bonus Issues

Rights Issue

Debentures

Protection of the Debenture Holders

Underwriters

Investor Protection

New Issues

Prohibition Of unf air Trade Practices

Book Building

Buyback of Shares

Introduct ion on Credit Rat ing Agencies (CRAs)

Credit rating is a sim ple and easy to under stand symbolic indicator of the o pinion of a

credit rating agency a bout the r isk involved in a borr owing pr ogramme of an issuer with

ref erence to the capa bility of the issuer to repay the de bt as per ter ms of the issue. This is

neither a general purpose evaluation of the com pany nor a recommendation to buy, hold or

sell a de bt instr ument.

Credit rating is an o pinion expressed by an independent pr of essional organization,

after mak ing a detailed study of all relevant f actor s. Such an o pinion will be of great

assistance to investor s in mak ing investment decisions. It also hel ps the issuer s of de bt

instr ument to pr ice their issue correctly and to reach out to new investor s. R egulator s like

R eserve Bank of India (RBI) and Secur ities & Exchange Board of India (SEBI) often use

credit rating to deter mine eligibility cr iter ia for some instr uments. In general, credit rating is

expected to im pr ove quality consciousness in the market and esta blish over a per iod of time,



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a more meaningful relationshi p between the quality of de bt and the yield f r om it. Credit

rating is also a valua ble in put in esta blishing business relationshi ps of var ious ty pes.1

Credit rating, however is neither a general purpose evaluation of a corporate entity nor

an overall assessment of the credit r isk likely to be involved in all the de bts/financial

instr uments contracted/to be contracted by such issuer s. A rating is s pecific to a de bt/financial

instr ument and is intended to grade diff erent and s pecific instr uments in ter ms of the credit

r isk associated with the par ticular instr uments. Although it is an o pinion expressed by an

independent pr of essional organization, on the basis of a detailed study of all the relevant

f actor s, the rating does not amount to any recommendation to buy, hold or sell an instr ument

as it does not take into consideration f actor s such as market pr ices, per sonal r isk pref erences

of an investor and such other considerations, which may influence an investment decision.

As a f ee based financial advisor y service, credit rating is, obviously, extremely useful

to investor s, corporate (borr ower s), bank s, and financial institutions. For the investors, it is

an indicator expressing the under lying credit quality of an (de bt) issue pr ogram. The investor

is fully infor med a bout the com pany as any eff ect of changes in business/economic

conditions on the com pany is evaluated and published regular ly by the rating agencies. The

corporate borr ower can raise funds at a cheaper rate, with a good rating. It minimizes the r ole

of µname recognition¶ and lesser -k nown com panies can also appr oach the market on the basis

of their rating. Fund ratings are useful to the bank s and other financial institutions when they

decide on lending and investment strategies.

A pr os pective investor who is going to invest his ear ned money in secur ities (more s pecific

de bt secur ities) would naturally like an assessment of r isk associated with the secur ities

ena bling him for the pr o per evaluation of r isk -retur n trade-off . But, f actor s such as lack of

time, lack of k nowledge of secur ity evaluation, lack of relia bility etc. could leave any

investor look ing for an agency, which would pr ovide an unbiased judgment of r isk associated

with the secur ity.



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Thus, the assessment of risk associated with particular security/financial

instrument regarding timely repayments of interest and principal is termed as credit

rating.

A rating is s pecific to a de bt/instr ument. Thus, a rating is a general- purpose evaluation

neither of the com pany or issuer, nor an overall assessment of the credit r isk likely to be

involved in all the de bts contracted or to be contracted by such issues.

Although it is an o pinion expressed by an independent credit rating agency, on the

basis of a detailed study of all the relevant f actor s, the rating does not make any

recommendations to buy, hold or sell an instr ument as it does not take into considerationanother f actor s such as market pr ices, per sonal r isk pref erences of an investor and such other

considerations, which may influence an investment decision.2

Def init ions: -

According to the Moody¶s, ³A rating on the future a bility and legal obligation of the

issuer to make timely payments of Pr inci pal and interest on a s pecific fixed income secur ity.

The rating measures the pr oba bility that the issuer will def ault on the secur ity over its lif e,

which depending on the instr ument of the expected monetar y loss, should a def ault occur.´

According to the Standard & poor¶s, ³it hel ps investor s by pr oviding an easily

recogniza ble, sim ple tool that cou ples a possibly unk nown issuer with an infor mative and

meaningful symbol of credit quality.´

According to the CRISIL, ³Credit R ating is an unbiased, objective and independent

o pinion as to an issuer ¶s capacity to meet financial obligations. ́



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According to the ICRA, ³Credit R ating is a sim ple and easy to under stand symbolic

indicator of the o pinion of the credit rating agency a bout the r isk involved in a borr owing

pr ogramme of an issuer with ref erence to the capa bility of the issuer to repay the de bt as per

ter ms of issue. This is neither a general purpose evaluation of a com pany nor a

recommendation to hold, buy or sell a de bt instr ument.´

List of credit rating agencies

Agencies that assign credit ratings for corporations include:

M. Best (U.S.)

Baycorp Advantage (Australia)

Bulgar ian Credit R ating Agency (Bulgar ia, Eur o pean Union)

Capital Intelligence (Cy pr us)

Capital Standards R ating (Kuwait)

Credo line (Ukraine)

Dagong Global (Peo ple's R epublic of China)

Dominion Bond R ating Service (Canada)

Egan-Jones R ating Com pany (U.S.)

Fitch R atings (Dual-headquar tered U.S./UK), 80% of which is owned by FIMALAC,

a French fir m.

CRISIL (India)

Japan Credit R ating Agency, Ltd. (Japan)

Moody's Investor s Service (U.S.)

Mur os R atings (Russia alter native rating agency)

R apid R atings Inter national (U.S.)

Standard & Poor's (U.S.)

Weiss R atings (U.S.)

Big Three (credit rating agencies)

The Big Three credit rating agencies are Standard & Poor's, Moody's Investor Service,

and Fitch R atings. Moody's and S&P each contr ol a bout 40 percent of the market. Third-

ranked Fitch R atings, which has a bout a 14 percent market share, sometimes is used as an

alter native to one of the other ma jor s.



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Credit rating agencies in India

ONICRA CREDIT RATING AGENCY OF INDIA

CREDIT RATING INFORMATION SERVICES OF INDIA LTD. (CRISL)

INVESTMENT INFORMATION AND CREDIT RATING AGENCY OF INDIA

(ICRA)

CREDIT ANALYSIS AND RESEARCH LTD. (CARE)

DUFF & PHELPS CREDIT RATING INDIA PVT. LTD. (DCR INDIA)

The Determinants of R ating

The def ault-r isk assessment and quality rating assigned to an issue are pr imar ily

deter mined by three f actor s:

i) The issuer ¶s a bility to pay.

ii) The strength of the secur ity owner ¶s claim on the issue, and

iii) The economic significance of the industr y and market place of the issuer.

R atio analysis is used to analyze the present and future ear ning power of the issuing

corporation and to get the insight into the strengths and weak nesses of the fir m. Bond rating

agencies have suggested guidelines a bout what value each ratio should have within a

par ticular quality rating. Diff erent ratios are f avored by rating agencies. For any given set of

ratios, diff erent values are appr o pr iate for each industr y. Moreover, the values of ever y fir ms

ratios var y in a cyclical f ashion thr ough the u ps and downs of the business cycle.

To assess the strength of secur ity owner ¶s claim, the pr otective in the indenture (legal

instr uments s pecifying bond owner ¶s r ights), designed to ensure the saf ety of bond holder ¶s

investment, are considered in detail.



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The f actor s considered in regard to the economic significance and size of issuer

includes: nature of industr y in which issuer is o perating (s pecifically issues like position in

the economy, lif e cycle of the industr y, la bour situation, su pply f actor s, volatility, ma jor

vulnera bilities, etc.), and the com petition f aced by the issuer (market share, technological

leader shi p, pr oduction efficiency, financial str ucture etc.).

Regulatory Framework for CRA¶s

SEBI guidelines for Credit R ating Agencies

General Obligations of Credit R ating Agencies

Code of Conduct

Ever y credit rating agency shall a bide by the Code of Conduct contained in the Third

Schedule.

Agreement with the client

Ever y credit rating agency shall enter into a wr itten agreement with each client whose

secur ities it pr o poses to rate, and ever y such agreement shall include the following

pr ovisions, namely:-

(a) The r ights and lia bilities of each par ty in res pect of the rating of secur ities shall be

defined;

(b) The f ee to be charged by the credit rating agency shall be s pecified;

(c) The client shall agree to a per iodic review of the rating by the credit rating agency dur ing

the tenure of the rated instr ument;

(d) The client shall agree to co-o perate with the credit rating agency in order to ena ble the

latter to arr ive at, and maintain, a tr ue and accurate rating of the clients secur ities and shall in

par ticular pr ovide to the latter, tr ue, adequate and timely infor mation for the purpose.



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(e) The credit rating agency shall disclose to the client the rating assigned to the secur ities of

the latter thr ough regular methods of dissemination, irres pective of whether the rating is or is

not accepted by the client;

(f) The client shall agree to disclose, in the off er document;-

(i) The rating assigned to the client¶s listed secur ities by any credit rating agency dur ing the

last three year s and

(ii) Any rating given in res pect of the client¶s secur ities by any other credit rating agency,

which has not been accepted by the client.

(g) The client shall agree to obtain a rating f r om at least two diff erent rating agencies for any

issue of de bt secur ities whose size is equal to or exceeds, r u pees one hundred cr ores.

Monitoring of ratings

3. (1) Ever y credit rating agency shall, dur ing the lif etime of secur ities rated by it

continuously monitor the rating of such secur ities.

(2) Ever y credit rating agency shall disseminate infor mation regarding newly assigned

ratings, and changes in ear lier rating pr om ptly thr ough press releases and we bsites, and, in

the case of secur ities issued by listed com panies, such infor mation shall also be pr ovided

simultaneously to the concer ned regional stock exchange and to all the stock exchanges

where the said secur ities are listed.

Procedure for review of rating

4. (1) Ever y credit rating agency shall carr y out per iodic reviews of all published

ratings dur ing the lif etime of the secur ities.

(2) If the client does not co-o perate with the credit rating agency so as to ena ble the credit

rating agency to com ply with its obligations under regulation 15 of this regulation, the credit

rating agency shall carr y out the review on the basis of the best availa ble infor mation.

Pr ovided that if owing to such lack of co-o peration, a rating has been based on the best



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availa ble infor mation, the credit rating agency shall disclose to the investor s the f act that the

rating is so based.

(3) A credit rating agency shall not withdraw a rating so long as the obligations under the

secur ity rated by it are outstanding, except where the com pany whose secur ity is rated is

wound u p or merged or amalgamated with another com pany.

Internal procedures to be framed

5. Ever y credit rating agency shall f rame appr o pr iate pr ocedures and systems for monitor ing

the trading of secur ities by its em ployees in the secur ities of its clients, in order to prevent

contravention of ±

(a) The Secur ities and Exchange Board of India (Insider Trading) R egulations, 1992;

(b) The Secur ities and Exchange Board of India (Pr ohibition of Fraudulent and Unf air Trade

Practices relating to the Secur ities Market) R egulations, 1995; and

(c) Other laws relevant to trading of secur ities.

Disclosure of R ating Definitions and R ationale

6. (1) ever y credit rating agency ±

(a) Shall make public the definitions of the concer ned rating, along with the symbol and,

(b) Shall also state that the ratings do not constitute recommendations to buy, hold or sell any

Secur ities.

(2) Ever y credit rating agency shall make availa ble to the general public infor mation relating

to the rationale of the ratings, which shall cover an analysis of the var ious f actor s justifying a

f avoura ble assessment, as well as f actor s constituting a r isk.

Submission of information to the Board

7. (1) where any infor mation is called for by the Board f r om a credit rating agency for the

purposes of these regulations, including any repor t relating to its activities, the credit rating

agency shall fur nish such infor mation to the Board ±



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(a) Within a per iod s pecified by the Board or

(b) If no such per iod is s pecified, then within a reasona ble time.

(2) Ever y credit rating agency shall, at the close of each accounting per iod, fur nish to the

Board co pies of its balance sheet and pr ofit and loss account.

Compliance with circulars etc., issued by the Board

8. Ever y credit rating agency shall com ply with such guidelines, directives, circular s and

instr uctions as may be issued by the Board f r om time to time, on the subject of credit rating.

8A. Appointment of Compliance Officer

(1) Ever y credit rating agency shall appoint a com pliance officer who shall be res ponsible for

monitor ing the com pliance of the Act, r ules and regulations, notifications, guidelines,

instr uctions etc issued by the Board or the Central Gover nment.

(2) The com pliance officer shall immediately and independently repor t to the Board any

noncom pliance observed by him.

Maintenance of Books of Accounts records, etc.

9. Ever y credit rating agency shall keep and maintain, for a minimum per iod of five year s, the

following book s of accounts, records and documents, namely:

(a) Co py of its balance sheet, as on the end of each accounting per iod;

(b) A co py of its pr ofit and loss account for each accounting per iod;

(c) A co py of the auditor ¶s repor t on its accounts for each accounting per iod.

(d) A co py of the agreement entered into, with each client;

(e) Infor mation su pplied by each of the clients;

(f) Corres pondence with each client;



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(g) R atings assigned to var ious secur ities including u p-gradation and down gradation (if any)

of the ratings so assigned.

(h) R ating notes considered by the rating committee;

(i) R ecord of decisions of the rating committee;

(i) Letter assigning rating;

(k) Par ticular s of f ees charged for rating and such other records as the Board may s pecify

f r om time to time.

(2) Ever y credit rating agency shall intimate to the Board the place where the book s of

account, records and documents required to be maintained under these regulations are

being maintained.

Steps on auditor¶s report

10. Ever y credit rating agency shall, within two months f r om the date of the auditor ¶s repor t,

take steps to rectify the deficiencies if any, made out in the auditor ¶s repor t, insof ar as they

relate to the activity of rating of secur ities.

Confidentiality

11. Ever y credit rating agency shall treat, as confidential, infor mation su pplied to it by the

client and no credit rating agency shall disclose the same to any other per son, except where

such disclosure is required or per mitted by under or any law for the time being in force.

R ating process

12. (1) Ever y credit rating agency shall ±

(a) S pecify the rating pr ocess;

(b) File a co py of the same with the Board for record; and file with the Board any

modifications or additions made therein f r om time to time.



P a g e | 24

(2) Ever y credit rating agency shall, in all cases, follow a pr o per rating pr ocess.

(3) Ever y credit rating agency shall have pr of essional rating committees, com pr ising

member s who are adequately qualified and k nowledgea ble to assign a rating.

(4) All rating decisions, including the decisions regarding changes in rating, shall be taken by

the rating committee.

(5) Ever y credit rating agency shall be staff ed by analysts qualified to carr y out a rating

assignment.

(6) Ever y credit rating agency shall infor m the Board a bout new rating instr uments or

symbols intr oduced by it.

(7) Ever y credit rating agency, shall, while rating a secur ity, exercise due diligence in order to

ensure that the rating given by the credit rating agency is f air and appr o pr iate.

(8) A credit rating agency shall not rate secur ities issued by it.

(9) R ating definition, as well as the str ucture for a par ticular rating pr oduct, shall not be

changed by a credit rating agency, without pr ior infor mation to the Board.

(10) A credit rating agency shall disclose to the concer ned stock exchange thr ough press

release and we bsites for general investor s, the rating assigned to the secur ities of a client,

after per iodic review, including changes in rating, if any.

Code of conduct for Credit R ating Agencies

(1) A credit rating agency in the conduct of its business shall observe high standards of

integr ity and f air ness in all its dealings with its clients.

(2) A credit rating agency shall fulfill its obligations in an ethical manner.

(3) A credit rating agency shall render at all times high standards of service, exercise due

diligence, ensure pr o per care and exercise independent pr of essional judgement. It shall

wherever necessar y, disclose to the clients, possible sources of conflict of duties and interests,

while pr oviding unbiased services.



P a g e | 25

(4) The credit rating agency shall avoid any conflict of interest of any member of its rating

committee par tici pating in the rating analysis. Any potential conflict of interest shall be

disclosed to the client.

(5) A credit rating agency shall not indulge in unf air com petition nor shall they wean away

client of any other rating agency on assurance of higher rating.

(6) A credit rating agency shall not make any exaggerated statement, whether oral or wr itten,

to the client either a bout its qualification or its capa bility to render cer tain services or its

achievements in regard to services rendered to other clients.

(7) A credit rating agency shall always endeavor to ensure that all pr of essional dealings are

aff ected in a pr om pt and efficient manner.

(8) A credit rating agency shall not divulge to other clients, press or any other par ty any

confidential infor mation a bout its client, which has come to its k nowledge, without mak ing

disclosure to the concer ned per son of the rated com pany / client.

(9) A credit rating agency shall not make untr ue statement or su ppress any mater ial f act in

any documents, repor ts, paper s or infor mation fur nished to the Board or to public or to stock

exchange.

(10) A credit rating agency shall not generally and par ticular ly in res pect of issue of secur ities

rated by it be par ty to -

(a) Creation of f alse market;

(b) passing of pr ice sensitive infor mation to br oker s, member s of the stock exchanges, other

player s in the capital market or to any other per son or take any other action which is unethical

or unf air to the investor s.

(11) A credit rating agency shall maintain an ar m¶s length relationshi p between its credit

rating activity and any other activity.

(12) A credit rating agency shall a bide by the pr ovisions of the Act, regulations and circular s

which may be applica ble and relevant to the activities carr ied on by the credit rating agency.



P a g e | 26

[Inser ted on 25-9-2001 (11 A) (a) A credit rating agency or any of his em ployees shall not

render, directly or indirectly any investment advice a bout any secur ity in the publicly

accessible media, whether real ± time or non- real time, unless a disclosure of his interest

including long or shor t position in the said secur ity has been made, while render ing such

advice.

3

1.1.5 Types of Credit R ating

There are var ious ty pes of credit rating. The most common for ms of credit ratings are:

y Long Ter m Instr ument R ating.

y Equity R ating.

y Shor t Ter m Instr ument R ating.

y Customer s/Borr ower s R ating.

y Sovereign R ating.

y Individual R ating.

y Com pulsor y R ating.

Figure 1.1: T hese common forms of credit ratings are shown in the following diagram:4

3 www.icraindia.com/services/inves/se bi.htm, ³SEBI Guidelines for R ating Agency´

Credit Ratings

Customer R ating Borr ower s R ating Financial

Instr uments R atin

Long Ter m

Instr ument

Shor t Ter m

Instr ument R atin

Sovereign R ating

Equity R ating

Individuals R ating Com pulsor y R ating



P a g e | 27

1. Long Terms Instruments R ating :

Long-ter m instr ument rating ref er s to the rating of bonds, de bentures and another

long-ter m de bt secur ities issued by a gover nment or quasi-gover nmental body.

2. Equity R ating:

Equity rating ref er s to the rating of equity issued in the capital market. The concept of equity rating is still not ado pted by the rating agencies in India.

3. Short term Instrument R ating :

In this k ind of rating we include the rating of commercial paper s, shor t-ter m public

deposits etc.

4. Customer or Borrower R atings:

Customer /Borr ower s rating require the assessment credit wor thiness of the customer s

to whom the credit sale is being made or grant of loan is under consideration.

. Sovereign R ating:

Sovereign rating ref er s to evaluation of credit wor thiness of a countr y in which

investment by a foreign body (foreign Govt. or corporate body) is envisaged or to which a

loan is to be given. This k ind of rating is generally done by the inter national rating agencies.

The inter national rating agency standard and poor has im pr oved its outlook on India foreign

currency rating to positive f r om sta ble but retained the sovereign rating at junk grade due to

high public de bt and ser ious fiscal inflexibility.

S&P said the revision reflects ³India¶s im pr oving exter nal liquidity and better

pr os pects for the gover nment¶s de bt burden to sta bilize´.

S&P had last revised India¶s foreign currency outlook f r om negative to sta ble in

December 2003 on account of im pr oved exter nal finance.5



P a g e | 28

6. Individuals R ating:

R ating of individuals is called as individual¶s credit rating.

7. Compulsory R ating:

The rating at which the gover nment bound the obligation is called the com pulsor yrating like commercial paper s etc.

Following on the rating change, cr iticism of ratings per se has been in some evidence. One,

that sovereign ratings have not been a good predictor of currency cr isis, basically a ref erence

to Asian difficulties in 1997-98. The pr inci pal pr oblem of the ³Asian miracle´ was regulator y

weak ness, with large gaps in what the central bank s k new a bout the exter nal lia bilities of

their domestic bank s, and rating agencies were aff ected by the same infor mation lapses.

Second, till this cr isis, mainstream economic theor y, had over sim plified the pr ocess by which

capital flows occur. The received wisdom in the mid-nineties had little s pace for the

singular ity of large currency cr ises and contagion.

Importance of Credit R ating

In today¶s changing scenar io where corporates are increasingly dependent on the public credit rating, which pr ovides an unbiased judgment to the general public has emerged

as a cr itical element in the functioning of Indian financial market.

A rating published by a rating agency pr ovides su per ior infor mation to var ious

gr ou ps, which is not publicity availa ble. Credit rating pr ovides several benefits to diff erent

sections of peo ple that are summar ized as follow:

1. Benefits to the Investors: - Pr ovides cost-eff ective and relia ble infor mation.

- Investor can evaluate r isk -retur n trade off on the basis of rating.

- Pr ovides investor with an insight of r isk involved in an investment.

2. Benefits to the company:

- A com pany with high credit rating can mobilize large amount of funds.



P a g e | 29

- High credit rating indicates less associated with secur ity. So, the com pany with

high credit rating can lower its cost of borr owing.

- High credit rating hel ps com panies to build its image among customer s, lender s

and creditor s.

3. Benefits to brokers

and fin

anci

alintermedi

aries:

- Br oker s can convince clients to put money in investments with high credit

rating.

-Financial inter mediar ies such as bank s can be assured of their investing in a com pany.

Approaches of Credit R ating Agencies

R ating related products and activities

CRAs in India rate a large number of financial products:

1. Bonds/ de bentures- [the main pr oduct].

2. Commercial paper.

3. Str uctured finance pr oducts.

4. Bank loans.

5. Fixed deposits and bank cer tificate of deposits.

6. Mutual fund de bt schemes.

7. Initial Public Off er s (IPOs).

CRAs also under take customized credit research of a number of borr ower s in a credit

por tfolio, for the use of the lender. CRAs use their under standing of com panies business and

o perations and their exper tise in building f ramework s for relative evaluation, which are thenapplied to arr ive at per for mance grading. For exam ple, develo per gradings are carr ied out to

assess the a bility of the develo per s to execute pr ojects on a timely basis and pr omised quality

while mar itime institute gradings are carr ied out to assess quality of education im par ted to the

students vis a vis DGS (Directorate General of Shi pping) objectives.



P a g e | 30

Non-rating related activities

CRAs often undertake a variety of non rating related activities. These include the

following:

1.

Economya

nd Company Rese

arch:

Some Indian CRAs have set u p research ar ms to com plement their rating activities.

These ar ms carr y out research on the economy, industr ies and s pecific com panies, and make

the same availa ble to exter nal subscr iber s for a f ee. In addition, they disseminate o pinions on

the per for mance of the economy or s pecific industr ies, availa ble thr ough releases to the

media. The research would also be used inter nally by the rating agencies for arr iving at their

rating o pinions. SEBI per mits CRAs to carr y out this activity subject to relevant firewalls.

2. Risk consulting:

There is considera ble demand for tools and pr oducts that will allow bank s to com pute

their capital adequacy ratios under the revised guidelines. The r isk consulting gr ou ps of credit

rating agencies would leverage the agencies under standing of credit r isk to develo p and

pr ovide the tools and data that bank s would require. The pr oducts in this area include tools

for inter nal ratings, o perational r isk evaluation, and overall capital calculation.

3. Funds research:

Some CRAs have diver sified f r om mutual fund ratings into mutual fund research. The

services that are availa ble under this head include fund rank ings, per for mance attr ibution

tools (to hel p user s under stand the reasons for funds per for mance), desk to p tools, and fixed

income research.

4. Advisory services:

CRAs off er var ious k inds of advisor y services, usually thr ough dedicated advisor y

ar ms. Most of this is in the nature of develo ping policy f ramework s, bid pr ocess

management, public pr ivate par tner shi p consulting, and creating an ena bling envir onment for

business in India and globally.

5. Knowledge Process Outsourcing:



P a g e | 31

Some Indian CRAs (CRISIL and ICRA) have K PO ar ms that leverage their analytical

sk ills and other pr ocess and man power capa bilities. These ar ms pr ovide services to the CRAs

affiliates in develo ped markets, and also to other clients outside India.6

R ating symbols and their definations

AAA - Instr uments with this rating are considered to have the highest degree of

saf ety regarding timely servicing of financial obligations. Such instr uments carr y

lowest credit r isk.

AA - Instr uments with this rating are considered to have high degree of saf ety

regarding timely servicing of financial obligations. Such instr uments carr y ver y

low credit r isk.

A - Instr uments with this rating are considered to have adequate degree of saf ety

regarding timely servicing of financial obligations. Such instr uments carr y low

credit r isk.

BBB - Instr uments with this rating are considered to have moderate degree of

saf ety regarding timely servicing of financial obligations. Such instr uments carr y

moderate credit r isk.

6Ministr y of Finance Capital market division, p17-18



P a g e | 32

BB - Instr uments with this rating are considered to have moderate r isk of def ault

regarding timely servicing of financial obligations.

B - Instr uments with this rating are considered to have high r isk of def ault


C - Instr uments with this rating are considered to have ver y high r isk of def ault


D - Instr uments with this rating are in def ault or are expected to be in def ault

soon.

Modifier s {"+" ( plus) / "-"(minus)} can be used with the rating symbols for

the categor ies AA to C. The modifier s reflect the com parative standing within the categor y.

Credit R ating Agencies in India

In India, the credit rating agencies are gover ned by the SEBI R egulations, 1999 and

the SEBI (Amendment) R egulations, 2003. Accordingly, anybody corporate that is engaged

in or pr o poses to be engaged in the business of rating of secur ities has to obtain a cer tificate

of registration f r om the SEBI and com ply with the pr ovisions of the Act.

Fur ther, according to the SEBI (Disclosure and Investor Pr otection) Guidelines, 2000,

a com pany off er ing conver tible/non-conver tible de bt instr uments thr ough an off er document

must com ply with the requirements of credit rating. The pr ovisions are as follows:

No public or r ights issue of de bt instr uments including conver tible instr uments in

res pect of their matur ity or conver sion per iod shall be made unless credit rating

agency has been obtained and disclosed in the off er document.

For a public/r ights issue of de bt secur ity greater than or to Rs 1 billion, two ratings

f r om two diff erent credit rating agencies shall be obtained.

In cases where credit rating is obtained f r om more than one credit rating agency, all

the credit rating/s, including the unaccepted credit ratings, shall be disclosed.



P a g e | 33

All the credit ratings obtained dur ing the three year s preceding the public or r ights

issue of de bt instr ument (including conver tible instr uments) for any listed secur ity of

the issuer com pany shall be disclosed in the off er document.

The pr ogressive liberalization of economic policies, which led to the esta blishment of

new pr ojects and corporate sector s increasing dependence on pr imar y market for raising funds, highlighted the need for setting u p a credit rating agency in India.

Dur ing this per iod pr imar y as well as secondar y market witnessed a phenomenal

gr owth. So in order to pr ovide unbiased assessment of the credit wor thiness of

com panies issuing de bt instr ument. The fir st credit rating agency (CRISIL) was

esta blished in1987 and it star ted its o perations in 1888.

In res ponse to the ever -increasing r ole of credit rating, two more agencies were not u p in

1990 (ICRA) and 1993 (CARE) res pectively.

Today, following are the credit rating agencies functioning in India:

1. Credit R ating Information Service of India Ltd. (CRISIL)

2. Investment Information and Credit R ating Agency. (ICRA)

3. Credit Analysis and Research Ltd. (CARE)

4. Duff and Phelps Credit rating Pvt. Ltd.

5. Brickwork R atings.

Credit R ating and Information services of India Limited (CRISIL)

The Credit R ating Infor mation Service of India Ltd. (CRISIL) was esta blished in

1987 jointly by the ICICI Ltd and the UTI. Other shareholder s include the Asian

Develo pment Bank Lif e Insurance Corporation of India, HDFC Ltd., General Insurance

Corporation of India and several foreign and India bank s. CRISIL is India¶s premier credit

rating agency and rank s amongst the to p five in the wor ld.

It commenced its o peration in Januar y 1998. In 1996 CRISIL forged a strategic

business alliance with Standard and Poor with purpose to dr ive benefits such as inter national



P a g e | 34

exper ience revam ping of o perating systems, intr oduction of value added methodologies in

new areas and assist the client-com panies in raising funds acr oss the countr y. CRISIL¶s core

com petencies are in the areas of r isk identification, classification and assessment.

Credit R ating and Infor mation Services of India Ltd (CRISIL) is one of the countr y's

to p research, rating, r isk and Policy Advisor y Com pany Known for its analytical r igor and

credibility, CRISIL aims to ena ble the market function in a better way. It also hel ps its

customer s and clients with managing their financial r isk s and business pr o per ly. Ma jor shares

of the com pany are held by Standard & Poor, a division of the McGraw-Hill Com panies.

Standard & Poor is, indeed, the wor ld's fir st com pany to pr ovide financial market

intelligence.

On 14th August 2008 in Mumbai, CRISIL ascr ibed ratings to several bank services

such as cash credit, ter m loan, bill discounting and bank guarantee of Global Coal and

Mining Pr ivate Limited (GCMPL) as 'A/Sta ble/P2+'. It expects that com pany would maintain

healthy credits on the basis of sound cash accr uals. Besides, on the same day, CRISIL also

allotted a rating of 'AAA(so)' to the receiver's payout in business dealing with

Cholamandalam DBS Finance Ltd.

CRISIL was set u p with a basic purpose to rate de bt obligations, which would guide

investor s as to the r isk of timely payment of interest and pr inci ple. At present, functions

per for med by CRISIL f all under three board categor ies:-

1. Credit R ating Services.

2. Advisor y Services.

3. R esearch and Infor mation Services.

4. CRISIL.com Ltd.

5. Credibility Fir st (CF).

6. Global Data Services.

7. CRISIL Training Services.

8. CRIS.

1. Credit R ating Services: -



P a g e | 35

The pr inci ple function of CRISIL is to rate mandated de bt obligations of Indian

Com panies, chit funds, real estate develo per s, non-bank ing finance com panies, and Indian

States and so on. It is the core business of CRISIL while new business has begun to make a

moderate contr ibution, which is a bout 80% to the revenue. Being a pioneer in credit rating

business in India, the rating agency rank s amongst the to p five in the wor ld.

A CRISIL rating reflects CRISIL's current o pinion on the relative likelihood of timely

payment of interest and pr inci pal on the rated obligation. It is an unbiased, objective, and

independent o pinion as to the issuer's capacity to meet its financial obligations.

So f ar, CRISIL has rated 30,000 de bt instr uments, cover ing the entire de bt market.

The de bt obligations rated by CRISIL include:

Non-conver tible de bentures/bonds/ pref erence shares.

Commercial paper s/cer tificates of deposits/shor t-ter m de bt.

Fixed deposits.

Loans.

Str uctured de bt.

CRISIL R atings' clientele includes all the industr y ma jor s - 23 of the BSE Sensex

constituent com panies and 39 of the NSE Nifty constituent com panies, accounting for 80 per

cent of the equity market capitalization, are CRISIL's clients.

F ollowing functions has been included in the rating services by CRISIL:

-R ating the de bt obligations

-R ating of str uctural obligations `

-R ating of real estate develo per s pr ojects



P a g e | 36

-bond fund rating

-R ating of collective investment schemes.

2. CRISIL Advisory S ervice: -

CRISIL Advisory Services for consultancy services to various state Government,

Disinvestments Commission on disinvestments plan for public sector enterprise, major port

authorities, and state Electricity Boards and so on. Other clients availing of advisory

services from CRISIL are the Public sector enterprises, banks and financial institutions and

instigating risk. It also formulates and executes strategies for that.

CRISIL I nfrastructure Advisory: It provides policy, regulatory and transaction

level advice to governments and leading organizations across sectors.

I nvestment and Risk Management S ervices: CRISIL Risk Solutions offers

integrated risk management solutions and advice to Banks and Corporate by leveraging

the experience and skills of CRISIL in the areas of credit and market risk.

3. CRISIL Research and Information Services: -

CRISIL R esearch and Infor mation Services include value-added research activities

and customized studies in following areas:

-Indian Capital Market.

-Indian Industr ies, and

-Indian Corporate Sector.

F ollowing are the services, which are included in CRISIL:

A. CRISIL Sector Wise.

B. CRISIL View.

C. Inter national Infor mation Vending.CRISIL Index Services.



P a g e | 37

4. CRISIL.com Ltd.:-

The inter net¶s a bility to infor m, educate, interact and customize is unlimited. CRISIL

has recognized this medium as o ppor tunity to widen and deepen its customer reach in its

existing and new segments, create value added content and deliver it to new market segments. CRISIL has transf erred its inter net business to CRISIL.com a wholly owned subsidiar y in

order to give it the required focus. CRISIL.com leverages CRISIL¶s existing com petencies,

resources and credibility and positions itself as an im por tant resource center for authentic

infor mation and a valua ble decision su ppor t system. It work s for increased penetration,

exclusive and su per ior content and increased market exposure.

The CPR rank ings and po pular ity index are covered each quar ter. CRISIL.com is also

pur suing strategic Alliances/ tie-u ps for creating r ich contents and value added pr oducts

aimed at meeting the research and infor mation needs of business and investment decision

maker s.

5. Credibility-First (CF):-

Credibility ± Fir st pr ovides rating and evaluation services acr oss the cr oss-section of

the Indian economy. While, CRISIL¶s rating division focuses on to p-ended corporate,

es pecially in the small sized sector, where infor mation is not easily availa ble. CF pr ovides its

services to bank s, financial institutions, B2B exchanges, yellow page director ies and business

counterpar ts.

C F provides the following services:

1.

Ver ification Services. 2. Cer tification Services.

3. R ating Services.



P a g e | 38

C F verification services are a pre-requisite for corporate to list on some ma jor B2B

exchanges. CF is positioning this service as a national standard for listing on any domestic

exchange.

C F Certification Services hel p merchants to communicate their business strength to the

potential buyer s. These cer tifications would hel p buyer s shor t-list su pplier s f r om a number of

similar su pplier s.

C F Rating Services are aimed at corporate to hel p them esta blish credibility in trade and

financial transactions. These ratings f acilitate the corporate business transactions and

financial transactions.

6. Global Data Services:-

The Global Data Services of India Ltd. is a 100% subsidiar y of CRISIL. It has been

for med with a view to using the existing strengths and resources of CRISIL to pr ovide high

quality, relia ble and timely financial analysis of Indian corporate, cover ing more than 1500 of

the largest com panies listed on the Indian stock exchanges. This list is gradually expanded.

The data is pr ovided both, online and offline

It also pr ovides data entr y services and off er s to maintain financial u pdates of credit

and investment por tfolios of clients. This service is es pecially useful to institutional investor s,

capital market inter mediater ies, bank s and financial institutions, mutual funds, pr ovident

funds and high net wor th individual investor s including NRIs.

7. CRISIL Training Services:-

CRISIL pr ovides a wide s pectr um of training pr ogrammes, including the tailor - made

one¶s, to meet the s pecific needs of var ious agencies and individuals connected with credit as

well as investments. Pr ogrammes are s pecially designed for pr of essionals whose business

necessitates assessment of credit and investment r isk. The pr ogrammes are es pecially useful

for credit analysts, lending and investment officer s of bank s and financial institutions,

por tfolio manager s and de bt market trader s, corporate treasurer s and finance manager s. Other



P a g e | 39

training pr ogramme have been designed for business strategists including entrepreneur s and

com pany executives, f aculty of educational institutions individual investor s and students. At

present, all training pr ogramme are availa ble only offline, in var ious cities of India.7

CRISIL RATING SYMBOLS

CRISIL assigns ratings only to r u pee denominated de bt instr uments. These symbols

are symbolic expression of o pinion/assessment of the credit rating agency. Here is a br ief

summar y of CRISIL¶s rating symbols used for the rating of :

1. De benture.

2. Fixed Deposits.

3. Shor t Ter m Instr uments.

4. Str uctured Obligations.

5. Foreign Str uctured Obligations.

6. Instr ument Carr ying Non-credit Risk.

7. Financial Strength ratings of insurance com panies.

8. De bt Fund Por tfolio

9. R eal Estate Pr ojects.

10. Gover nment and Creation R atings

instrument High invest Grade Investment Grade Speculative Grade

Highest

Safety

High

Safety

Adequate

Safety

Moderate

Safety

Inadequate

Safety

High

Risk

Substantial

Risk

Def ault



P a g e | 40

S ource: Credit Rating Information S ervice of India

Note:-CRISIL may apply µ+¶or µ-µsigns for ratings with rating symbols to reflect com parative

standing within the categor y.8

Debentures

Fixed

Deposits

Short TermInstrument

Structured

Obligations

Foreign

Structured

Obligations

Debt Funds

Portfolio

Instrument

Carrying

Non Credit

Risk

R ating of

Insurance

Companies

Debt Fund

Portfolio

Real Estate

Projects

AAA

FAAA

P1

AAA(so)

AAA(FSo)

AAAf

AAAr

AAA

AAAf

PA1

AA

FAA

P2

AA(so)

AA(FSo)

AAf

AAr

AA

AAf

PA2

A

FA

P3

A(so)

A(FSo)

Af

Ar

A

Af

PA3

BBB

BBB(so)

BBB(FSo)

BBBf

BBBr

BBB

BBBf

BB

FB

P4

BB(so)

BB(FSo)

BBf

BBr

BB

BBf

B

FC

B(so)

B(FSo)

Br

B

C

C(so)

C(FSo)

Cf

Cr

C

Cf

D

FD

P5

D(so)

D(Fso)

Dr

D



P a g e | 41

CRISIL places ratings of MFI¶s on µR ating watch with negative Implications¶

CRISIL has placed its outstanding ratings on the de bt instr uments of 12 micr o-finance

institutions (MFI¶s) on µR ating watch with negative im plications¶. Six of these MFI¶s have

ratings that are in the µBB¶ categor y or below. The im plementation of the Andhra Pradesh(Andhra) ordinance has tr iggered a chain of events that can per manently damage the business

models of MFI¶s, by im pair ing their gr owth, asset quality, pr ofita bility and capital ± raising

a bility. The Rs. 250 billion (as on 31st March 2010) micr ofinance plays an im por tant r ole in

extending for mal financial services to 28 million of India¶s under -served r ural poor; with the

decline of the sector, the flow of credit to this segment of the po pulation will be cur tailed.

The Andhra ordinance has been highly unf avora ble for the industr y resulting in a

preci pitous dr o p in the collection efficiency and pr ofita bility of MFI¶s, es pecially those

o perating in Andhra. Fur ther, the flow of funding to the entire sector f r om the bank ing system

has been severely constrained. Consequently, the liquidity position and gr owth pr os pects of

many MFIs, including those o perating outside Andhra Pradesh have been aff ected.

Str ucturally, the regulator y jur isdiction and f ramework for MFIs remain unclear, with actions

by multi ple author ities increasing the challenges for the industr y. Unless urgent steps,

including regulator y intervention, are taken to address these issues, these develo pments have

a potential to mater ially weaken the business and financial r isk pr ofiles of MFIs and result in

rating downgrades. The im pact on the credit wor thiness of the individual entities will diff er

depending to their exposure to Andhra, their liquidity and their a bility to raise the capital

f r om alter nate sources. CRISIL will actively monitor the develo pments in the sector and take

appr o pr iate rating actions.

Another r isk is that other states may initiate state- level legislation similar to the

Andhra ordinance. Moreover, the regulator y envir onment for the sector could evolve fur ther

after the decision of Andhra Pradesh High Cour t, recommendations of the Malegam

committee instituted by the R eserve Bank of India (RBI), any potential changes in RBI nor ms

related to pr ior ity sector funding to the sector, and pr ovisions of the micr ofinance bill

pr o posed by the Ministr y of Finance. CRISIL has consistently highlighted that as an

emerging sector, the MFI industr y is exposed to the r isk of changes in the political,

legislative, and regulator y envir onment. Some of these r isk s are now becoming evident.



P a g e | 42

Collections in Andhra have plummeted below 20 per cent, f r om near ly 99 per cent

pr ior to the ordinance, with MFIs finding it difficult to make contact with borr ower gr ou ps,

and having to move to a monthly repayment cycle in line with the ordinance. Fresh

disbur sements in Andhra have been negligible over the past f ew week s. CRISIL believes that

this would lead to a sharp increase in delinquencies for MF

Is that have significant Andhra exposure. So f ar, MFIs with limited or no Andhra presence have maintained good collection

levels, though their disbur sement gr owth has reduced sharply.

MFIs a bility to raise exter nal funding is correctly significantly constrained. Access to

f resh loans f r om bank s and institutions, which for m a significantly pr o por tion of the sector ¶s

total funding, has dr o pped mater ially. R educed access to funding not only aff ects MFIs

liquidity- and, consequently, their a bility to service de bt- but also limits their f resh

disbur sements, which can have a cascading eff ect on their gr owth and asset quality in the

near ter m. It is possible that bank funding to the sector will resume later, but the timing and

extent of such funding are uncer tain. In addition, the quality of the bank s exposure to this

sector could weaken f r om the current str ong levels.

CRISIL also rates nine secur itization transactions or iginated by MFIs. Only two of

these transactions have some exposure to loans or iginated in Andhra Pradesh. The collection

per for mance of all rated pools remained str ong until recently. The credit enhancements and

the str uctural f eatures currently pr otect investor payouts f r om any potential increase in

delinquencies, and are consistent with the outstanding ratings. CRISIL will continue to

monitor the per for mance of these pools regular ly, and will take appr o pr iate rating actions in

case collections dr o p significantly.9

Name R ating Action

Asmitha Microfin Limited BBB(Placed on µR ating Watch with Negative

implications¶)

Bhartiya Samruddhi Finance Limited BBB (Placed on µR ating Watch with Negative

implications¶)

Digamber Capfin Limited B+(Placed on µR ating Watch with Negative

implications¶)

Equitas Micro Finance India Private Limited BBB(Placed on µR ating Watch with Negative



P a g e | 43

implications¶)

Grameen Financial Services Private Limited P4+(Placed on µR ating Watch with Negative

implications¶)

Sanghamithra Rural Financial Services BB(Placed on µR ating Watch with Negative

implications¶)

Shri Kshetra Dharmasthala Rural Development

Project (R.)

BB+(Placed on µR ating Watch with Negative

implications¶)

SKS Microfinance Limited P1+(Placed on µR ating Watch with Negative

implications¶)

South Sundarban Janak alyan Sangha B+(Placed on µR ating Watch with Negative

implications¶)

Spandana Sphoorty Financial Limited A-/P1(Placed on µR ating Watch with Negative

implications¶)

Ujjiven Financial Services Private Limited BBB-(Placed on µR ating Watch with Negative

implications¶)

Vedik a Credit Capital Limited B+(Placed on µR ating Watch with Negative

implications¶)

Table No. 1.2: CRISILs Rat ings of MFIs on Rat ing watch with negat ive

Implicat ions

Name R ating Action

Asmitha Microfin Limited BBB(Placed on µR ating Watch with Negative

implications¶)

Bhartiya Samruddhi Finance Limited BBB (Placed on µR ating Watch with Negative

implications¶)

Digamber Capfin Limited B+(Placed on µR ating Watch with Negative

implications¶)

Equitas Micro Finance India Private Limited BBB(Placed on µR ating Watch with Negative

implications¶)

Grameen Financial Services Private Limited P4+(Placed on µR ating Watch with Negative

implications¶)

Sanghamithra Rural Financial Services BB(Placed on µR ating Watch with Negative

implications¶)

Shri Kshetra Dharmasthala Rural Development

Project (R.)

BB+(Placed on µR ating Watch with Negative

implications¶)

SKS Microfinance Limited P1+(Placed on µR ating Watch with Negative

implications¶)



P a g e | 44

South Sundarban Janak alyan Sangha B+(Placed on µR ating Watch with Negative

implications¶)

Spandana Sphoorty Financial Limited A-/P1(Placed on µR ating Watch with Negative

implications¶)

Ujjiven Financial Services Private Limited BBB-(Placed on µR ating Watch with Negative

implications¶)

Vedik a Credit Capital Limited B+(Placed on µR ating Watch with Negative

implications¶)

S ource: Credit rating and information services of India ltd.

Investment Information and Credit R ating Agency of India

Limited (ICRA)

Esta blished in 1991, ICRA limited is a leading pr ovider of investment infor mation

and credit rating services in India. Pr omoted by the countr y¶s leading financial institutions,

bank s and financial services com panies, ICRA has, so f ar, com pleted near ly 1,800

assignments including credit ratings, equity ratings, customized research and need-based

advisor y assignments. It has a team of over 100 analysts acr oss nine locations in India, and is

a pr ominent player in the financial services sector.

Committed to the develo pment of the financial market in India, ICRA is focusing on

develo ping innovative concepts and pr oducts in a dynamic market envir onment, generating

wider investor education, and enhancing the efficiency and trans parency of the financial

markets. Com pleting its rating and advisor y functions, ICRA¶s R esearch and infor mation

services are directed towards the efficient dissemination of infor mation, thus ensur ing the

highest standards of quality and credibility.

The gr owth and globalization of Indian capital markets has led to an exponential

surge in demand for a pr of essional credit r isk analysis. ICRA has actively res ponded to this

need by executing assignments including credit ratings, equity grading and mandated studies

s panning diver se industr ial sector s. In addition to being a leading credit rating agency with

exper tise in vir tually ever y sector of the Indian economy, ICRA has br oadened its services to

the corporate and financial sector s, both in India and over seas.

ICRA presently off er s its services under these banner s namely Infor mation services,

grading services, rating services and advisor y services.



P a g e | 45

1. Information Services: -

The ICRA, in a way, is a culmination of the effor ts of ICRA Infor mation services; a

division that has evolved out of the core strengths of ICRA Limited in business and financial

analysis to service the unique infor mation needs of investor s and the capital markets

community.

ICRA¶s Infor mation Services endeavor s to constantly u pgrade its pr oducts and

intr oduce new ones in cognizance of the dynamic and evolving nature of the Indian business

envir onment. This is done for the purpose of hel ping sustain its pre - eminence as a quality

pr ovider of credible, value-added infor mation services, to market par tici pants, both Indian

and Foreign.

ICRA Infor mation Services has built u p a diver se por tfolio of publications in res ponse

to the increasing market requirements for value-added infor mation and analysis. These

include:

1. ICRA corporate review (ICR):

This is designed to serve as a fir st level infor mation resource for the market

community.

2. Corporate reports:

This is designed to present extensive infor mation along with an analysis on selected

India corporate entities. The cr itic in the corporate repor ts incorporates business, industr y,

market and financial and o perational analysis.

3. Industry and sector research reports:

These focuses on s pecific industr ies like steel, cement, tea and cotton yar n. These

repor ts are targeted at institutional investor s, practitioner s in the area of financial services and

decision maker s in corporate wor ld.

4. Money and finance bulletin:

Com plementing the research on industr ial sector s is another ICRA research team

engaged in the analysis of contem porar y develo pments that character izes the Indian money

and finance sector. The pr oduct of this exercise is the quar ter ly publication titled money and



P a g e | 46

finance bulletin. This bulletin is directed towards individuals interested in delving into the

reasons under lying economic and fiscal policy initiative and outcome.

5. R ating profile:

The standard ref erence mater ial for all player s in the Indian credit market is the rating pr ofile, currently a quar ter ly br ought out by ICRA Infor mation Services, is a com pilation of

the rationale of that ratings awarded by ICRA. The rating pr ofile contains the ratings that are

in use, the rationales for the ratings assigned, as well as the rating symbols and their

im plications.

6. Customized studies:

The customized studies, which also belong to the por tfolio of ICRA Infor mation

Services, cover due diligence studies, equity assessments, gr ou p assessments, industr y

analysis and market studies. Such studies, the r ising demand for which are being dr iven by

increasing cr oss-border activities, com plexity and volatility, are conducted on an assignment

basis, and pr ovide need-based infor mation in the areas mentioned. Needless to say, they go a

long way in enhancing investment decision.

2. Grading Services: -

ICRA¶s grading services are str uctured to pr ovide authentic infor mation on relating

quality of equity in diver se corporates. The relating quality of equity of com pany, its gr owth,

sta bility and com position of ear nings are assessed, by analyzing the under lying fundamentals

that will aff ect the com pany¶s future per for mance over the medium ter m. A com plex

combination of var ia bles is examined including, industr ial outlook, quality of management,

financial strength, corporate o perations, com petitive strength and outlook. The range of

grading services include: equity grading, equity assessment and Ear ning Pr os pects and Risk

Analysis (EPRA)

3. R ating Services:

As an ear ly entrant in the credit rating business, ICRA is one of the most exper ienced

credit rating agencies in India today. ICRA rates r u pee dominated de bt instr uments such as:

1. Bonds and de bentures (long-ter m).

2. Fixed deposit pr ogramme (medium-ter m).

3. Commercial paper s and cer tificates of deposit (shor t-ter m).



P a g e | 47

4. Str uctured obligations and sector s pecific de bt obligations (issued by

inf rastr ucture com panies).

The ICRA rating is a symbolic indicator of the current o pinion of the relative

capa bility of timely servicing of de bts and obligation by the corporate entity with ref erence tothe instr ument being rated. The rating is based on an objective analysis of the infor mation and

clar ifications obtained f r om the enterpr ises and also other sources, which are considered by

ICRA to be relia ble. The independence and pr of essional appr oach of ICRA ensures relia ble,

consistent and unbiased ratings. R atings f acilitate investor s to f actor credit r isk in their

investment decision. ICRA rates long-ter m, medium-ter m and shor t-ter m de bt instr uments.

ICRA off er s its rating services to wide range of issuer s including:

1. Manuf actur ing Com panies.

2. Bank s and financial institutions.

3. Power com panies.

4. Service com panies.

5. Constr uction com panies.

6. Insurance com panies.

7. Munici pal and other local bodies.

8. Non-bank ing financial service com panies.

9. Telecom com panies.

10. Com panies involved in inf rastr ucture such as por ts, dams, r oads and highways.

4. Advisory Services: -

ICRA¶s foray into advisor y services represents an organic gr owth of the cumulative

exper tise built by ICRA in diff erent industr ies and sector. The main dr ive for ICRA¶s

advisor y services has been the gr owing needs in India for an unbiased and pr of essional view

on ado pting the best business practices, against the backdr o p of economic deregulation and

increasing com petition.

With its extensive k nowledge, bank of business and management practices s panning

the ma jor sector s of the Indian economy and as a repositor y of high quality analytical talent,

ICRA is well positioned to extend advisor y services to diff erent Indian organizations,

regulator y author ities and other organizations having business interest in India.



P a g e | 48

ICRA advisor y services off er s independent, objective and high quality consulting

services to organizations with an interest in India, with the fundamental aim of im pr oving the

quality of decision mak ing. It is active in the following areas:

1. Strategic Consultancy.

2.

Risk Management. 3. In puts for Policy For mulation.

10

Strategy Consulting: This com pr ises the following:

y Assisting in the goal setting pr ocess.

y Im pr oving com petitiveness.

y Merger s, Acquisitions and gr owth strategies.

y Im pr oving organizational capa bilities.

y Organizational R estr uctur ing.

y Financial Strategy and systems.

Risk management: This com pr ising the following:

y Assisting pr oject r isk s for investor s/develo per s/lender s.

y Pr oject str uctur ing and financial modeling.

y Str uctur ing payment mechanisms.

y Building organizational sk ills in credit r isk management for bank s and lender s.

y Risk audit studies.

Policy Formulation: This includes the following:

y Deregulation and pr ivatization studies.

y Pr icing of public goods.

y Subsidies

y Concessions.

y Guarantees management.

y Fiscal studies.

y Preparation of license agreements and documents for large pr ojects.



P a g e | 49

ICRA R ating Symbols

The ICRA rating is a symbolic indicator of the current o pinion of the relative

capa bility of timely servicing of the de bt obligations. ICRA rates long ter m, medium ter m

and shor t-ter m de bt instr uments.

F ollowing is a brief summary of the rating symbols used by ICRA for the following:

y Long Ter m Instr uments (De bentures Bonds, Pref erence Shares)

y Collative Investment Schemes.

y R ating of Insurance Com panies.

y Corp. Gover nance R ating.

Table 1.3: ICRA¶s R ating Symbols Chart

Instruments SYMBOLS

Highest

Safety

High

Safety

Adequate

Safety

Moderate

Safety

Inadequate

Safety

High

Risk

Substantia

l

Risk

Def ault



P a g e | 50

S ource: Investment Information and Credit Rating Agency of India Limited.

Note: - The Suffix of µ+¶ or µ-µmay be used with rating symbols to indicate the com parative

position within the gr ou p covered by the symbols.

Knowledge Process Outsourcing and Online Software

ICRA Online Limited (ICRON) is a wholly-owned subsidiar y of ICRA Limited.

ICRON was incorporated in Januar y 1999 and has over the per iod since then esta blished

itself as an independent and credible source of authentic infor mation, software and

outsourcing solutions pr ovider.

Long Term

Instruments

Medium

Term Debt

Short Term

Instruments

Collective

Instrument

Schemes

Insurance

Companies

Corporate

Governance

LAAA

MAAA

A1

iAAA

CGR1

LAA

MAA

A2

CS1

iAA

CGR2

LA

MA

A3

CS2

iA

CGR3

LBBB

CS3

iBBB

CGR4

LBB

MB

CS4

iBB

CGR5

LB

CS5

CGR6

LC

MC

A4

iB

LD

MD

A5

CARE5

iC



P a g e | 51

ICRON cater s for some of the biggest names in the financial services sector in India

and a br oad, which is a testimony to its pr oduct quality, commitment and credibility. ICRON

has two Strategic Business Units (SBUs) with a list of reputed global and domestic clients:

The Knowledge Pr ocess Outsourcing Division (K PO Division); and

The Infor mation Services and Technology Solutions Division (MFI Division).

Encouraged by the emerging dynamics of the outsourcing business, ICRON

diver sified into the Knowledge Pr ocess Outsourcing (K PO) business in A pr il 2004, with

focus on the Bank ing, Financial Services and Insurance (BFSI) ver tical as well as other

ver ticals like R etail, Healthcare and Phar maceuticals.

The K PO Division of ICRON off er s Knowledge Pr ocess Outsourcing services that

combine advanced analytical a bilities and deep domain exper tise to deliver value by

translating data and infor mation into str uctured business in puts. It pr ovides back -end

analytical services su ppor t to its clients in the areas of Data Extraction, Aggregation,

Validation and Analysis, Accounting and Finance, R esearch, R epor t Preparation and

Modeling. The Division has attained ISO 27001 cer tification thr ough r igor ous adherence to

data secur ity policies and practices.

The MFI Division serves the Mutual Fund Industr y thr ough R esearch, Analytics and

Mutual Fund R ank ing. Besides, it leverages its domain exper tise to deliver high quality

technology solutions, in the for m of pr oducts, to a large number of Bank s, Mutual Funds,

Financial Institutions, Third Par ty Pr oducts¶ Distr ibutor s, Insurance Com panies, Investment

Advisor s, Por tfolio Manager s, Stock Br oker s, Treasur y Manager s, and Academic Institutions,

among other s. The Com pany has develo ped several innovative pr oducts to meet the var ied

needs of its clients. The pr oducts are customized to meet s pecific client requirements,

ena bling them in research, analysis and decision mak ing while also hel ping them achieve

automation in business o perations.

ICRON has a wholly-owned subsidiar y M-Serve Business Solutions Pr ivate Limited,

a K PO Services Com pany headquar tered in Kolkata, India.



P a g e | 52

ICRA assigns equity grading to Havells India Limited

ICRA online has assigned the fundamental 4 and the valuation grade B to Havells

India Limited (Havells). The fundamental grade 4 assigned to Havells im plies that the

com pany has ³str ong fundamentals´ to other listed secur ities in India. The grade f actor s in

Havells diver sified pr oduct por tfolio with core focus on the f ast gr owing consumer goods

sector, its eff ective marketing and distr ibution reach that su ppor ts premium pr icing, and the

significant gr owth potential of its subsidiar y, Sylvania. The grade also takes note of the

intense com petition that Havells f aces acr oss the segments it o perates in. The valuation Grade

B assigned to Havells im plies that the com pany is ³moderately undervalued´ on a relative

basis (as on the date of the grading assigned).

An ICRA Equity R esearch assessment, while not s pecifying any target pr ice for the

shares evaluated, captures two key f actor s: fundamental earning quality (fundamental grade)

and relative valuation (valuation grade)- that influence the pr ice behaviour of equity shares

of com panies over the medium and long ter m. The fundamental grades are on five- point

scale, with 5 being the highest grade and 1 the lowest. Similar ly, valuation grades are also on

five- point scale, wherein A being the significantly undervalued and E the significantly

overvalued.11

1.1.8.3 Credit analysis and research Ltd (CARE)

Credit analysis and research Ltd. was pr omoted by IDBI jointly with financial

institution, bank s and pr ivate finance com panies. It star ted its o peration in 1993 and now it

off er s a wide range of pr oducts and services in the field of credit infor mation and equity

research.

CARE R atings is well equi pped to rate all ty pes of de bt instr uments like Commercial

Paper, Fixed Deposit, Bonds, De bentures, Hybr id instr uments, Str uctured Obligations,

Pref erence Shares, Loans, Asset Backed Secur ities(ABS), R esidential Mor tgage Backed



P a g e | 53

secur ities (RMBS) etc .

CARE R atings has been recognized by statutor y author ities and other agencies in

India for rating services. The author ities/agencies include: Secur ities and Exchange Board of

India (SEBI), R eserve Bank of India (RBI), Director General, Shi pping and Ministr y of Petr oleum and Natural Gas (MOP NG), Gover nment of India (GOI), National Housing Bank

(NHB), National Bank for Agr iculture and Rural develo pment (NABARD), National Small

Scale Industr ies Commission (NSIC). CARE R atings has also been recognized by RBI as an

Eligible Credit R ating Agency (ECRA) for Basel II im plementation in India

.

CARE R atings has significant presence in all sector s including Bank s / FIs,

Corporate, Public finance. Coverage of CARE R atings has extended to more than 2811

entities over the past decade and is widely accepted by investor s, issuer s and other market

par tici pants. CARE R atings have evolved into a valua ble tool for credit r isk assessment for

institutional and other investor s, and over the year s CARE has increasingly become a

pref erred rating agency .

CAREµs Credit R ating is an o pinion on the relative a bility and willingness of an issuer

to make timely payments on s pecific de bt or related obligations over the lif e of the

instr ument. CARE rates r u pee denominated de bt of Indian com panies and Indian subsidiar ies

of multinational com panies. CARE ratings are not recommendations to buy/sell or hold any

secur ity.

These services are categorized into the following categories:-

i. Credit R ating Services.

ii. Infor mation Services.

iii. Equity R esearch.

i. Credit R ating Services:-

CARE rates all ty pes of de bt instr uments including long ter m. It is the core business

of this rating agency.

ii. Information Services:-



P a g e | 54

Like CRISIL and ICRA. It also pr ovides infor mation services to var ious player s in the

financial market. It pr ovides infor mation on any com pany, industr y or sector to individuals,

mutual funds, and investment com panies. So that they can take well infor med investment

decision.

iii. Equity Research:-

Equity R esearch involves extensive study of the shares listed or which are going to be

listed on stock exchange and forecasts Potential looser and winner on the basis of this study.

For this purpose, it analyzes all the fundamentals aff ecting the industr y, market share,

management capa bilities etc.

Apart from basic services, CARE also provides some other services like:

y CARE Loan R ating

y Credit Analysis R ating etc.

Table 1.4: R ating Experience: (As at March 2010)

Total Assignments Completed 8488

Total Instruments R ated 7989

Total Volume of Debt R ated Rs.26609 billion

Total Issuers R ated 3071

S ource: Credit Analysis and Research Ltd.

Table 1.5: CARE¶s R ating Symbols Chart

Instruments SYMBOLS

Highest

Safety

High

Safety

Adequate

Safety

Moderat

e

Safety

Inadequate

Safety

High

Risk

Substantial

Risk

Def aul

t



P a g e | 55

S ource: Credit Analysis and Research Limited

Long

Term&

Medium

Term

Instruments

Short

Term

Instrume

nts

Credit

Analysis

R ating

Long

Term

Loans

Short

Term

Loans

Collectiv

e

Investme

nt

Schemes

CAREAA

A

PR1

CARE1

CAREAA

A

(L)

PL1

CARE1

(CIS)

CAREA

A

PR2

CARE2

CAREA

A

(L)

PL2

CARE2

(CIS)

CAREA

PR3

CARE3

CAREA

(L)

PL3

CARE3

(CIS)

CAREBBB

CAREBBB

(L)

CAREBB

PR4

CARE4

CAREBB

(L)

PL4

CARE4

(CIS)

CARE

B

CARE

B(L)

CAREC

CAREC

(L)

CARED

PR5

CARE5

CAREC

(L)

PL5

CARE5

(CIS)



P a g e | 56

NOTE: CARE may assign ¶+¶ or µ-µsigns after the assigned rating, where necessar y, to

indicate the relative position within the brand covered by the symbol.12

1.1.8.4 Duff and Phelps Pvt. Ltd.

Duff & Phel ps was founded in 1932 to pr ovide high quality investment research

services focused on the utility industr y. Over the decades, it evolved into a diver sified

financial services fir m that pr ovides financial advisor y, investment bank ing, credit rating and

investment management services. The investment management and credit rating businesses

were acquired by Vir tus Investment Par tner s and Fitch, res pectively. The fir m¶s current

management team acquired Duff & Phel ps¶ financial advisor y and investment bank ing

business in 2004. The following year, Duff & Phel ps strengthened its valuation capa bilities

with the acquisition of Standard & Poor's Corporate Value Consulting business. Since then,

Duff & Phel ps has continued to expand and develo p its core services. In 2006, it acquired

s pecialty investment bank Chanin Capital Par tner s, LLC. The following year, it for med a

strategic alliance with Tok yo-based Shinsei Bank, Ltd. and added pr o per ty tax management

services thr ough the acquisition of R ash and Associates, LP to com plement its tax business.

In 2008, it grew its dis pute and legal management consulting services with the acquisitions of

Dubinsk y & Com pany, P.C. and Lumin Exper t Gr ou p. It also enhanced its valuation

off er ings by acquir ing K ane R eece Associates, Inc., a valuation consulting fir m that

s pecializes in the communications, enter tainment and media industr ies.

In 2010, Duff & Phel ps esta blished a presence in Canada and continued to expand its

dis pute consulting, valuation and corporate advisor y services with the acquisition of Cole &

Par tner s, a Tor onto-based independent financial advisor y practice.

K ey F acts:

y NYSE-listed com pany since 2007.

y Headquar tered in New York City.

y Offices in Nor th Amer ica, Eur o pe and Asia.



P a g e | 57

y Pr imar y services are valuation, investment bank ing, transaction advisor y, dis pute,

legal management consulting and tax.13

1.1.8.5 Brickwork R atings

Br ick work R atings is a Bangalore-based com pany incorporated in 2007 with the

mission of pr oviding unbiased infor mation to Indian investor s for mak ing better investment

decisions. Mr. Balasubramanian, Mr. Vivek Kulkar ni and Mr. R avishankar are the founder

director s of Br ick work R atings. Mr. Balasubramanian is the for mer Chair man of SIDBI and a

pioneer in the bank ing industr y. He was instr umental in setting u p of SMERA ± an SME

rating agency. He has tremendous credit exper ience with the Bank of Bar oda. Mr.

R avishankar is a financial pr of essional with a r ich exper ience of over 25 year s in BFSI

segment. He was Managing Director of Asia-Pacific Risk Solutions business of Standard and

Poor's .

The initial concept of Br ick work R atings was conceived by Mr. Vivek Kulkar ni after

the success of pr oviding high-end financial services to the global market thr ough Br ick work

India Pvt. Ltd. ± a k nowledge pr ocess outsourcing com pany.

Br ick work R atings, a SEBI licensed credit rating agency, founded by banker s, credit

rating pr of essionals, for mer regulator s as well as pr of essor s, is committed to pr omoting

Financial Literacy, having its corporate office in Bangalore and branches at New Delhi,

Mumbai, Chennai, Hydera bad and Pune.

While Indian financial markets have been liberalized in the past two decades, useful

infor mation is still scarce. Com plex str uctures, inadequacy of infor mation and below-average

disclosures make it difficult for retail investor s to make sense of financial markets. No

wonder small investor s always lose money in ever y market crash.



P a g e | 58

Br ick work's pr o pr ietar y models in credit r isk customized for large corporates, SMEs,

bank s, financial institutions, state and local gover nments, hel p investor s under stand the

com plexity of the investment wor ld.

Brickwork R ating Symbols

1) Brickwork R ating Symbols for Long Term debt instruments

The µlong-ter m de bt instr uments¶ includes Bonds, Non Conver tible De bentures,

Cer tificate of Deposits, Fixed Deposits, Conver tible Pref erence Shares, R edeema ble

Pref erence Shares and Str uctured Obligations, all with or iginal matur ity exceeding one year.

1. Investment Grade R atings:

BWR AAA

(BWR Triple A)

Instr uments with µAAA¶ rating are considered to off er the Best credit

quality, in ter ms of timely servicing of de bt obligations.

BWR AA

(BWR Double

A)

Instr uments with µAA¶ rating are considered to off er High credit quality.

BWR AInstr uments with µA¶ rating are considered to off er Adequate credit

quality.

BWR BBB

(BWR Triple B)

Instr uments with this rating are considered to off er Moderate credit

quality.

2. Speculative grade:

BWR BB

(BWR Double

B)

Instr uments with this rating are considered to off er Inadequate credit

quality.

BWR B Instr uments with this rating are considered to off er Low credit quality.

BWR CInstr uments with this rating are considered to off er Very Low credit

quality.

BWR D Instr uments with this rating are in Def ault or expected to Def ault.



P a g e | 59

2) Brickwork R ating Symbols for Short Term debt instruments

Short Term Instruments R ating Scale

The µShor t Ter m de bt instr uments¶ with or iginal matur ity u p to one year.

BWR P1 Instr uments with this rating are considered to off er Excell

ent credit quality

BWR P2 Instr uments with this rating are considered to off er High credit quality

BWR P3 Instr uments with this rating are considered to off er Moderate credit

quality

BWR P4 Instr uments with this rating are considered to off er Low credit quality

BWR P5 Instr uments with this rating are in Def ault or expected to Def ault

3) Brickwork R ating Symbols for issuer rating

BWR AAA

(BWR Triple A)

Issuer with µAAA¶ rating is considered to off er the BEST creditwor thiness.

BWR AA

(BWR Double

A)

Issuer with µAA¶ rating is considered to off er High credit wor thiness.

BWR A Issuer with µA¶ rating is considered to off er Adequate credit wor thiness.

BWR BBB

(BWR Triple B)

Issuer with this rating is considered to off er Moderate credit wor thiness.

BWR BB

(BWR Double B)

Issuer with this rating is considered to off er Inadequate credit wor thiness.



P a g e | 60

BWR B Issuer with this rating is considered to off er Low credit wor thiness.

BWR C Issuer with this rating is considered to off er Very Low credit wor thiness.

BWR D Issuer with this rating is in Def ault or expected to Def ault.

4) Brickwork R ating Symbols for IPO Grading

BWR IPO

Grade 5:Str ong fundamentals

BWR IPO

Grade 4:Above-average fundamentals

BWR IPO

Grade 3:Average fundamentals

BWR IPO

Grade 2:Below-average fundamentals

BWR IPO

Grade 1:Poor fundamentals

5) Brickwork R ating Symbols for Fixed Deposit R atings

a) Investment grade:

BWR FAAA

(BWR F Triple

A)

Deposits with this rating are considered to off er the BEST saf ety, in ter ms

of timely servicing of interest & pr inci pal

BWR FAA(BWR F Double

A)

Deposits with this rating are considered to off er a High saf ety, in ter ms of timely servicing of interest & pr inci pal

BWR FA Deposits with this rating are considered to off er Adequate saf ety in ter ms




P a g e | 61

b) Speculative grade:

BWR FB Deposits with this rating are considered to off er Low saf ety, in ter ms of

timely servicing of interest & pr inci pal

BWR FC Deposits with this rating are considered to off er Very Low saf ety, in ter ms


BWR FD Deposits with this rating are in Def ault or expected to Def ault

6) Brickwork R ating Symbols for Corporate Governance

BWR CG 1 Quality of Corporate Gover nance is The BEST

BWR CG 2 Quality of Corporate Gover nance is EXCELLENT

BWR CG 3 Quality of Corporate Gover nance is HIGH

BWR CG 4 Quality of Corporate Gover nance is ADEQUATE

BWR CG 5 Quality of Corporate Gover nance is MODERATE

BWR CG 6 Quality of Corporate Gover nance is INADEQUATE

BWR CG 7 Quality of Corporate Gover nance is LOW

BWR CG 8 Quality of Corporate Gover nance is The LOWEST

7) Brickwork R ating Symbols for SME rating

BWR aaa

(BWR Triple a)

SME with µaaa¶ rating is considered to off er the Best credit wor thiness in

relation to other SMEs.

BWR aa

(BWR Double

a)

SME with µaa¶ rating is considered to off er High credit wor thiness in


BWR a SME with µa¶ rating is considered to off er Adequate credit wor thiness in


BWR bbb

(BWR Triple b)

SME with µbbb¶ rating is considered to off er Moderate credit wor thiness

in relation to other SMEs.

BWR bb

(BWR Double

SME with µbb¶ rating is considered to off er Inadequate credit wor thiness

in relation to other SMEs.



P a g e | 62

b)

BWR b SME with µb¶ rating is considered to off er Low credit wor thiness in


BWR c SME with µc¶ rating is considered to off er Very Low credit wor thiness in


BWR d SME with µd¶ rating is in Def ault or expected to Def ault

8) Brickwork R ating Symbols for Security Receipts R atings

BW RR1+ R ecover y Value of the Under lying Assets is greater than 150% of SR Face

Value.

BW RR1 R ecover y Value of the under lying assets in the range of over 100% - 150%

of SR Face Value.

BW RR2 R ecover y Value of the under lying assets in the range of over 75% - 100%

of SR Face Value.

BW RR 3 R ecover y Value of the under lying assets in the range of over 50% - 75%

of SR Face Value.

BW RR 4 R ecover y Value of the under lying assets in the range of 25% - 50%

of SR Face Value.

BW RR5 R ecover y Value of the under lying assets less than 25% of SR F

ace Value.

9) Brickwork R ating Symbols for Insurance Companies

BWR In AAA BEST financial capa bility to meet policyholder s obligations

BWR In AA HIGH financial capa bility to meet policyholder s obligations

BWR In A ADEQUATE financial capa bility to meet policyholder s obligations

BWR In BBB MODERATE financial capa bility to meet policyholder s obligations

BWR In BB INADEQUATE financial capa bility to meet policyholder s obligations

BWR In B LOW financial capa bility to meet policyholder s obligations



P a g e | 63

BWR In C VERY LOW financial capa bility to meet policyholder s obligations

BWR In D DEFAULT on current policy holder obligations

10) Brickwork R ating Symbols for Mutual Fund

BWR MF AAA BEST credit quality of under lying De bt por tfolio

BWR MF AA HIGH credit quality of under lying De bt por tfolio

BWR MF A ADEQUATE credit quality of under lying De bt por tfolio

BWR MF BBB MODERATE credit quality of under lying De bt por tfolio

BWR MF BB INADEQUATE credit quality of under lying De bt por tfolio

BWR MF B LOW credit quality of under lying De bt por tfolio

BWR MF C VERY LOW credit quality of under lying De bt por tfolio

11) Brickwork R ating Symbo

ls for Re

alEst

ate Project

BWR RP 1+ BEST pr oject im plementation

BWR RP 1 EXCELLENT pr oject im plementation

BWR RP 2 ADEQUATE pr oject im plementation

BWR RP 3 MODERATE pr oject im plementation

BWR RP 4 INADEQUATE pr oject im plementation

BWR RP 5 LOW pr oject im plementation



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12) Brickwork R ating Symbols for Real Estate Developer

BWR RD 1+ BEST pr oject im plementation capa bility

BWR RD 1 EXCELLENT pr oject im plementation capa bility

BWR RD 2 ADEQUATE pr oject im plementation capa bility

BWR RD 3 MODERATE pr oject im plementation capa bility

BWR RD 4 INADEQUATE pr oject im plementation capa bility

BWR RD 5 LOW pr oject im plementation capa bility

14

1.1.9 Rating Process

In India all the three credit rating agencies ado pt almost a similar rating pr ocess for

rating new de bt issues and reviewing the rating of existing instr uments. The steps generally

taken by the rating agencies in rating pr ocess are shown as under: -

1. R ating Request: -

The purpose of the rating star ts with the rating request made by the issuer of the

instr ument issues a letter to the rating agency and signed an agreement with the agency.

2. Assignment of Analytical Team: -

On the basis of rating request credit rating agencies assign an analytical team

com pr ising two or more analysts. These analysts would be the exper ts in the relevant

business area. It is a ver y detailed pr ocess. Nor mally, two-three per sons with the required

technical sk ills team u p for investigations (due diligence) for a bout three week s.



P a g e | 65

Issuer

request

for rating

CRISIL

Assigns an

analytical

Analytical

team collects

and analyses

infor mation

Meets

Com pany¶s

management

and resolves

Interaction

with back u p

team for

industr ialfor mation

Findings

presented

to a

rating

R ating

committee

decides the

rating

Notification

of rating to

issuer

Does issuer

wants to appeal

R ating is

released

Additional data

pr ovided is

reviewed and

rating revised if

No

Yes



P a g e | 66

Figure 1.2: R ating Pr ocess

They go to the com pany, talk to the peo ple, go thr ough the com pany's book s and

records, its accounts, talk to its auditor s, its banker s, its consumer s, look at how the com pany

has handled investor gr ievances, look at its track record in servicing de bt obligations and so

on. This pile of data is then screened and, based on that, the team arr ives at a str uctured

repor t.

This repor t is then presented before the rating committee. A brainstor ming session on

due diligence ensures that no one gets away by mak ing a sweeping statement. After a lot of

interaction, the matter is finally put to vote for a decision on the rating.15

3. Analytical Team Obtains & Analysis Information: -

After assignment of Analytical Team, the team obtains and analysis infor mation

relating to its financial statements, cash flow and other relevant infor mation which have

im pact on the com pany¶s functioning. Generally, following k ind of infor mation is obtained

and analyzed by this team:

A.

Annual repor ts for past five year s including cash flow statements and inter imrepor ts.

B. Two co pies of the pr os pectus off er ing statement and application for listing on any

ma jor stock exchange.

C. Consolidated financial statements for the past three fiscal year s.

D. Two co pies of the pr ojected financial statements along with assum ptions on which

pr ojection have made.

E. A cer tified co py of resolution passed by the Board of Director s author izing the

insurance of de bentures instr uments, including the name of author ized signator ies.

15 Khan MY(2003), R ating Pr ocess Ch. Credit rating, Financial services Tata McGraw Hill Publishing

Com pany Limited New Delhi sixth edition 2003.p16.25-16.31.



P a g e | 67

F. List of bank showing lines of credit along with the contact officer s. A par t f r om

this, analytical team may obtain some addition infor mation, which it consider s to

be necessar y for this purpose.

4. Meeting with Management:-

After obtaining and analyzing the infor mation explained in previous step, analyticalteam meets with the management of the com pany and obtains more infor mation on some

im por tant as pects which have im pact on the credit quality of the instr ument being rated.

Though the to pics discussed dur ing the management meeting are wide ranging but discussion

with management might reveal more infor mation like:

Management¶s Philoso phy and Plan for the com pany in future.

Business segment analysis. Com petitive position, strategies, financial policies.

Histor ical per for mance.

5. Interaction with Back Up Team:-

While Analytical team collects the infor mation f r om com pany; its back u p team

collects the infor mation on industr y which this com pany belongs. It also makes interaction

with back u p team in order to collect infor mation on industr y along with the industr y

pr os pects in near future.

6. R ating Committee: -

After collecting and analyzing infor mation f r om com pany and its management, the

analytical team presents their repor t to a rating committee which then decides on the rating.

The rating committee meeting is the only as pects of the pr ocess in which the issuer does not

par tici pate.

7. Deciding on R ating by R ating Committee:-

Now the rating committee makes assessment or evaluate all the f actor s concer ning the

issuer giving greater attention to some key issues. After pr o per analysis rating committee

arr ives at the rating, which is suita ble to the pr o posed issue.



P a g e | 68

8. Notification to the issuer: -

After the committee has assigned the rating, this decision is communicated to the

issuer along with the reasons or rational su ppor ting the rating. If the issuer agrees with the

ratings and does not wish to appeal fo9r reviewing the rating given to the instr ument, then as

a last movement rating is released thr ough pr int media by the rating agency. But if issuer raises objection on the rating given by the rating agency and wants to fur nish additional data

for that, then this additional infor mation is reviewed and rating agency may revise previous

rating. Then this revised rating is released thr ough media and for mal notification of final

rating assigned to the issuer.16

1.1.10 Internat ional Credit Rat ing Agencies (CRAs)

Currently, the following rating agencies rate general obligation bonds, notes, lease-

purchase revenue bonds and commercial paper s:

Figure 1.3 Inter national Credit R ating Agencies

How are bonds rated?

16 V Bhalla VK(2001), Investment Management S. Chand and Co. Ltd. New Delhi 8th edition 2001.p 136-137

International Credit R ating Agencies

Fitch Moody¶s Investor Standard & Poor¶s



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The rating pr ocess begins with an application to the rating agencies by the issuer or its

agent either via a telephone call or in wr iting. The State of Califor nia has engaged Standard

& Poor's, Moody's and Fitch in rating all its de bt instr uments for decades.

The rating request is usually done several week s before the issuance of the bonds to

allow time for the rating agencies to per for m their review and analysis. Generally, the

following documentations are pr ovided to the rating agencies as soon as possible:

a. The preliminar y official statement;

b. Latest audited and unaudited financial statements;

c. The latest budget infor mation, including economic assum ptions and trends;

d. Capital outlay plans;

The bond counsel o pinion addressing the author ity and tax-exem pt status of the bond

issuance; All legal documents relating to the secur ity for the bonds; and Any other documents

that may per tain to the bond issuance as requested by the rating agencies.

Following this, a meeting is set u p at the rating agency's or issuer's office to present

the credit wor thiness. The credit analyst prepares a munici pal credit repor t, which discusses

key analytical f actor s. The credit analyst presents credit for "sign-off" with the senior analyst

and makes a recommendation for rating. The credit analyst makes a presentation before a

rating committee com pr ised of senior analysts. Finally, the rating is released to the issuer,

then to a wire service, followed by a publication of full credit repor t.

Table 1.6: International CRA¶s R ating Symbols Chart

Moody¶s S&P Fitch NAIC



P a g e | 70

Aaa AAA AAA 1

Aa1 AA+ AA+ 1

Aa2 AA AA 1

Aa3 AA- AA- 1

A1 A+ A+ 1

A2 A A 1

A3 A- A- 1

Baa1 BBB+ BBB+ 2

Baa2 BBB BBB 2

Baa3 BBB- BBB- 2

Ba1 BB+ BB+ 3

Ba2 BB BB 3

Ba3 BB- BB- 3

B1 B+ B+ 3

B2 B B 3

B3 B- B- 3

S ource: National Association of Insurance Commissioners

Moody's Explanation

Aaa indicates Best quality.

Aa indicates High quality.

A indicates Higher -medium grade.

Baa indicates Medium grade.



P a g e | 71

Ba indicates Possess s peculative elements.

B Generally lack character istics of desira ble investment.

Caa indicates Poor standing; may be in def ault.

Ca indicates S peculative in a high degree; often in def ault.

C indicates lowest grade.

Standard & Poor's Explanation

AAA Highest grade.

AA High grade.

A U pper medium grade.

BBB Medium grade.

BB Lower medium grade.

B S peculative.

CCC-CC Outr ight s peculation.

C' R eserved for income bonds.

DDD-DD In def ault, with rating indicating relative salvage value.

All of these agencies are represented in India through their collaborations:

S&P: CRISIL

Moody¶s: ICRA

Fitch: CARE (for 1 year only)

Fitch: Fitch India (for mer ly Duff & Phel ps India)



P a g e | 72

These colla borations br ing in financial capital, and more im por tantly, k now how,

exper ience, depth of exper tise, research capa bilities and man power synergies. The global

or ientation received by CRAs in India is fur ther enhanced by two f actor s Affiliation to the

Association of Credit R ating Agencies in Asia (ACRAA), an ADB s ponsored body. Indian

CRAs are founder member s. Alignment with the IOSCO Code of Conduct, to the extent theycoincide with the SEBI Code of Conduct for CRAs. These colla borations, affiliations and

alignments ena ble the Indian CRAs to benefit f r om an exposure to an inter national

envir onment. It is also a nota ble f eature that Indian CRAs, in tur n, pr ovide technical exper tise

and k nowhow to CRAs in Mexico and other countr ies in the SAARC and ASEAN regions.

This pr ovides an emerging markets per s pective. Indian CRAs have a leader shi p position in

Asia, behind only Japan, who¶s CRAs show a greater affinity in interacting with CRAs f r om

the develo ped (G7) countr ies.

1.1.11 Elements involved in determining a credit rating

Economic Factor s.

Evaluation of histor ical and current economic f actor s.

Economic diver sity.

R es ponse to business cycles.

Economic restr uctur ing.

Assessing the quality of lif e in the given area.

De bt/Issue Str ucture.

Economic f easibility and need for pr oject.

Length of bond's matur ity, shor t-ter m de bt financing.

Pledged secur ity and other bondholder pr otections.

Futur istic outlook: capital im pr ovement plan.

Financial Factor s.

Sufficient resources accumulated to meet unforeseen contingencies and liquidity

requirements.

On-going o perations are financed with recurr ing revenues.

Pr udent investing of cash balances.

Ability to meet expenditures within economic base.

Management/Str uctural Factor s.



P a g e | 73

Organization of gover nment and management.

Taxes and tax limits.

Clear delineation of financial and budgetar y res ponsibilities.

Definitions of R atings by Standard & Poor ¶s and Moody¶s.

Investor s are often confused or uncer tain a bout bond ratings used by the ma jor

secur ity rating services.

1.1.12 CREDIT RATING: ITS TRUSTWORTHINESS

Why ratings are so trustworthiness?

Investor s and creditor s are pr imar ily concer ned with relative value based on their

lending and for the investment hor izon they have. Accordingly, the credit ratings have

traditionally pr ovided one element in su ppor t of the investment decision-mak ing pr ocess. As

such, they hel p lower the aggregate costs of borr owing and lending and increase overall

market trans parency and efficiency for both issuer s and investor s. However, cer tain attr ibutes

of ratings have, over time, encouraged pr olif eration in the ty pes of user s and uses of ratings:

Public dissemination

Because ratings are publicly availa ble, infor mation a bout issuer s can easily and

quick ly be disseminated to br oad and var ying gr ou ps of user s.

Simplicity

R ating symbols distill much infor mation into an easy to use symbol.

Breadth of coverage

The wor ldwide ratings exist on a large and diver se gr ou p of entities and de bt

instr uments. R ating service allows investor s to assign an individual issuer or de bt instr ument

into a credit r isk class vis-a-vis the overall univer se of de bt issuer s and instr uments.



P a g e | 74

Objectivity and independence

The f ew reputa ble player s in the R ating industr y have str ict inter nal policies and

pr ocedures have mitigated the latent conflict of interest that is inherent in the rating agency

business model. As such, the rating o pinions are the pr oduct of analysis that is widely

accepted as unbiased and tr ustwor thy.

Predictive content

The predictive content of the wor ld-recognized ratings has been consistently mapped

and measured. All to p rating agencies and many academic researcher s have published studies

on the relationshi p between the ratings and credit def aults. R esearch has shown a str ong

relationshi p between assigned ratings and actual def ault exper ience.

Judicious rating process

The recognized rating agencies assign ratings thr ough a r igor ous and judicious

pr ocess that tends not to react to transitor y conditions in f avor of longer -ter m considerations

and ratings sta bility. For diff erent class of per sons diff erent benefits accr ue f r om use of rated

instr uments. Such benefits directly accr uing to investor s thr ough rated instr uments that

become a reason for tr ustwor thiness are as follows:

1.1.12.1 TRUSTWORTHINESS TO INVESTORS

Investor s are benefited in ver y many ways if the corporate secur ity in which they

intend to invest their saving has been rated by credit rating agency. Some of the benefits,

which become a reason for tr ustwor thiness to investor s, are as:

Safeguards against bankruptcy:

Credit rating of an instr ument by credit rating agency give an idea to the investor sa bout degree of financial strength of the issuer com pany, which ena bles him to decide a bout

the investment. Highly rated instr ument of a com pany gives an assurance to the investor s of

saf ety of instr ument and minimum r isk of bankr u ptcy.



P a g e | 75

Recognition of risk:

Credit rating pr ovides investor s with rating symbols, which carr y infor mation in

easily recogniza ble manner for the benefit of investor s to perceive r isk involved in

investment. R ating symbol gives them the idea a bout the r isk involved or the expected

advantages f r om the investment.

CREDIBILITY OF ISSUER:

R ating gives a clue to the credibility of the issuer com pany. The rating agency is quite

independent of the issuer com pany and has no business connections or other wise any

relationshi p with it or its Board of Director s, etc.

Easy understandability of investment proposal:

R ating symbols can be under stood by an investor, which needs no analytical

k nowledge on his par t. Investor can take quick decisions a bout the investment to be made in

any par ticular rated secur ity of a com pany.

Saving of resources:

Investor s rely u pon credit rating. This relieves investor s f r om the botheration of

k nowing a bout the fundamentals of a com pany, its actual strength, financial standing,

management details, etc. The quality of credit rating done by pr of essional exper ts of the

credit rating agency repose confidence in him to rely u pon the rating for tak ing investment

decisions.

Independent of investment decisions:

For mak ing investment decisions, investor s have to seek advice of financial

inter mediar ies, the stock br oker s, merchant banker s, the por tfolio manager s etc. a bout the

good investment pr o posal, but for rated instr uments, investor s need not depend u pon the

advice of these financial inter mediar ies as the rating symbol assigned to a par ticular

instr ument suggests the credit wor thiness of the instr ument and indicates the degree of r isk

involved in it.



P a g e | 76

Benefits of rating surveillance:

Investor s get the benefit of credit rating agency¶s on-going surveillance of the rating

and rated instr uments of diff erent com panies. The credit rating agency downgrades the rating

of any instr ument if subsequently the com pany¶s financial strength declines or any event

takes place, which necessitates consequent dissemination of infor mation on its position to the

investor.

1.1.12.2 Trustworthiness to Company

Com pany which had its credit instr ument or secur ity rated by a credit rating agency is

benefited in many ways as summar ized below:

Lower cost of borrowing:

A com pany with highly rated instr ument has the o ppor tunity to reduce the cost of

borr owing f r om the public by quoting lesser interest on fixed deposits or de bentures or bonds

as the investor s with low r isk pref erence would come for ward to invest in saf e secur ities

thr ough yielding marginally lower rate of retur n.

Wider audience for borrowing:

A com pany with a highly rated instr ument can appr oach the investor s extensively for

the resource mobilization using the press media. Investor s in diff erent strata of the society

could be attracted by higher rated instr ument as the investor s under stands the degree of

cer tainty a bout timely payment of interest and pr inci pal on a de bt instr ument with better

rating.

R ating as marketing tool:

Com panies with rated instr ument im pr ove their own image and avail of the rating as a

marketing tool to create better image in dealing with its customer s f eel confident in the utility

pr oducts manuf actured by the com panies carr ying higher rating for their credit instr uments.



P a g e | 77

Reduction of cost in public issues:

A com pany with higher rated instr ument is a ble to attract the investor s and with least

effor ts can raise funds. Thus, the rated com pany can economies and minimize cost of public

issues by contr olling expenses on media coverage, conf erences and other publicity stunts and

gimmick s. R ating f acilitates best pr icing and timing of issues.

Motivation for growth:

R ating pr ovides motivation to the com pany for gr owth as the pr omoter s f eel confident

in their own effor ts and are encouraged to under take expansion of their o perations or new

pr ojects. With better image created thr ough higher credit rating the com pany can mobilize

funds f r om public and instr uctions or bank s f r om self-assessment of its own status, which is

subject to self-disci pline and self-im pr ovement, it can perceive and avoid sick ness.

Unknown issuer:

Credit rating pr ovides recognition to a relatively unk nown issuer while enter ing into

the market thr ough wider investor base who rely on rating grade rather than on µname

recognition¶.

Benefits to brokers and financial intermediaries:

Highly rated instr uments put the br oker s at an advantage to make less effor t in

studying the com pany¶s credit position to convince their clients to select an investment

pr o posal. This ena bles br oker s and other financial inter -mediar ies to save time, energy, costs,

and man- power in convincing their clients a bout investment in any par ticular instr ument.

Credit R ating as a tool for Credit risk management in Banks

A sim ple way to evaluate credit r isk is to think in ter ms of past credit wor thiness.

A par t f r om the big credit rating agencies like Moody¶s, Standard & Poor or Fitch-IBCA,



P a g e | 78

there are the data bases com piled by Equif ax and CCN on peo ple whose creditwor thiness is

f requently quer ied by com panies and bank s.16

CRISIL believes that for radically im pr oving credit r isk management, the use of better

tools and techniques needs to be com plemented by im pr oved infor mation systems, redesigned organizational str uctures and pr ocesses, sk ill u p gradation and most of all, the willingness and

a bility to adapt attitudes and organizational cultures to suit the changing envir onment.

The RBI guidelines for risk rating on credit risk management are as:

Set u p com prehensive r isk scor ing system (6 to 8 point scale)

Clear ly define rating thresholds.

Per iodic (half year ly) review of ratings

Map rating migrations to estimate expected loss.

For purpose of better contr ol, the RBI study gr ou p (Tandon Committee) has also

suggested a system of borr ower classification in each bank within a credit rating scale.

The study gr ou p has suggested a five point- point scale in which borr ower s could be

classified as excellent, good, average, Below-Average or Unsatisf actor y: an al pha betical

range would do equally well. Such a system of classification according to credit r isk, which

results for per iodic review will f acilitate easy identification of the borr ower whose aff air

require to be watched with more than ordinar y care. Moreover, such classification will be

advantageous for the for mulation of a rational base for fixing the rates of interest according to

the credit rating of the borr ower.

A customer who is given the finest credit rating may be given the lowest lending rate

of the bank. On the other hand, a customer who is rated as a poor r isk, will have to pay the

wor st interest rate. In such a case the bank should take appr o pr iate action to im pr ove the

quality of loan and lessen the bank ¶s exposure.



P a g e | 79

The recommendation of the study gr ou p have been, by & large, accepted by the

R eserve Bank. Bank s have, therefore accepted the suggested pr ocedure as a regular par t of

their follow-u p machiner y. A pr ocedural consideration will have to do how management

chooses to deal with loans graded anything less than satisf actor y, that is, those that are

classified µbelow average¶ or unsatisf actor y. In eff ect, the entire administration of a substandard loan should be shared or regular ly reviewed with management.

R ating Industry Performance

Surpr isingly, the largest wealth creating sector s are the industr ials-oil & gas, utilities,

trans por tation, financial services, and metals & mining. On the other hand, gr owth or iented

sector s like leisure, telecom, and FMCGs have destr oyed shareholder s wealth. Moreover

wealth-creating sector s have created more wealth than the gr owth-or iented sector s.

Role of R ating Agencies in Capital Market

The capital and financial markets in develo ping countr ies are remarka ble for their lack

of so phistication. A par t f r om a f ew stock exchanges and gover nment-appointed regulator s,

there aren¶t many relia ble inter mediar ies like Credit rating agencies, investment analysts,

merchant banker s, or venture capital fir ms.

Credit rating agencies have played an im por tant r ole in the capital markets for

almost a centur y by pr oviding analytic o pinions to investor s on the a bility and willingness of

issuer s to make timely payments on de bt instr uments over the lif e of those instr uments.

Issuer s pay for the ratings in order to lower the cost of and increase their access to capital.

Investor s tr ust the agencies¶ im par tiality and quality, and rely on the ratings.

Limitations of Credit R ating System in India

(1) The fir st pr oblem of Credit R ating System relates to the rating symbols. Sometimes,

rating symbols according to the tenure of the instr ument and not by the instr ument¶s

character istics creates confusion. For exam ple the instr uments like Fixed Deposits, Non

Conver tible De bentures or Commercial paper s are rated by ICRA on the basis of their

matur ity per iod, them will be given the same rating by ICRA.But on the other hand CRISIL



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pr ovides rating symbols in accordance with the character istics of instr ument. For exam ple,

CRISIL prefix µF¶ to the rating for Fixed Deposits. This pr oblem of assigning rating symbols

cause confusion among treasur y manager s and investor s who other wise can deter mine the

pr oduct or the instr ument on the instr ument on seeing the rating.

(2) The rating agencies do not per for m an audit and they rely only on the infor mation

pr ovided by the issuer of the instr ument. If the infor mation pr ovided is inaccurate or

incom plete, the ratings pr ocess is com pr omised. Therefore, ultimately, this k ind of rating will

not reflect the tr ue picture behind the issuance of secur ity or in other words, it will not assess

the tr ue creditwor thiness of the issuer.

(3) A Credit R ating pr ovides only guidance to the investor s and creditor s in deter mining the

r isk associated with a instr ument. It does not recommend buying selling a par ticular secur ity

because it does not take into account f actor s like: market pr ices and per sonal r isk pref erences,

which might influence investor ¶s decision. So apar t f r om Credit R ating, investor s should

analyze all those f actor s depending on his pr o posed investment decision.

(4) Sometimes, cer tain instr ument of a s pecific com pany is pr ovided lower rating by a rating

agency. Now the com pany has an incentive to go ar ound for the best possible rating by

com pr omising the authenticity of the rating pr ocess itself .

(5) Some com panies use Credit R ating as a tool to cheat the investor s. They get rating done

by more then one rating agency and publish only that rating which reflects highest saf ely. But

this published rating may not be tr ue which can mislead investor ¶s decision.17

(6) Conflict between the two rating agencies can be happen. E.g. IDBI Bank has been

u pgraded to AA+ f r om A on account of the merger with Industr ial Develo pment Bank of

India (IDBI), said Cr isil. Meanwhile, Icra has placed IDBI Bank under rating watch with

positive im plications. The agency said that the rating action takes into account the

announcement of the in- pr inci ple appr oval of the merger of the IDBI Bank with IDBI. The

rating agency is in the pr ocess of evaluating the im pact of the merger and would announce its

final view on the outstanding rating after com pletion of the merger, an Icra official said. The

17Bhalla VK(2001), Investment Management S. Chand and Co. Ltd. New Delhi 8

th edition 2001.p 136-137



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rating agency is in the pr ocess of evaluating the im pact of the merger and would announce its

final view on the outstanding rating after com pletion of the merger said an official with the

rating agency. Agency has also assigned outstanding ratings of LAA, MAA+ and A1+ to

IDBI¶s long-ter m, medium-ter m and shor t-ter m de bt plans. Now it can create contr over sy

between the two rating agency if the ratings of the bank var ies.

18

(7) R atings volatility The most im por tant issue ar ising in the present tur moil is do rating

agencies need the quasi gover nment author ity of inside access at all as rating agencies access

to inside access at all as rating agencies access to inside infor mation did not hel p them

antici pate the financial infor mation is essential to under standing com pany creditwor thiness, it

is not hel pful to detect f raud. It is not economically via ble for rating agencies to act as

guarantor s of f raud. Financial instr uments are increasingly designed solely to carr y a

par ticular rating, not the other way r ound. The eff ect is to discourage agencies f r om changing

ratings on objective gr ounds until it is too late. Fur ther, though com panies tend to give credit

rating agencies access to confidential documents in general to justify the highest possible

credit rating, there is no requirement that they divulge ever ything.

ANNEXURE

Questionnaire on analysis of credit rating agencies

and their poteial impact on developing countries with

reference to india and with speci

alreference to

mumbai.

18 Sowdeepti(2004), R ating volatility titled financial services rating agencies inducing com petition, Chartered

Financial Analyst, Vol. X, Issue 1, p.49



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Please read the instructions below and answer all questions:

1. This infor mation collected will be kept confidential and only aggregated results will

be presented in the research.

2. Please answer the questions by putting a tick mark on the relevant choice that best

reflects your o pinion.

3. If for any reason you f eel uncomfor ta ble with answer ing some questions, sim ply leave

them blank. However, we would appreciate it if you answer all questions.

4. Tr y to answer as accurately as possible.

5. You can put a tick mark on more than one o ption also.

PART - 1

Basic Information

Contact Name :

Age :

Contact No :

Email :

Occu pation :

Qualification :

PART ± 2

Please indicate your res ponse to each question by tick ing the relevant o ption. You can mark

more than one choice also.

1. How many credit rating agencies listed below are you aware of?

a) CRISIL b) CARE c) ICRA d) Duff & Phel ps.

2. Are you aware of credit rating agencies with their rating symbols?

a) Yes. b) No.

3. Do you tr ust credit rating agencies?a) Yes b) No

4. In which of these secur ities you pref er to invest your money?

a) Shares. b) De bentures. c) Bonds. d) Gover nment Secur ities.



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5. How occasionally do you invest in shares and de bentures?

a) Ver y f requently. b) Frequently. c) R arely.

6. In which of these financial Institutions you pref er to invest your money?

a) Commercial Bank s. b) Insurance Com panies. c) Mutual Fundsd) Gover nment Secur ities. e) Other FI¶s.

7. Does your investment decision get aff ected by rating given to the instr ument by credit

rating agencies?

a) Yes. b) No.

8. Are you satisfied with the work ing and rating of Credit R ating Agencies in India? a) Yes. b) No.

9. Do you k now anything a bout Multi ple Credit R ating?

a) Yes. b) No.

10. Do you think Multi ple Credit rating is boom to the capital market?a) Yes. b) No.

11. Do you think Credit R ating Agencies pr ove to be an eff ective tool for r isk

management?a) Yes. b) No.

12. Do you think that it is saf e for small investor to depend u pon the ratings pr ovided by

the Credit R ating Agencies?

a) Yes. b) No.

13. Do you k now any of these services pr ovided by Credit R ating Agencies?a) Credit R ating Services. b) Advisor y Services. c) Equity R esearch.

d) R esearch and Infor mation Services. e) Infor mation Assistant to govt.

14. Should the rating agencies monitor the issue already rated?a) Yes. b) No.

15. Do you think a good rating given to an instr ument can hel p it sail easily in the

market?



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a) Yes. b) No.

16. Does the intr oduction of Credit R ating Agencies pr ove conductive for capital market?a) Yes. b) No.

17. What are the main shor tcomings of credit rating agencies in India?

a) Confusion created by var ious rating symbols. b) R ely only on infor mation pr ovided by issuer of the instr ument.

c) Com panies publishing only the higher rated secur ities. d) Conflict between ratings given by two agencies.

e) Any, Other.

If , any other, s pecify.

Ans:

18. What are the sources f r om where you get credit rating infor mation?

a) News Paper. b) Magazines. c) We b-sites d) Per sonal Contacts. e) Television f) Other Sources.

Chapters

Chapter 1

Introduct ion

introduction

Objective of the Study

Scope and need of the Study




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Chapter 2

Theoret ical Perspect ive

Definitions

List of credit rating agencies

Big Three (credit rating agencies)

Credit rating agencies in India

The Determinants of R ating

Regulatory Framework for CRA¶s

(a) SEBI guidelines for Credit R ating Agencies

1)General Obligations of Credit R ating Agencies

(i)Code of Conduct

(a) Agreement with the client

(b) Monitoring of ratings

(c) Procedure for review of rating

(d) Internal procedures to be framed

(e) Disclosure of R ating Definitions and R ationale

(f) Submission of information to the Board

(g) Compliance with circulars etc., issued by the Board

GA. Appointment of Compliance Officer



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(h) Maintenance of Books of Accounts records, etc.

(i) Steps on auditor¶s report

(j) Confidentiality

(k ) R ating process

(i) Code of conduct for Credit R ating Agencies

Types of Credit R ating

Importance of Credit R ating

Approaches of Credit R ating Agencies

(A) R ating related products and activities

(B) Non-rating related activities

R ating symbols and their definations

Credit R ating Agencies in India

1. Credit R ating Information Service of India Ltd. (CRISIL)

2. Investment Information and Credit R ating Agency. (ICRA)

3. Credit Analysis and Research Ltd. (CARE)

4. Duff and Phelps Credit rating Pvt. Ltd.

5.

Brickwork R atings.

R ating Process Inter national Credit R ating Agencies (CRAs)

Elements involved in determining a credit rati



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Credit R ating as a tool for Credit risk management in

Banks

Limitations of Credit R ating System in India

ANNEXURE

THESIS Role of SEBI in Regulation of Indian Capital Market

Documents

Transcript of THESIS Role of SEBI in Regulation of Indian Capital Market