Credit Rating Agencies 80 %

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Chapter 1
OVERVIEW OF FINANCIAL
SERVICES

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1.1 INTRODUCTION
Financial services are those that help with borrowing and funding,
lending and investing, buying and selling securities, making and enabling
payments and categories of financial services are funds intermediation,
payments mechanism, and provision of liquidity, risk management and
financial engineering.
Financial services are necessary for the management of risk in the
increasingly complex global economy. They enable risk transfer and
protection from risk. The four financial system components discussed do
not function in isolation. They are independent and interact continuously
with each other. Their interaction leads to the development of a smoothly
functioning financial system.
A financial service is a term used to refer to the service s provided by the
finance industry. Bank s, insurance companies, investment bank s, and
brokerages, are examples of the types of firms forming this industry:
They provide money and investment and related services. Financial
services are the term used to describe those organizations that deal with
the management of money. Financial services include banking, insurance,
stock broking (i.e. the buying and selling of stocks and shares), credit
card companies, etc. Financial services refer to services provided by the
finance industry. The finance industry encompasses a broad range of
organizations that deal with the management of money. Among these
organizations are banks, credit card companies, insurance companies,
consumer finance companies, stock brokerages, investment funds and
some government sponsored enterprises.


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1.2 DEFINITION
Financial services can be defined as the products and services offered by
institutions like banks of various kinds for the facilitation of various
financial transactions and other related activities in the world of finance
like loans, insurance, credit cards, investment opportunities and money
management as well as providing information on the stock market and
other issues like market trends.
The term ―Financial Services‖ means ―mobilizing and allocating
savings‖. In general, all types of activities, which are of a financial
nature, could be brought under the term ‗financial services‘. Thus, it
includes all activities involved in the transformation of saving into
investment.
The ‗financial service‘ can also be called ‗financial intermediation‘.
Financial intermediation is process by which funds are mobilized from a
large number of savers and make them available to all those who are in
need of it and particularly to corporate customers. Thus, financial services
sector is a key area and it is very vital for industrial developments.







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1.3 TYPES OF FINANCIAL SERVICES
Today the importance of the financial services is gaining momentum all
over the world. In these days complex finance, people accept a financial
service company to play a very dynamic role not only as a provider of
finance but as a departmental store of finance. They can be grouped under
two heads:

1.3.1 Fund based activities
Leasing:
A lease is an agreement under which a company or a firm acquires a
right to make use of a capita asset like machinery, on payment of a
prescribed fee called rental charges. Many financial companies have
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started equipment leasing. A lease is an agreement under which a
company or a firm, acquires a right to make use of a capital asset like
machinery, on payment of a prescribed fee called ―rental charges‖. The
lessee cannot acquire any ownership to the asset, but he can use it and
have full control over it. He is expected to pay for all maintenance
charges and repairing and operating costs. In India, many financial
companies have started equipment leasing business. Commercial banks
have also been permitted to carry on this business by forming subsidiary
companies.
Hire purchase:
Hire purchase is the legal terms for a contract, in these persons usually
agree to pay for goods in parts or a percentage at a time. Hire purchase is
financial facilities which allow a business to use an asset over a fixed
period, in return for regular payments. The business customer chooses the
equipment it requires and the finance company buys it on behalf of the
business. With a hire purchase agreement, after all the payments have
been made, the business customer becomes the owner of the equipment.
This ownership transfer either automatically or on payment of an option
to purchase fee. Under a hire purchase agreement, the business customer
is normally responsible for maintenance of the equipment.
Discounting:
Discounting is a financial mechanism in which a debtor obtains the right
to delay payments to a creditor, for a defined period of time, in exchange
for a charge or fee.
Loans:
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A loan is a type of debt. Like all debt instruments, a loan entails the
redistribution of financial assets over time, between the lender and the
borrower. A loan is a type of debt. The borrower initially does receive an
amount of money from the lender, which they pay back, usually but not
always in regular installments, to the lender. This service is generally
provided at a cost, referred to as interest on the debt.
Venture Capital:
A venture capital is another method of financing in the form of equity
participation. It is in contrast to the conventional security based financing.
A venture capital is another method of financing in the form of equity
participation. A venture capitalist finances a project based on the
potentialities of a new innovative project. It is in contrast to the
conventional ―security based financing‖. Much thrust is given to new
ideas or technological innovations. Finance is being provided not only for
‗development capital‘ by the financial intermediary.
Housing Finance:
In housing finance there are various schemes like purchase of new house,
construction of in home, home improvement, repairs, land purchase,
bridge loans etc. In house financing is a facility by which prospective
buyer of any type of goods is provided required finance by the seller.
Thus, seller becomes financier too in case of in-house financing. There
are many types of advantages associated with this facility. First of all, a
person is able to get finance at lower costs as there are no middlemen
involved .Middlemen here mean financial institutions and other lenders
that provide finance for buying goods. Second advantage is getting
finance at easy terms and conditions as seller of goods is making profit
out of sale also. Third advantage of in-house financing is that a person is
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not required to approach different lenders and compare them for getting
finance at lowest cost. Similarly, in-house financing also involves less
formalities pertaining to documentation etc. By way of in-house
financing, a person is able to get finance quickly.
Factoring:
Factoring is an arrangement in which receiving arising out of sale by a
firm to the factor. The factor becomes responsible for credit control,
accounting of sale ledger and debt collection. Factoring refers to the
process of managing the sales ledger of a client by a financial service
company. In other words, it is an arrangement under which a financial
intermediary assumes the credit risk in the collection of book debts for its
clients. The entire responsibility of collecting the book debts passes on to
the factor. His service can be compared to a Del credre agent who
undertakes to collect debts. But, a factor provides credit information,
collects debt, monitors the sales ledger and provides finance against
debts. Thus, he provides a number of services apart from financing
1.3.2 Non-Fund based activities
Issue management:
Issue management covers marketing of securities i.e. equity shares,
preference shares, debentures or bonds. It covers marketing of securities
i.e. equity shares, preference shares, debentures and bond. it involves pre-
issue and post-issue management. Pre-issue management can be through
prospectus offer for sale or provide placement. Post-issue management
covers collection of application forms, deciding allotment procedure,
share certificate, refund order etc.
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Portfolio Management:
Portfolio means combination of various securities and investment. Here
merchant bankers assist in maintain the proper portfolio by having good
qualification of shares, debentures, bonds, government securities, equities
etc.
Loan Syndication:
It refers to assistance to get term loan for project. It may be obtain from
single institution. The decision of which financial institutions to be
approach and it is given by merchant banking. This is more or less similar
to consortium financing. But, this work is taken up by the merchant
banker as a lead manager. It also enables the members of the syndicate to
share the credit risk associated with a particular loan among them.
Advisory Services Relating to Mergers & Takeovers:
A merger is a combination of two or more companies into a single
company where one survives and other lose their corporate existence. A
Takeover is the purchase by one company acquiring controlling interest
in the share capital of another existing company. Merger means that the
two merging companies become history and a new firm is established
while acquisition means only one company become history which is the
acquired company while the acquiring company remains.
Corporate Counseling:
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Its covers activities related to companies such as project counseling,
capital restricting, project management, loan syndication, fixed deposits,
working capital, lease finance, public issue management. It is provide to
every business unit to ensure better performance, stay growth and better
image among investor





















Chapter 2
CREDIT RATING

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2.1 INTRODUCTION
Credit rating assesses the creditworthiness of an individual, corporation
or even a country. It is calculated from the financial history and current
assets and liabilities. A rating agency collects qualitative and quantitative
data from the company which has to be rated and assesses the relative
strength and capacity of a company. The rating is given on the judgment
of a team of experts from the agency. The rating of a company is a
financial indicator to potential investors of debt securities such as the
bonds. It is an assessment of the credit worthiness of individuals and
corporations. It is based upon the history of borrowing and repayment, as
well as the availability of assets and extent of liabilities. The ratings are
expressed alphabetically, numerically, alpha – numerically or even
symbolically on the basis of the information provided by the client.
E.g. A++, A+, A, A1, B1, *****, very good, etc.
2.2 DEFINITIONS
 According to CRISIL: ―credit rating is an unbiased and
independent opinion as to issuer‘s capacity to meet its financial
obligations. It does not constitute a recommendation to buy or sell
or hold a particular security.‖
 According to Moody‘s, ratings are designed exclusively for the
purpose of grading bonds according to their investment qualities.‖
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 According to ICRA, ―ratings are opinions on the relative capability
of timely servicing of corporate debt and obligations. These are not
the recommendations to buy or sell.......... neither the accuracy nor
the completeness of the information is guaranteed.‖

2.3 ORIGIN OF CREDIT RATING
The first mercantile credit rating agency was set up in New York in 1841
to rate the ability of merchant and taken over by Robert Dun published
first raing guide in 1859. The second agency was established by John
Bradstreet in 1849 and managed with first agency to from Dun and
Bradstreet in 1933, which became the owner of Moody‘s Investor‘s
Service in 1962. The history of Moody‘s can be traced back about 100
years back. In 1900, John Moody laid stone of Moody‘s Investors Service
and published his ‗Manual of railroad securities‘.
The Poor‘s publishing company published its first rating guide in
1916, subsequently Fitch publishing company and standard statistics
company were set up in 1924 and 1922 respectively. Poor and standard
merged together in 1941 to form standard and poor‘s & taken over by
McGraw Hill in 1966. Between 1924-1970, no major new rating agencies
were set up. But since 1970‘s, numbers of credit rating agencies was set
up in Malaysia, Thailand, Korea, Australia, Pakistan and Philippine etc.
In India CRISIL ( Credit Rating and Information Services India Ltd.) in
1991, and CARE (Credit Analysis and Research Ltd.) in 1994. The all
India financial institutions have promoted all the three agencies. The
rating agencies have established their creditability through their
independence, professionalism, continuous research, consistent efforts
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and confidentiality of information. Duff and Phelps has tied up with two
Indian non banking financial companies to set up Duff and Phelps Credit
Rating India Ltd. in 1996.


2.4 FUNCTIONS OF CREDIT RATING
1. Superior information: - Rating by an independent firm offers a
superior and more reliable source of information on credit risk for three
inter related risks.
2. Low cost information: - A rating firm which gathers, analyses,
interprets and summarizes complex information in a simple and readily
understood format for wide public consumption represents a cost
effective arrangement.
3. Basis for proper risk-return trade off: - If debt securities are rated
professionally and if such ratings enjoy widespread investor acceptance
and confidence, a more rational risk-return tradeoff would be established
in the capital market.
4. Healthy discipline on corporate borrowers: - Public exposure has
healthy influence over the management of issuer because of its desire to
have a clear image.
5. Formulation of public policy guidelines on institutional
investment: -The public policy on the kinds of securities that are eligible
for inclusion in different kinds of institutional portfolios can be developed
with great confidence if securities are rated professionally by independent
agencies.
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6. Indication of risk: - Through the study of credit rating, the investors
can assess the degree of default risk involvement in the financial
instrument issued by the company.
7. Gradation: - Credit rating is designed for the purpose of grading the
bonds in accordance with their investment quality.
8. Assessment of solvency: - Credit rating estimates or assesses the vales
of credit instruments by applying specialized and expert knowledge to
assess the solvency position of the borrower or issuer of the credit
instrument.
9. Symbolization: - The companies or borrowers whose credit are rated
by the credit rating agencies are expressed through certain predefined
symbols, such as, AAA, AA, A, A+, BBB, BB, B+, C, D, etc. These
symbols indicate the ability of the company or borrower to repay its debt.
10. Assessment of credit worthiness: - The creditworthiness and
reliability of the obligator are made available to the investors or lenders
by credit rating.
2.5 BENEFITS OF CREDIT RATING
2.5.1 Benefits to Investors: -
 Low cost information: It is a source of low cost information to the
investors.
 Quick investment decision: In the present day complex world
ratings enable investors to take quick decisions based on ratings.
 Independent investment decision: For rated instruments, investors
need not depend upon the advice of the financial intermediaries.
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 Investor protection: Hiring of credit agencies imply that the
management of the company is ready to show its operations for
independent scrutiny. So the investors who are not provided with
confidential information can have overall assessment based on
ratings. The creditable and objective rating agency can provide
increased disclosure, better accounting standards and improved
investor protection.
2.5.2 Benefits to the Rated Companies:-
 Sources of additional certification - Credit rating agency
provides additional information to the issuers of debt/financial
instruments. A highly rated firm can enter the market with great
confidence. Indian experience shows that use of rating, benefit a
great deal by getting larger amount of money from a wider
audience at lower cost.
 Increases investors’ population - A sound credit rating system
gives an alternative method to name recognition as a determining
factor in making investment and helps increase the population of
those investing in debt obligations.
 Forewarns the risk - Credit rating acts as a guide to the
companies which get a lower rating.
 Encourages financial discipline - Ratings also encourage
discipline among corporate borrowers to improve their financial
structure and performance.
 Rating as a marketing tool -Companies with rated instruments
use rating as a marketing tool to create better image in dealing with
their customers, lenders and borrowers.
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 Low cost of borrowing - A company with higher rated instrument
has the opportunity to reduce the cost of borrowing by quoting
lesser interest rate on fixed deposits or debentures as the investors
with low risk preference would invest in safe securities though
yielding low rate of return.



2.6 CREDIT RATING PROCESS
Credit rating process: -
The procedure followed by all major credit rating agencies in the
country is almost similar and usually comprises of the followed steps:

Receipt of the Request

Assignment to Analytical Team

Plant Visit and Meeting with Management

Presentation of Findings

Rating Committee Meeting

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Communication of Decision

Dissemination to the Public

Monitoring for Possible Change


1. Receipt of the Request: -
The rating process begins with the receipt of formal request for
rating a company desirous of having its issue obligation under proposed
instruments rated by credit rating agencies. An agreement is entered into
between the rating agencies and the issuer company.
The agreement spells out the terms of rating assignment and covers
the following aspects-
 It requires the CRA to keep the information confidential.
 It gives to the issuer company to accept or not to accept the rating.
 It requires the issuer company to provide all material information
to the CRA for rating and subsequent surveillances.
2. Assignment to Analytical Team: -
On receipt of the above request, the CRA assigns the job to an
analytical team. The team usually comprises of two members/analysts.
The analytical team obtains the required information from the
client company. Issuers are usually provided a list of information and
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broad frame works for discussions. These requirements are derived from
the experience of the issuers business and broadly confirms to all the
aspects, which have a bearing on the rating. The analytical team analysis
the information relating to its financial statements, cash flows projections
and other relevant information.
3. Plant Visit and Meeting with Management: -
To obtain classification and better understanding of the client‘s
operation, the team visits and interacts with the company‘s executives.
Plant visits facilitate understanding of the production process, evaluated
the quality of technical personal and from an opinion on the key variable
that influence level, quality and cost of production.
A direct dialogue is maintained with the issuer company as this
enable the CRAs to incorporated non-public information in a rating
decision and also enable the rating to be forward looking. The topics
discussed during the management meeting are wide ranging including
competitive position, strategies, financial policies, historical
performances, risk profile and strategies in addition to reviewing financial
data.
4. Presentation of Finding: -
After completing the analysis, the findings are discussed at length
in the internal committee comprising senior analysts of the credit rating
agency. All the issue having a bearing on rating is identified. An opinion
on the rating is also formed. The findings of the team are finally
presented to rating committee.
5. Rating Committee Meeting: -
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This is the final authority for assigning rating. The rating
committee meeting is the only aspect of the process in which the issuers
dose not participate directly. The rating is arrived at after composite
assessment of all the factors concerning the issuers, with the key issues
getting greater attention.
6. Communication of Decision: -
The assigAn rating grade is communication finally to the issuer
along with reasons or rationale supporting the rating. The ratings, which
are not accepted, are either rejected or reviewed in the light of additional
facts provided by issuer. The rejected ratings are not disclosed and
complete confidentially maintained.
7. Dissemination to the Public: -
Once the issuer accepts the rating the credit rating agencies
disseminate it through printed reports to the public.
8. Monitoring for Possible Change:
Once the company has decided to use the rating, CRAs are obliged
to monitor the accepted rating over the life of the instrument. The CRA
constantly monitors all ratings with reference to new political,
economical and financial development and industry trends. All this
information is reviewed regularly to find companies for major ratings
changes. Any changes in the rating are made public through published
reports by CRAs.
2.7 USES OF RATING
Credit ratings are used by investors to increase the range of investment
alternatives and provide independent, use by issuers, investment
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banks, broker-dealers, and governments. Its easy-to-use measurements of
relative credit risk; this generally increases the efficiency of the market,
lowering costs for both borrowers and lenders. This in turn increases the
total supply of risk capital in the economy, leading to stronger growth &
opens the capital markets to categories of borrower who might otherwise
be shut out altogether: small governments, startup companies, hospitals,
and universities


2.7.1 Ratings use by bond issuers
 Ratings use by bond issuers as an independent verification of their
own credit-worthiness and the resultant value of the instruments
they issue.
 Issuers use credit ratings in certain structured finance transactions
also.

 The issuer also may have different credit ratings for different
bonds.
 Many larger CRAs offer "credit rating advisory services" that
essentially advise an issuer on how to structure its bond offerings
and SPEs so as to achieve a given credit rating for a certain
debt tranche.
2.7.2 Ratings use by government regulators
 Regulators use credit ratings & permit ratings to be used for
regulatory purposes like banking regulators can allow banks to use
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credit ratings from certain approved CRAs (called "ECAIs", or
"External Credit Assessment Institutions") when calculating their
net capital reserve requirements.
 In the United States, the Securities and Exchange
Commission(SEC) permits investment banks and broker-dealers to
use credit ratings from "Nationally Recognized Statistical Rating
Organizations" (NRSRO) for similar purposes.
 CRA ratings are also used for other regulatory purposes like SEC
regulations require thatmoney market funds (mutual funds that
mimic the safety and liquidity of a bank savings deposit, but
without Federal Deposit Insurance Corporationinsurance) comprise
only securities with a very high NRSRO rating. Likewise,
insurance regulators use credit ratings to ascertain the strength of
the reserves held by insurance companies.
2.7.3 Ratings use in structured finance
 Credit rating agencies may also play a key role in structured
financial transactions to pay a certain return on a loan, structured
financial transactions may be viewed as either a series of loans
with different characteristics, or else a number of small loans of a
similar type packaged together into a series of "buckets" (with the
"buckets" or different loans called "tranches").
 credit rating agencies to help them determine how to structure the
individual tranches so that each receives a desired credit rating.
 A rating agency could be correct in its opinion that the chance of
default of a structured product is very low, but a slight change in
the market's perception of the risk of that product can have a
disproportionate effect on the product's market price, with the
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result that an ostensibly AAA or Aaa-rated security can collapse in
price even without there being any default (or significant chance of
default).

2.8 LIMITATIONS OF CREDIT RATING
There are several limitations of credit ratings.
 First, credit ratings are changed when the agencies feel that
sufficient changes have occurred. The rating agencies are
physically unable to constantly monitor all the firms in the
market. The opinions of rating agencies may turn wrong in the
context of subsequent events that may have an adverse impact
on asset quality of the issuer.
 Second, the use of credit ratings imposes discrete categories
on default risk, while, in reality default risk is a continuous
phenomenon. Moody's recognized this way back in 1982 by
adding numbers to the letter system, thereby increasing its
number of rating categories from 9 to 19. Nevertheless, this
limitation still pertains. The letter grades assigned by rating
agencies serve only as a general, somewhat coarse form of
discrimination.
 Third, owing to time and cost constraints, credit ratings are
unable to capture all characteristics for an issuer and issue. A
borrowing company can reduce the cost of borrowing, if it
obtains a higher rating for its contemplated issue. The stakes
and pressures, consequently, to get a good quality rating are
high. If the company comes to know that it issue is going to
get a low quality rating, it may approach another agency and
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then use the best rating among them since it is not under
obligation to disclose all ratings.
 The absence of widespread branch network of the rating
agency may limit its skills in rating.
 Inexperienced, unskilled or overloads staff may not do justice
give their job and the resulting ratings may not be perfect.
 Since the rating agencies receive a sizable fee from the
companies for award in ratings, a tendency to inflate these
ratings may develop.
 The time factor greatly affects the ratings and gives
misleading conclusions.











Chapter 3
CREDIT RATING AGENCIES
AT A GLANCE

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3.1 CREDIT RATING AGENCIES
Credit rating is systematic assessment of two types of risks namely
―business risk‖ and ―payment risk‖ with view to protect small investors,
who are the main target for unlisted corporate debt in the form of fixed
with companies, credit rating has been made mandatory.
Credit rating is the opinion of the rating agency on the relative
ability and willingness of the issuer of a debt instrument to meet the debt
service obligation as and when they arise. Rating is usually expressed in
alphabetical or alphanumerical symbols. Symbols are simple and easy to
understood tool, which help the investor to differentiate between debt
instruments on the basis of their underlying credit quality. Rating
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companies also publish explanation for their symbols as well as the
rational for the earning assigned by them to facilitate deeper
understanding.
The rating is an opinion on the future ability and legal obligation of
the issuer to make timely payments of principal and interest on a specific
fixed income security. The rating measures the probability that the issuer
will default on the security over its life, which depending on the
instrument may be a matter of days to thirty years or more.
Credit rating is symbolic indicator of the current opinion of the
relative capability of the issuer to service its debt obligation in a timely
fashion, with specific reference to the instrument being rated. It can also
be defined as an expression, through use of symbols, of the opinion about
credit quality of issuer of security/instrument.
Credit rating established a link between risk and return. They thus
provide a yardstick against which to measure the risk interest in any
instrument. An investor uses the rating to assess the risk level and
compares the offered rate the return with his expected rate of return
optimizes risk return trade off.
India was perhaps the first amongst developing countries to set up
credit rating agency in 1988. The function of credit was institutionalized
when RBI made it mandatory for the issue of commercial and
subsequently by SEBI, when it made credit rating compulsory for certain
categories of debenture and debt instruments. In June 1994, RBI made it
mandatory for Non-banking financial companies (NBFCs) to be rated.
Credit rating is optional for public sector undertaking (PSUs) bonds and
privately placed non-convertible debenture up to Rs. 50 million fixed
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deposits of manufacturing companies also come under the purview of
optional credit rating.

3.2 THE GROWTH OF CREDIT RATING IN INDIA
The prominent rating agencies in India are:
 CRISIL: Credit Rating information Services of India Limited
 ICRA: Investment Information and Credit Rating Agencies of
India Limited
 CARE: Credit Analysis and Research Limited
 FITCH Rating India Private Limited
Fitch Rating India was formerly known as OCR India-Duff and Phelps
Credit Rating Co. USA and OCR India merged to form a new entity
called Fitch India. Fitch India is a 100 per cent subsidiary of Fitch IBCA,
and is the only wholly owned foreign operator in India. Fitch is the only
international rating agency with a presence on the ground in India.
The Indian credit rating industry is next to the US in terms of number
of rating issued and in the number of agencies. Between the four rating
agencies in India, over 5,000 rating have been issued for around 1,400
issuers. CRISIL is the market leader in the credit rating industry with a 65
per cent market share.
The regulator‘s support played an important role in the development
of the credit rating industry. In 1992, for the first time, the Reserve Bank
introduced the requirement of rating for commercial paper. The SEBI
followed up by introduced mandatory rating of bonds. The other growth
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drivers of the credit rating industry were declining interest rates, a shift
towards market borrowings form bank loan a steep increase in the state
government borrowing through special purpose vehicles. Besides these
factors the growth in the private placement market of debt increased
business volume in the credit rating 1997, the penetration of rating, i.e.
the number of rated issues out of the total number of issues was 35 per
cent. In the year 2002, it was 97 per cent. This means that the credit rating
industry has transited from a regulatory-driven market to an investor-
driven market in the growing debt markets. Between fiscal 1997 and
2001, rated debt volumes increased from Rs. 13,743 crore to Rs. 52,746
crore, which is 84 per cent of the total issuance.

3.3 RATING METHODOLOGY
In India, the rating exercise starts at the request of the company.
The process of obtaining a rating is quite lengthy and time consuming.
The rating of a financial instrument requires a thorough analysis of
relevant factors that affect the creditworthiness of the issuer. Rating are
assigned after an in depth study of both object and subjective factors
related to business, financial management and so on. Rating are based on
an in depth study of the industry and an evaluation of the strength and
weakness of the company. The analytical framework for rating consists of
the following four areas.
3.3.1. Business Analysis
This covers an analysis of industry risk, market position in the country,
operating efficiency of the company, and legal position.
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 Industry risk covers an analysis of actual and estimated demand/
supply, number of firms and potential entrants in the industry,
government policies relating to the industry, the performance of the
industry, its future potentiality, and other factors.
 Market position in the industry covers the study of market share of
the firms (marketing strengths and weakness of the firm vis-à-vis
its competitors), marketing arrangement, products, and customers.
 Operating efficiency is a study production process of the firm its
cost structure, location advantages, labour relationships, input
availability, and prices.
 Legal position covers a study of prospectus, accuracy of
information, and filing of forms, returns, and so on with proper
regulatory authorities.
3.3.2. Financial Analysis
Financial analysis includes an analysis of accounting quality, earnings
protection, cash flow adequacy, and financial flexibility.
 Accounting quality is known by the study of method of income
recognition, inventory valuation, depreciation policies, auditor‘s
remarks, and off-balance liabilities.
 Earnings protection is examined with reference to profitability
ratios, earnings growth, and projected earnings, among others.
 Adequacy of cash flows includes a study of future cash flows,
working capital needs, and capital budgets.
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 Financial flexibility is examined in terms of whether alternative
financing plans have been developed and the feasibility of such
plans, among other aspects.

3.3.3 Management Evolution: - This includes a study of the track
record of the management, the management‘s capacity to overcome
adverse situation, goals, philosophy, and strategies.
3.3.4 Fundamental Analysis: - This covers an analysis of liquidity
management, asset quality, profitability and interest, and tax sensitivity.
 Liquidity management can be known through of capital structure,
matching of assets and liabilities, liquid assets, maturing deposits,
among others.
 Asset quality includes the company‘s credit management, policies
for monitoring credit, composition of assets, and sector risk.
 Internet and tax sensitivity is in terms of exposure to interest rate
charges, hedge against interest rate, tax provisions, and impact of
tax law changes.
The above information is collected and then analysed by a team of
professional in an agency. The rating is assigned is then notified to the
issuer and only on his acceptance, the rating is published. A rating agency
assures strict confidentiality of information to its client. If the client wants
to furnish additional information, he can do so and gets the rating
reviewed again. Once the issuer decides to use and publish the agency
continuously monitors the corporate, and rating is monitored till the life
of the instrument. This process is known as surveillance.
29

Rating may be upgraded, downgraded, or continue unchanged,
depending upon new information or developments and their resultant
effect on the debt instrument being rated.

3.4 SEBI REGULATIONS FOR CREDIT RATING
AGENCIES
SEBI issued regulations for credit rating agencies in 1999.
These regulations are called as Securities and Exchange board of
India. (Credit Rating Agencies) Regulations, 1999.

1. Only commercial banks, public financial institutions, foreign
banks operating in India, foreign credit rating agencies, and
companies with a minimum net worth of Rs 100 core as per
its audited annual accounts for the previous five years are
eligible to promote rating agencies in India.
2. Rating agencies are required to have a minimum net worth of
Rs 5 core.
3. Rating agencies cannot assess financial instruments of their
promoters who have 10 % stake in them.
4. Rating agencies cannot rate a security issued by an entity,
which is (a) a borrower of its promoter. (b) a subsidiary of its
promoter. (c) An associate of its promoter, if (i) there is
common chairman, directors between credit rating agency and
these entities (ii) there are common employees (iii) there are
common chairman, directors, and employees on the rating
committee.
5. Rating agencies cannot rate a security issued by its associated
or subsidiary, if the credit rating agency or its rating
30

committee has a chairman, director or employee, who is also a
chairman, director or employee of any such entity.


3.5 REGISTRATION OF CREDIT RATING
AGENCY

3.5.1 Grant of Certificate: -
 Any person proposing to commence any activity as a credit
rating agency on or after the date of commencement of these
regulations shall make an application to the Board for the
grant of a certificate of registration for the purpose.
 A non- refundable application fee shall accompany an
application for the grant of a certificate.

3.5.2 Promoter of Credit Rating Agency: -
The Board shall not consider an application under unless a person
belonging to any of the following categories promotes the applicant,
a) A Public Financial Institution.
b) A Scheduled Commercial Bank.
c) A Foreign Bank operating in India.
d) A foreign credit rating agency having at least five years
experience in rating securities.
e) Any company or a body corporate, having continuous net
worth of minimum rupees of one hundred crores for the
previous five years prior to filling of the application with the
board for the grant of certificate under these regulations.
31

3.5.3 Eligibility Criteria: -
The Board shall not consider an application for the grant of a
certificate unless the applicant satisfies the following condition:
a) The applicant is set up and registered as a company under the
Companies Act, 1956;
b) The applicant has, in its memorandum of Association,
specified rating activity as one of its main objects;
c) The applicant has a minimum net worth of rupees five cores.
d) The applicant has adequate infrastructure, to enable it to
provide rating service.
e) The applicant and the promoters of the applicant have
professional competence, financial soundness and general
reputation of fairness and integrity in business transactions,
to the satisfaction of the Board.
f) Neither the applicant, nor its promoter, nor any director of the
applicant or its promoter, s involved in any legal proceeding
connected with the securities market, which may have an
adverse effect on the interest of the investors;
g) Neither the applicant, nor its promoters, nor any director, or
its promoter has at any time in the past been convicted of any
offence involving moral turpitude or any economic offence.
h) The applicant has, in its employment, persons having
adequate professional and other relevant experience to the
satisfaction of the Board.
i) The applicant in all other respects is a fit and a proper person
for the grant of a certificate.


32

3.5.4 Application to Conform to the Requirements: -
The Board shall reject any application for a certificate, which
is not complete in all aspects or does not confirm to the requirements
of regulation or instructions. Providing that, before rejecting any
such application, the applicant shall be given an opportunity to
remove. Within thirty days of the date of receipt of relevant
communication, from the Board such objections as may be indicated
by the Board.
Provided further, that the Board may, on sufficient reason
being shown, extend the time for removal of objections by such
further time, not exceeding thirty days, as the Board may consider fit
to enable the applicant to remove such objections.

3.5.5 Furnishing of Information, Clarification and Personal
Representation
a) The Board may require the applicant to furnish such further
information or clarification, as the Board may consider
necessary, for the purpose of processing of the application.
b) The Board, if it so desires, may ask the applicant or its
authorized representative to appear before the Board, for
personal representation in connection with the grant of a
certificate.

3.5.6 Conditions of Certificate and Validity Period
The certificate shall be granted subject to the following
conditions namely;
a) The credit rating agency shall comply with the provisions of
the Act, the regulations made there under and the guidelines,
33

directives, circulars and instructions issued by the Board from
time to time on the subject of credit rating.
b) Where any information furnished to the Board by a credit
rating agency:
Found to be false or misleading in any material particular;
has undergone change subsequently to its furnishing at the
time of the application for the certificate; the credit rating
agency shall forthwith inform the Board in writing;
c) The period of validity of the certificate of registration shall be
three years.

3.5.8 Renewal of certificate
A credit rating agency, if it desires renewal of the certificate
granted to it, shall make to the Board an application for the
renewal of the certificate or registration within 3 months before
expiry of the period of the validity of the certificate.






34










4.1 INVESTMENT INFORMATION AND CREDIT
RATING AGENCY OF INDIA LIMITED
Chapter 4
CREDIT RATING AGENCIES
IN INDIA

35

ICRA Limited (formerly Investment Information and Credit Rating
Agency of India Limited) was set up in 1991 by leading
financial/investment institutions, commercial banks and financial services
companies as an independent and professional Investment Information
and Credit Rating Agency.
Today, ICRA and its subsidiaries together form the ICRA Group of
Companies (Group ICRA). ICRA is a Public Limited Company, with its
shares listed on the Bombay Stock Exchange and the National Stock
Exchange.
Alliance with Moody’s Investors Service
The international Credit Rating Agency Moody‘s Investors Service
1
is
ICRA‘s largest shareholder. The participation of Moody‘s is supported by
a Technical Services Agreement, which entails Moody‘s providing
certain high-value technical services to ICRA. Specifically, the agreement
is aimed at benefiting ICRA‘s in-house research capabilities, and
providing it with access to Moody‘s global research base. The agreement
also envisages Moody‘s conducting regular training and business
seminars for ICRA analysts on various subjects to help them better
understand and manage concepts and issues relating to the development
of the capital markets in India. Besides this formal training programme,
the agreement provides for Moody‘s advising ICRA on Rating-products
strategy, and the Ratings business in general.

4.1.1 The ICRA Factor
 Facilitating Efficiency in Business.
36

ICRA information products, Ratings, and solutions reflect
independent, professional and impartial opinions, which assist businesses
enhance the quality of their decisions and help issuers access a broader
investor base and even lesser known companies approach the money and
capital markets
 The Research Factor.
We strongly believe that the quality of analytical output is a
derivative of an organisation‘s research capabilities. We have dedicated
teams for Monetary, Fiscal, Industry and Sector research, and a panel of
Advisors to enhance our in-house capabilities. Our research base enables
us to maintain the highest standards of quality and credibility.
 Committed to the Development of the Financial Market:-
The focus of ICRA in the coming years will continue to be on
developing innovative concepts and products in a dynamic market
environment, generating and promoting wider investor awareness and
interest, enhancing efficiency and transparency in the financial market,
and providing a healthier environment for market participants and
regulators.




4.1.2 Range of Services
1. Rating Services
37

As an early entrant in the Credit Rating business, ICRA Limited
(ICRA) is one of the most experienced Credit Rating Agencies in the
country today. ICRA rates rupee denominated debt instruments issued by
manufacturing companies, commercial banks, non-banking finance
companies, financial institutions, public sector undertakings and
municipalities, among others. ICRA also rates structured obligations and
sector-specific debt obligations such as instruments issued by Power,
Telecom and Infrastructure companies. The other services offered include
Corporate Governance Rating, Stakeholder Value and Governance
Rating, Credit Risk Rating of Debt Mutual Funds, Rating of Claims
Paying Ability of Insurance Companies, Project Finance Rating, and Line
of Credit Rating. ICRA, along with National Small Industries
Corporation Limited (NSIC), offers a Performance and Credit Rating
Scheme for Small-Scale Enterprises in India. The service is aimed at
enabling Small and Medium Enterprises (SMEs) improve their access to
institutional credit, increase their competitiveness, and raise their market
standing.
2 .Grading Services
The Grading Services offered by ICRA employ pioneering concepts and
methodologies, and include Grading of: Initial Public Offers (IPOs);
Microfinance Institutions (MFIs); Construction Entities; Real Estate
Developers and Projects; Healthcare Entities; and Maritime Training
Institutes. In IPO Grading, an ICRA-assigned IPO Grade represents a
relative assessment of the ―fundamentals‖ of the issue graded in relation
to the universe of other listed equity securities in India. In MFI Grading,
the focus of ICRA‘s grading exercise is on evaluating the candidate
institution‘s business and financial risks. The Grading of Construction
Entities seeks to provide an independent opinion on the quality of
38

performance of the entities graded. Similarly, the Grading of Real Estate
Developers and Projects seeks to make property buyers aware of the risks
associated with real estate projects, and with the developers‘ ability to
deliver in accordance with the terms agreed. ICRA‘s Healthcare Gradings
present an independent opinion on the quality of care provided by
healthcare entities. In the education sector, ICRA offers the innovative
service of Grading of Maritime Training Institutes in India.
3.Consulting Services
ICRA Management Consulting Services Limited (IMaCS), a wholly-owned
subsidiary of ICRA Limited, is a multi-line management and
development consulting firm with a global operating footprint. IMaCS
offers Consulting Services in Strategy, Risk Management, Regulation &
Reform, Transaction Advisory, Development Consulting and Process Re-
engineering. IMaCS‘ clientele includes Banks and Financial Service
Companies, Corporate Entities, Institutional Investors, Governments,
Regulators, and Multilateral Agencies. Besides India, IMaCS has
consulting experience across 35 countries in South East Asia, Northern
Asia, West Asia, Africa, Western Europe, and North America.





4. Equity Research Service
39

The ICRA Equity Research Service seeks to provide market participants
with an assessment of the fundamental earning quality of specific
companies and their current relative valuation as reflected by the
prevailing price of their equity shares. An ICRA Equity Research
assessment, while not specifying any target price for the shares evaluated,
captures two key factors–fundamental earning quality and relative
valuation–that influence the price behaviour of equity shares of
companies over the medium and long term. In assessing the relative
valuation of a company‘s equity share, the same is benchmarked against
an appropriate peer set or index

ICRA Equity Research reports are aimed at benefiting all categories of
investors, including retail investors and especially those with a longer
term investment horizon.






4.2 CREDIT ANYLISIS & RESEARCH LIMITED.
40

4.2.1 Overview
CARE Ratings commenced operations in April 1993 and over nearly two
decades, it has established itself as the second-largest credit rating agency
in India. With the rating volume of debt of around Rs.41,822 bn (as
on June 30, 2012) , CARE Ratings is proud of its rightful place in the
Indian capital market built around investor confidence. CARE Ratings
has also emerged as the leading agency for covering many rating
segments like that for banks, sub-sovereigns and IPO gradings.
CARE Ratings provides the entire spectrum of credit rating that helps the
corporates to raise capital for their various requirements and assists the
investors to form an informed investment decision based on the credit
risk and their own risk-return expectations. Our rating and grading
service offerings leverage our domain and analytical expertise backed by
the methodologies congruent with the international best practices.
With majority shareholding by leading domestic banks and financial
institutions in India, CARE‘s intrinsic strengths have also attracted many
other investors.
CARE‘s registered office and head office, is located at 4th floor, Godrej
Coliseum, Somaiya Hospital Road, Sion (East), Mumbai 400 022. In
addition, CARE has regional offices at Ahmedabad, Bangalore, Chennai,
Hyderabad, Jaipur, Kolkata, New Delhi, Pune and international operation
in Male in the Republic of Maldives. With independent and unbiased
credit rating opinions forming the core of its business model, CARE
Ratings has the unique advantage in the form an External Rating
Committee to decide on the ratings. Eminent and experienced
professionals constitute CARE‘s Rating Committee.

41







4.2.2 VISION & MISSION VALUES
VISION
 To be a respected company that provides best - in its field - quality
and value services
MISSION
 To offer a range of high-quality services to all the stakeholders in
the capital market
 To build a pre-eminent position for ourselves in India in securities
analysis, research and information services and to be an
international credit rating agency
 To earn customer satisfaction and investor confidence through
fairness and professional excellence
 To remain deeply committed to our internal and external
stakeholders
 To apply the best possible tools & techniques for securities
analysis aimed to ensure efficiency and top quality
 To ensure globally comparable quality standards in our rating,
research and information services
VALUES
 Integrity and Transparency: Commitment to be ethical, sincere and
open in our dealings
42

 Pursuit of Excellence: Committed to strive relentlessly to
constantly improve ourselves
 Fairness: Treat clients, employees and other stakeholders fairly
 Independence: Unbiased and fearless in expressing our opinion
 Thoroughness: Rigorous analysis and research on every assignment
that we take
4.2.3 CARE's role in Indian Capital Market
Capital Market, both primary and secondary segments, play a vital role
in economic development because of its linkages with the banking
systems and investment communities (including foreign capital flows).
The vibrancy of capital market comes from its volume and varieties of
trades of financial instruments, its liquidity and ability to raise capital
by attracting fresh investments, which are derivatives of sound investor
confidence and transparency. CARE is committed to play a key role by
providing professional, insightful and independent informed opinion
through various grading and rating services, which can serve as a
valuable input to build investor confidence.
CARE‘s credit rating for debt instruments (viz debentures, bonds, asset-
backed securities etc) is a highly-valued credit risk opinion, which helps
the investors to effectively monitor and manage investments based on
their respective risk-return policies. On the other hand, it imparts the
issuers with financial flexibility for wider access to funds at a market-
determined cost related to their credit risk. It can also provide a helping
hand for establishing business relationships (including collaborations)
and awarding contracts to the counter parties.
CARE‘s grading products viz IPO Grading and Equi-Grade have proved
to be valuable means for primary and secondary market development
43

respectively. IPO Grading, through its opinion on fundamentals, works
as one of the important inputs to form long-term equity investment
decision for public offerings. On the other hand, the investor
community can have an unbiased and analytical opinion on the
fundamentals and valuations of any listed entity through Equi-Grade
product.
For the regulators, CARE‘s rating services facilitate in determining the
eligibility criteria and entry barriers for different types of securities, to
monitor financial soundness of borrowers and to promote overall
efficiency in the debt market. Our Equi-Grade product can also be useful
to the stock exchanges for investor education and improve liquidity in the
secondary market. Thus, services of CARE increase the transparency,
leading to a healthy development of the capital market









44



4.3 ONIDA INDIVIUAL CREDIT RATING AGENCY
Onicra Credit Rating Agency is one of the leading Credit and
Performance Rating agencies in India. It provides ratings, risk assessment
and analytical solutions to Individuals, MSMEs and Corporates.
Third party credit and performance rating and assessment helps to create
―trust‖ between players in markets that underpins transactions.

ONICRA plays a central and critical role in collecting and analyzing a
variety of financial, operational, industry and market information,
synthesizing that information, and providing autonomous, reliable
assessments of the entity, thereby providing stakeholders with an
important input into their decision making process.
To realize our goal we have committed ourselves to providing the
stakeholders with objective, timely, independent and forward-looking
credit and performance opinions. The foundation of that dedication is
embedded in several core principles — objectivity, quality,
independence, integrity and transparency.
4.3.1 Function Of ONICRA
Pan India Presence
We deliver services from a national network of Operation Centers and
Regional Offices.
Affiliations
45

Onicra has been acknowledged as pioneers in the field of credit rating by
the Ministry of Finance in the Economic Survey. We are also recognized
and empanelled by the likes of National Small Industries
Corporation (NSIC) for Small Scale Industry (SSI) assessment. We
aempanelled with National Skills Registry (NSR) for Employee
Background Assessment & Profiling. Onicra is ISO 27001 certified.

Process Excellence
Business principles are applied to eliminate defects, to decrease variations
and to reduce inefficiencies. We develop and track operational metrics to
measure process performance. This serves as a means of monitoring
service level and enhancing productivity. Our operation tracking system
is built using six sigma methodologies and industry expertise to ensure
timely delivery of reports and elimination of defects. Our ability to
deliver continuous process improvement is an important value that we
deliver to our clients.
Flexible Offerings
Our services are fully customizable and cater to organisations of all
shapes and sizes. Our team will customize a solution that is appropriate
for your requirements, budget and industry.
Data Security
Our highest priority is to protect your information and maintain the
highest level of privacy.

4.3.2 Rating
Onicra Credit Rating Agency of India Ltd. is one of the leading Credit
and Performance Rating agencies in India. It provides ratings, risk
46

assessment and analytical solutions to Individuals, MSMEs and
Corporates. Third party credit rating and assessment helps to create
―trust‖ between players in financial markets that underpins transactions
and trading. ONICRA plays a central and critical role in analyzing,
assessing and rating various entities to enable transactions.
We provide comprehensive ratings, risk assessment and analytical
solutions to individuals and businesses across all areas enabling clients to
make independent, informed & value based decisions on various
stakeholders. Our commitment is to build credible, independent and
leadership positions to help our customers‘ business grow profitably and
securely.

1.Micro, Small and Medium Enterprises (MSME) Rating
Small & medium firms play a key role in transition and developing
countries. These firms typically account for more than 90% of all firms
outside the agricultural sector, constitute a major source of employment
and generate significant domestic and export earnings. As such, SME
development emerges as a key instrument in poverty reduction efforts.
India is no exception and a large part of business in the country is done
through SMEs. Today, it accounts for nearly 35% of the gross value of
output in the manufacturing sector and over 40% of the total exports from
the country. The sector's contribution to employment is next only to
agriculture in India. It is therefore an excellent sector of economy for
investment.
However, despite its strategic importance in any industrialization
strategy, the opportunities that the Indian landscape presents and its
immense potential for employment generation, the MSME sector
confronts several challenges. Absence of adequate and timely banking
47

finance, limited capital and knowledge, non-availability of suitable
technology, low production capacity, ineffective marketing strategy are
just a few to name. Onicras endeavor to provide an objective assessment
of MSME with regard to their performance capability and financial
strength is helping MSME establish their credibility and thus access
adequate and timely financing at affordable rate.
4.3.3 Grading
1. Education Grading
With rapid expansion and commercialization of the education sector, it
is imperative that continuous monitoring and controlled mechanism be
built to ensure a systematic enhancement in the quality of education.
There is a wide variation in the quality of training being imparted by
various education institutes making it necessary for a system to be
evolved; where a common platform of benchmarking across the country
is in place.
A publicly available and highly credible bench-marking exercise acts as a
powerful tool for non-intrusive regulation and quality enhancement. This
will lead to healthy functioning of the institutes, providing their
stakeholders a standing in the environmental struggle and increasing their
level of productivity to perform effectively in the Indian and Global
environment.
Onicra Education Grading provides assessment of academic quality of
educational institutions, Programmes conducted therein and their
infrastructure to aid them identify, validate and improve quality of
education and standard of curriculum, thus achieving excellence in
specific facets of education.
48

The service addresses the perceived need among students and other
stakeholders for an informed, reliable and independent opinion on the
quality of education imparted by the various Education Institutes.
2. Healthcare Grading
While ever-increasing demand for healthcare products and services
bring enormous opportunities; some common threats exist like soaring
costs, inequitable and mismanaged access and inconsistent quality.
Gradings foster transparency, accountability and best practices in the
industry.
ONICRA Grading for Healthcare Institutions is an opinion on the relative
quality of healthcare delivered by the institution to its patients.
A healthcare institution with a higher Grading would have relatively
better facilities and processes than those Graded lower.
While evaluating a healthcare institution ONICRA looks into a host of
factors such as availability of infrastructure, equipment, manpower,
systems and clinical algorithms, all from the user‘s point of view.
The evaluation of these core factors involves a review of the institution‘s
resources, processes and outcome to determine its capability to deliver
quality healthcare.
After a grading has been assigned, Onicra monitors the on-going
performance of the institutions.
A transparent system of evaluation and grading serves to benefit not only
the healthcare organization but all stakeholders associated with it.
The grade assigned to a Healthcare Institution is, however, not a
comment on the probability of outcome of any particular treatment,
procedure or surgery


49


















Chapter 5
STUDY OF CRISIL
(Credit Rating Information Services of I ndia Limited)

50


CREDIT RATING AND INFORMATION SERVICES OF
INDIA LTD. (CRISIL)
5.1 OVERVIEW
It is India's leading Ratings, Research, Risk and Policy Advisory
Company based in Mumbai. CRISIL‘s majority shareholder is Standard
& Poor's, a division of The McGraw-Hill Companies and the world's
foremost provider of financial market intelligence. CRISIL pioneered
ratings in India more than 20 years ago, and is today the undisputed
business leader

with the largest number of rated entities and rating
products: CRISIL's rating experience covers more than 45000 entities,
including 30,000 small and medium enterprises (SMEs).
CRISIL offers domestic and international customers (CRISIL Global
Research and Analytics consisting of Irevna and Pipal Research caters to
international clients) with independent information, opinions and
solutions related to credit ratings and risk assessment; energy,
infrastructure and corporate advisory; research on India's economy,
industries and companies; global equity research; fund services; and risk
management.
CRISIL is a global analytical company providing ratings, research, and
risk and policy advisory services.
We are India's leading ratings agency. We are also the foremost provider
of high-end research to the world's largest banks and leading
corporations. With sustainable competitive advantage arising from our
strong brand, unmatched credibility, market leadership across businesses,
51

and large customer base, we deliver analysis, opinions, and solutions that
make markets function better.
Our defining trait is our ability to convert data and information into
expert judgements and forecasts across a wide range of domains, with
deep expertise and complete objectivity.
At the core of our credibility, built up assiduously over the years, are
our values: Integrity, Independence, Analytical Rigour, Commitment and
Innovation.
CRISIL's majority shareholder is Standard and Poor's (S&P). Standard &
Poor's, a part of The McGraw-Hill Companies (NYSE:MHP), is the
world's foremost provider of credit ratings.
Who We Serve
We address a rich and globally diversified client base. Within India our
customers range from small enterprises to the largest corporations and
financial institutions; outside India our customers include the world‘s
largest banks and leading corporations. We also work with governments
and policy-makers in India and other emerging markets in the
infrastructure domain.
How We Add Value
We empower our customers, and the markets at large, with independent
analysis, benchmarks and tools. These help lenders and borrowers, issuers
and investors, regulators, and market intermediaries make better-
informed investment and business decisions. Our offerings allow markets
and market participants to become more transparent and efficient - by
mitigating and managing risk, taking pricing decisions, generating more
revenue, reducing time to market and enhancing returns. By helping
52

shape public policy on infrastructure in emerging markets, we help
catalyse economic growth and development in these countries
5.2 HISTORY OF CRISIL
1987

 January 29: CRISIL, India's first credit rating
agency, is incorporated, promoted by the erstwhile
ICICI Ltd, along with UTI and other financial
institutions.
 Mr. N Vaghul and Mr. Pradip Shah are CRISIL's
first Chairman and Managing Director, respectively.


1988

 January 1: CRISIL commences operations within a
year of its incorporation. The business environment
is far from promising for the one-year old - the
lending rates are fixed, and India has no such thing
as a corporate bond market as yet. And, what's
more, credit rating is an idea that's far ahead of its
times.


1990

 The CRISILCARD Service - providing
comprehensive information and analytical opinion
on India's corporate entities - is launched.


1991

 Despite the odds, and the initial lack of market
acceptance of credit ratings, CRISIL's operations are
53

now well established. It begins to acquire brand
identity, with a reputation for analytical rigour and
independence.


1992

 CRISIL offers technical assistance and training to
help set up Rating Agency Malaysia Berhad, and
MAALOT, the Israeli securities rating company.


1993

 CRISIL's IPO is a whopping success - its 20, 00,000
shares, sold at a premium of Rs.40 per share, are
oversubscribed by 2.47 times.


1994

 Mr. R Ravimohan takes over as CRISIL's Managing
Director.
 CRISIL diversifies business portfolio with a
strategic entry into advisory services, and wins its
first major mandate in the infrastructure policy
advisory domain.


1995

 In partnership with the National Stock Exchange of
India Ltd (NSEIL), CRISIL develops and launches
the CRISIL500 Equity Index, helping investors clue
in on stock price movements.

54


1996

 CRISIL forges a strategic business alliance with
Standard & Poor's (S&P) Ratings Group. The tie-up
is part of CRISIL's strategy to develop its skills and
processes.


1997

 S&P acquires a 9.68 per cent stake in CRISIL. The
alliance with the world's leading rating agency adds
a new dimension to CRISIL's methodologies. It
provides CRISIL with exposure to the international
rating markets and to S&P's rating processes.


1998

 CRISIL sets up India Index Services Ltd (IISL), a
joint venture with NSEIL, to provide a variety of
indices and index-related services and products to
India's capital markets.


1999

 CRISIL's proprietary Risk Assessment Model
(RAM) becomes the banking industry standard:
given the heightened regulatory focus on the banks'
risk management practices, RAM serves as a
customised credit rating model for the banks.


55

2000

 CRISIL acquires the business, and brand, INFAC,
of Information Products and Research Services
(India) Pvt Ltd. INFAC is a leading provider of
research to India's financial sector. The acquisition
strengthens CRISIL's research business, and makes
it India's leading provider of integrated research.
 CRISIL launches the CRISIL Composite
Performance Ranking (CRISIL~CPR) to provide
performance evaluation standards and investment
decision support to mutual fund houses, distributors,
and investors.


2001

 CRISIL sets up subsidiary, Global Data Services of
India Ltd, to standardise published financial data for
analysis.
 CRISIL launches Mutual Fund Awards in
association with CNBC-TV18 - a benchmark award
for India's best performing mutual funds.
 CRISIL launches the CRISIL Young Thought
Leader (CYTL) Award - to attract outstanding talent
and provide a platform to India's future business
leaders to showcase their views.


2002

CRISIL sets up:
 The Centre for Economic Research - to apply
economic principles to live business situations
56

 CRISIL MarketWire - to provide real-time financial
news services to help clients make pricing- and
investment-related decisions



2003

 CRISIL sets up its investment and risk management
services group to offer integrated risk management
solutions and advice to banks and corporates.
 CRISIL follows it up with its first overseas
acquisition - EconoMatters Ltd (later the Gas
Strategies Group), a London-based company
providing natural gas related consulting, information
and training, and conference-organising services.


2004

 CRISIL expands its global reach further with an
equity investment in the world's first regional rating
agency, the Caribbean Information and Credit
Rating Services Limited (CariCRIS), which CRISIL
also helps set up.
 The CRISIL Awards for Excellence in Municipal
Initiatives are instituted, to recognise outstanding
programmes in urban development.


2005

 The strategic alliance with S&P since 1996
culminates in S&P's acquiring majority control of
57

CRISIL.
 CRISIL makes its second overseas acquisition, of
Irevna, thus adding equity research to its wide
canvas of work. Irevna is a leading global equity
research and analytics company.
 CRISIL launches Small and Medium Enterprise
(SME) Ratings to serve the specialised needs of the
SME sector.
 CRISIL partners CNBC-TV18 for Emerging India
Awards - the first platform to recognize and reward
the achievements of India's Small & Medium
Enterprises.


2006

 CRISIL launches IPO grading services to provide
investors with independent, reliable, and consistent
assessments of the fundamental strengths of new
public issues.
 Irevna is ranked globally as the top Investment
Research Outsourcing Firm by The Black Book of
Outsourcing.


2007

 Ms. Roopa Kudva takes over as Managing Director
and CEO of CRISIL, following Mr. Ravimohan's
appointment as Managing Director and Region
Head of S&P, South Asia.
 CRISIL assigns India's first Bank Loan Rating
58

under the Reserve Bank of India's Basel-II related
regulations.
 The Pension Fund Regulatory and Development
Authority awards CRISIL with a prestigious
mandate to assist in the selection of Fund Managers
under the New Pension Scheme.
 The Black Book of Outsourcing ranks Irevna the
No. 1 Financial Services Industry Analytics
Outsourcing Firm.
 CRISIL launches Real Estate Awards with CNBC
AWAAZ. The award honors India's exemplary
developers and builders.


2008

 CRISIL launches Complexity Levels, an initiative to
strengthen India's capital markets by providing
greater transparency to investors.
 CRISIL's revenues cross Rs.5 billion in 2008.


2009

 CRISIL's SME Ratings group assigns its 5000th
SME rating.
 CRISIL captures about half of India's bank loan
rating market.
 Irevna is ranked globally by The Black Book of
Outsourcing as the No. 1 Investment Research and
Analytics Outsourcing Firm.
 CRISIL Research launches Independent Equity
59

Research (IER).


2010

 CRISIL moves into a new, corporate head office -
the new CRISIL House, at Powai, Mumbai, is a
state-of-the-art, green building.
 CRISIL SME Ratings crosses its 15,000th SME
rating.
 CRISIL launches Real Estate Star Ratings.
 CRISIL acquires Pipal Research, further
strengthening its leadership in the KPO industry.


2011

 CRISIL launches Education Grading, beginning
with business schools
 CRISIL Rating enhances access to funding for
SMEs; Announces 20,000th SME Rating
 CRISIL Ratings launches Solar grading
 CRISIL Research launches Gold and Gilt Index
 CRISIL Global Research & Analytics receives
NASSCOM Exemplary Talent Practices Award







60







5.3 CREDIT RATING PROCESS















Crisil Issuer
Request For Rating
Signs rating agreement
Provide rating
information & rating fees.
Management intraction
with the rating team.
Accept the rating Or
Appeal
Rating team assigned .Team
collect information, conduct
preliminary analyisis.
Team conduct site visit &
performance analysis
Analysis presented to
rating commitee
Rating assigned and
communicated to issuer
Rating disseminated &
61







5.4 CREDIT RATINGS
A CRISIL rating reflects CRISIL's current opinion on the relative
likelihood of timely payment of interest and principal on the rated
obligation. It is an unbiased, objective, and independent opinion as to the
issuer's capacity to meet its financial obligations.
So far, CRISIL has rated 30,000 debt instruments, covering the entire
debt market.
The debt obligations rated by CRISIL include:
 Non-convertible debentures/bonds/preference shares
 Commercial papers/certificates of deposits/short-term debt
 Fixed deposits
 Loans
 Structured debt
CRISIL Ratings' clientele includes all the industry majors - 23 of the BSE
Sensex constituent companies and 39 of the NSE Nifty constituent
companies, accounting for 80 per cent of the equity market capitalisation,
are CRISIL's clients.
CRISIL's credit ratings are
62

 An opinion on probability of default on the rated obligation
 Forward looking
 Specific to the obligation being rate
But they are not
 A comment on the issuer's general performance
 An indication of the potential price of the issuers' bonds or equity
shares
 Indicative of the suitability of the issue to the investor
 A recommendation to buy/sell/hold a particular security
 A statutory or non-statutory audit of the issuer
 An opinion on the associates, affiliates, or group companies, or the
promoters, directors, or officers of the issuer
CRISIL ratings are based on a robust and clearly articulated analytical
framework, which ensures comprehensiveness, standardisation,
comparability, and effective communication of the ratings assigned and
of every timely rating action. The assessment is based on the highest
standards of independence and analytical rigour.
CRISIL rates a wide range of entities, including:
 Industrial companies
 Banks
 Non-banking financial companies (NBFCs)
 Infrastructure entities
 Microfinance institutions
 Insurance companies
 Mutual funds
 State governments
63

 Urban local bodies



5.5 PLACING SUSTAINABILITY IN ITS BUSINESS
CONTEXT
CRISIL is a knowledge-driven company geared towards making markets
function better, based on strong intellectual capital. Driven by this
explicit and overarching purpose, CRISIL's work has fostered tremendous
positive externalities.
In India, CRISIL offers credit rating, research, and advisory services.
Credit rating enriches market functioning by making large amounts of
credible, usable information and analysis freely available to all market
participants. CRISIL's role in this sphere is unparalleled: in 2011 alone,
CRISIL released over 7,000 rating analyses, and CRISIL's aggregate
studies of credit ratings are benchmarks that the market uses to
understand and predict trends in credit quality. Other ratings and grades
that CRISIL publishes are also freely available. CRISIL's equity research
and company reports (covering over 1,500 companies), mutual funds
reports, releases, and opinion pieces on developments in industries and in
the economy, are all published and distributed. This is a huge amount of
information and analysis, covering all aspects of economic activity in
India, and all of it is available and is widely disseminated to the market.
CRISIL's work in the risk management space has helped many leading
64

banks and financial institutions manage and mitigate their risks,
contributing to the stability of the Indian financial sector.
Globally, CRISIL offers high-end research and analytics services to the
world's leading commercial and investment banks, insurance companies,
and corporations. Today CRISIL Global Research & Analytics (CRISIL
GR&A) has the largest team of equity research analysts in the world; its
research support covers 90% of global trading volumes and 88% of
global market capitalisation in equities. Similarly, in the credit research
space, CRISIL GR&A has the largest team of credit analysts in the world
outside rating agencies, and its research supports around 80% of the
global structured finance market. CRISIL thus makes available to its
clients a vast amount of analytical capacity, helping them make better and
faster decisions, and contributing to global market efficiency
5.6 THE OUTLINES OF CRISIL'S SUSTAINABILITY EFFORT
CRISIL's sustainability philosophy aims to benefit stakeholders across
the spectrum by building on the strengths and capabilities acquired
through its business operations. The effort rests on four pillars:
Fostering Financial Awareness, Protecting the Environment, Giving
Back to Society, and Respecting the Individual.
a. Fostering Financial Awareness
b. Protecting the Environment
c. Giving Back to Society
d. Respect for the Individual
5.6.1 Fostering Financial Awareness
Financial awareness forms an integral part of CRISIL's corporate social
responsibility (CSR) agenda and integrates tightly with CRISIL's role of
65

making markets function better. As part of this commitment, CRISIL is a
knowledge partner of Swatantra, India's largest investor awareness
campaign. Swatantra is initiated by UTI Mutual Fund in association with
the Union Ministry of Corporate Affairs; over the next few months, it will
reach investors in more than 6,000 Indian villages and 500 cities. CRISIL
has developed specialised content for Swatantra in the form of easy-to-
understand one-page guides to mutual fund investments. As part of
Swatantra, CRISIL will make presentations to small investors at more
than 100 locations, and to more than 20 clusters of small and medium
enterprises (SMEs). CRISIL will also contribute regular opinion pieces in
The Times of India under this initiative.

5.6.2 Protecting the Environment
CRISIL is fully committed to the environment. Perhaps the greatest
symbol of this commitment is CRISIL House, CRISIL's headquarters in
Mumbai, which holds the coveted LEED Platinum level certification.
CRISIL's initiatives can broadly be summarised under three heads:
 Saving energy
Energy efficiency underlies the green building concept. at CRISIL
House in Mumbai, which houses around 40% of CRISIL's
employees, energy efficiency has been adopted as a guiding
philosophy, and manifests itself in a number of the building's
features, including:
 Frugal use of artificial lighting
Around 75% of the daytime working light requirements in CRISIL
House are met using natural light, compared with an average of 50-
60% for other leading buildings in the category. An atrium in the
66

centre of the building brings light to workstations on all floors, and
large windows on most floors directly light the work areas.
Workstations have task lights that are used as needed in the
evenings; the use of area lighting is minimized
 Energy-efficient air-conditioning:
The design and usage of the air-conditioning system in CRISIL
House conserves energy and minimises electricity usage. Air-
conditioning units are specific to areas; individual units are
controlled and adjusted zone-wise using an integrated building
management system. The building is designed and built to
minimise thermal leakage, both inward and outward.
 Server virtualisation:
This initiative resulted in a net reduction in the number of servers
in 2011 to 229 from 345, saving around 202,000 Kilowatt hours of
electricity.
 Reducing pollution
Pollution is an endemic problem in cities today, and CRISIL has
taken numerous innovative steps to combat it. A few of these are:
5.6.3 Giving Back to Society
Notable achievements in 2011 included a large number of registrations
for CRISIL's Payroll Giving scheme, CRISIL's participation in the
McGraw-Hill Global Volunteer Day event, and the inception of CRISIL's
Giving Circle.
 Payroll Giving for donation to various causes
Over 600 CRISIL employees have enrolled in this programme. In
2011, CRISILites donated around Rs.2 million to various causes of
67

their choice. CRISIL has itself contributed 10% of the amount as
the processing charges for these donations.

 McGraw-Hill Global Volunteer Day
Celebrated in June, McGraw-Hill Global Volunteer Day enables
employees of the McGraw-Hill Companies to contribute a day's
effort to a cause of their choice. Over 250 CRISILites participated
in more than 20 activities, including building houses for the
underprivileged as part of a Habitat for Humanity project, and
visiting NGOs working with children. In 2011, for the first time,
CRISIL employees in Argentina also participated in the Global
Volunteer Day activities.
 CRISIL Giving Circle
CRISIL enabled interested employees to get together and choose a
project that they would jointly fund. The project that the employees
chose is a centre of Mumbai Mobile Creches, which provides food,
education, and a secure environment to about 20 children of
migrant construction labourers. These children would otherwise
have had to endure the hardship and hazards of life on construction
sites. The CRISIL employees, contributing around Rs.60,000 each,
funded teachers' salaries for a period of one year at this centre.

5.6.4 Respect for the Individual
The cornerstone of CRISIL's relationship with its employees is an attitude
of respect. CRISIL is committed to providing a secure and nurturing
68

environment for its employees, encouraging them to grow and achieve
their potential.
Securing
 Physical security:
CRISIL offices have strong security teams and stringent
procedures for access and safety. Going beyond the basics, CRISIL
has implemented numerous measures such as home drops for
employees working late, with special care for the security of
women employees.
 Fairness:
CRISIL is bound by its own practices, and by the McGraw-Hill
Code of Business Ethics, to ensure that no employee faces
discrimination or harassment. Women are well-represented in the
CRISIL hierarchy, and the pursuit of diversity is a key goal in
hiring and people development in CRISIL
Engaging
CRISIL conducts annual Employee Engagement Surveys, now in
their fourth year; the participation level is more than 95%, and the
consistently improving scores and great insights about keeping
people motivated and making their work meaningful speak to the
usefulness of this tool.
Developing
CRISIL carried out more than 83,000 person-hours of training in
2011, covering over 90% of its employee base. CRISIL won a
NASSCOM skill enhancement award in 2011.
69

CRISIL recognises the criticality of the sustainability agenda as it
takes centre stage in the corporate consciousness worldwide.
Roopa Kudva, MD & CEO of CRISIL, observes:
A sustainability mindset and the pursuit of corporate success are
mutually reinforcing. Sustainability thinking is no longer a matter
of choice, it is a necessity."






5.7 FAQ FOR CRISIL
What is a credit rating?
A credit rating represents the rating agency's opinion on the likelihood of a rated
debt obligation being repaid in full and on time. A simple alphanumeric symbol
is normally used to convey a credit rating.
How does a credit rating agency differ from a credit bureau?
A credit rating agency provides an opinion relating to future debt repayments by
borrowers. A credit bureau provides information on past debt repayments by
borrowers.
Is a credit rating a recommendation to invest in a debt instrument?
70

A credit rating is not a recommendation to buy, hold, or sell a debt instrument.
A credit rating is one of the inputs used by investors to make an investment
decision.
What is the difference between credit rating and equity research?
Credit ratings are assigned to debt instruments, while equity research relates to
equity shares. A credit rating is focused on the risk of non-payment, the primary
variable in debt instruments. Equity research is focused on growth possibilities,
for that is what drives equity valuations.
How does a credit rating differ from an audit?
A credit rating agency relies on a variety of information sources, including
published annual reports. An audit process is designed to detect fraud or
misrepresentation of information, whereas the credit rating process is not.


How does a rating agency operate when issuers' disclosure levels are low?
During a credit rating exercise, issuers provide rating agencies with confidential
information and insights into business strategy that are not normally available in
the public domain. As a policy, CRISIL does not assign credit ratings without
issuer interaction, except when a previously rated instrument is outstanding or
when a specific investor asks for a private exercise. In cases where CRISIL
believes that the information is inadequate to assign a rating, it may not do so.
Also, for rated clients, if subsequent information is not adequate, CRISIL may
suspend the rating and inform the investors.
Does a credit rating assure repayment?
71

A credit rating is not an assurance of repayment of the rated instrument. Rather,
it is an opinion on the relative degree of risk associated with such repayment.
This opinion represents a probabilistic estimate of the likelihood of default.
Who pays for a credit rating?
Most credit rating agencies across the world use a revenue model where the
issuer pays for the credit rating. Alternative revenue models (such as the one
based on investor fees) pose numerous challenges in terms of ease and
practicality of implementation that have not yet been overcome.
Who regulates a rating agency?
The capital market regulator regulates rating agencies in most regions. In India,
the capital markets regulator, the Securities and Exchange Board of India
(SEBI), regulates the rating agencies in the country.
Is competition desirable in the credit rating industry?
Competition in the credit rating industry is desirable to meet the 'better service
at a cheaper price' objective on an ongoing basis. However, it is essential to
guard against some undesirable effects of competition, such as lax ratings or
sub-optimal quality of research and analysis.
What do the various credit rating symbols mean?
CRISIL uses simple alphanumeric symbols to convey credit ratings. CRISIL
assigns credit ratings to debt obligations on three basic scales: the long-term
scale, the short-term scale, and the fixed deposit scale. To illustrate, CRISIL's
long-term credit rating scale and the description associated with each category
on the rating scale is given below:

72

Symbol
(Rating
category).
Description (with regard to the likelihood of
meeting the debt obligations on time)
AAA Highest Safety
AA High Safety
A Adequate Safety
BBB Moderate Safety
BB Inadequate Safety
B High Risk
C Substantial Risk
D Default





ANALYSIS OF DATA
How many companies instrument rated by three credit rating agencies?
Agencies Companies
CRISIL More than 25000
ICRA More than 4000
CARE More than 8488
73




 CRISIL
 ICRA
 CARE

As par above, the CRISIL is the India‘s largest Credit Rating Agency
rated the companies‘ instrument more than 25,000 and below that
ICRA and CARE rated the instrument of companies‘ more than 4,000
and 8488 respectively.

SUGGESTION
 In spite of all benefits of rating one must remember the fact that
rating is merely for guidance & is not a recommendation to buy or
sell or retain an instrument.
74

 The investors themselves have to become aware of rating
mechanism & have start using the rating as a tool of risk
assessment.
 Industries should go for the credit rating to create a good image at
national as well as international level. Before going to public or
financial institution for the fund.














75

CONCLUCION
Thus to conclude, ratings are based on an in-depth study of the
industry and an evolution of the strength and weakness of the company.
Ratings are opinion on creditworthiness based on objective and
speculative analysis. Rating is done based on information. Credit rating is
the assessment of a borrower‘s credit quality.
The Credit rating is systematic assessment of two type risk namely
―business risk‖ and ―payment risk‖ with view to protect small investors
and on the basis of rating grades the investors choose the instrument for
the investment and also rating is given into consideration the quality of
management, corporate strategy, economic outlook & international
environment.
Credit rating agencies should be made accountable for any faulty
rating by penalizing them or even de-recognizing them, if needed. Credit
rating agencies cannot afford to commit too many mistakes as it is the
investor who pays the price to their mistakes.
Credit rating agencies now undertake financial analysis,
individuals‘ institution, and governments. In India all the rating agencies
have its own rating symbols; the rating differs from instrument to
instrument and company to company.
Rating agencies also provides advisory services apart from the
rating services.



76

BIBLIOGRAPHY
Books
 AGASHE ANIL, ―Financial Services, Markets & Regulation‖,
Himalaya Publication House, Year 2010
 BABU RAMECH G., ―Indian Financial System‖,
Himalaya Publication House, Year 2011
 BHARTI V. PATHAK, ―The Indian Financial System, Market,
Institution & Services‖,
Dorling Kindersley (India), Year 2008
 GORDIN & NATRAJAN, ―Financial Market & Service‖ ,
Himalaya Publishing House, Year 2007

News Papers :-
 TIMES OF INDIA
 DAILY NEWS & ANALYSIS
 HINDUSTAN TIMES
 ECONOMIC TIMES

Websites:-
 www.financialexpress.com
77

 www.standardpoor.com
 www.crisilresearch.com
 www.icrarating.com
 www.care.org
QUESTIONNAIRE
For CRISIL (Credit Rating Information Services of India
Limited)
Name of Manager:
No. of Services: yrs
Age: yrs Gender: M/F
1. When the CRISIL was established?

2. How many companies are rated by CRISIL?



3. Out of that, which are the top list Companies?



4. What type of data CRISIL collect from companies, for rating
their instrument?



78

5. How CRISIL analyses the data, provided by the company?

79


6. What is the process followed by CRISIL for rating the
instrument?



7. Does, rating or grading actually shows the risked involved in
instrument?
YES NO
8. If yes, then How?



9. Could CRISIL change the rating of any instrument after some
period?



10. Can rating agencies reduce the scams of fake issue?





SIGNATURE

80


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