Credit Rating in India

Credit rating in India
SUMMERY
Credit enabling rating the usually investor expressed to in alphabetical between s y mb o l s , a r e a s i mp l e a n d e a s i l y u n d er s t o o d t o o l di f f e r e n t i a t e i n s t r u me n t s o n t h e b a s i s o f t h e i r c r e d i t q u a l i t y . C r e d i t r a t i n g h a d i t s o r i g i n i n t h e f i n a n c i a l cr i s i s o f t h e U . S . i n 1 8 3 7 . T h e f i r s t me r c a n t i l e c r e d i t : R a t i n g agency was set up in New York in 1841 to rate the a b i l i t y o f t h e me r c h a n t s t o p a y f i n a n c i a l o b l i g a t i o n s . I mp o r t a n c e o f c r e d i t r a t i n g t o I n v e s t o r s f o r r i s k recognition and Fair Assessment of issuers c r e d i b i l i t y , Q u i c k d e c i s i o n b e t t er c h o i c e A d v a n t a g e s t o I n t e r me d i a r i e s , A d v a n t a g e s t o R e g u l a t o r s C r e d i t rating is of recent origin in India. The first credit rating institution in India was setup in 1988. It was christened as Credit Rating and Information S e r v i c e s o f I n d i a L t d . ( C R I S I L ) i n a l l t h er e ar e f o u r credit rating agencies functioning in the country the m o s t d o mi n a t i n g f a c t o r s i s t h e r e p u t a t i o n o f t h e c r e d i t r a t i n g a g e n cy a n d i t s a n a l y t i c a l c r e d i b i l i t y . Credible and Independent Structures and Procedures. Market forces viz., issuers, Corporate Disclosure and Credit Market
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Education
u n d e r wr i t e r s ,
Reliance
on
the
M a r k e t M e c h a n i s m d G o v e r n me n t . E x i s t e n c e o f D e b t
I s s u e r C o mp a n y a p p o i n t s R a t i n g A g e n cy T h e r a t i n g a g e n c i e s a r e a p p r o a c h e d by a pr o s p e c t i v e i s s u e r t h r o u g h a f o r m a l r e q u e s t t o r a t e i t s d e b t / c o mm e r c i a l paper/fixed deposits.The rating agency appoints a team to undertake the\rating work. T h e t e a m n o r ma l l y c o mp r i s e s me mb e r s h a v i n g t h e required expertise and skills to evaluate the issue of the f i r m. T h e issuer with is requested to several to pr o v i d e i mp o r t a n t i n f o r ma t i o n Regard
business and financial risks. Business risk includes details of industry characteristics, market position, T h e r a t i n g a g e n cy m i n u t e l y e x a mi n e s t h e i n f o r m a t i o n about the industry characteristics of the issuer as it i s a k e y d e t e r mi n a n t o f t h e l e v e l o f v o l a t i l i t y i n earnings of any business. The Rating C o m mi t t e e of report after holds a the analysis and preparation preview meeting
f o l l o w e d b y r a t i n g me e t i n g t o a s s i g n r at i n g B u s i n e s s A n a l y s i s F i n a n c i a l A n a l y s i s i s , M a n a g e me n t E v a C r e d i t R a t i n g A g e n c i e s M a ny F a c t o r s c o n t r i b u t i n g t o s u c c e s s o f c r e d i t r a t i n g & P r o b l e m F a c e d by C R I S I L
HISTORICAL BACKGROUND
J o u r n a l i s t T h o m a s F r i e d ma n o n c e s a i d , T h e r e a r e t w o s u p e r p o w e r s i n t h e w o r l d t o d ay . T h e r e s t h e U n i t e d S t a t e s a n d t h e r e s M o o d y s B o u n d R a t i n g S e r v i c e . T h e U S c a n d e s t r o y by d r o p p i n g b o mb s a n d M o o d y s c a n d e s t r o y t h e m by d o w n g r a d i n g t h e i r b o u n d s . r a t i n g a g e n c i e s p l ay a k ey r o l e i n t h e i n f r a s t r u c t u r e o f m o d e r n f i n a n c i a l sy s t e m. The origin of credit rating can be traced to the 1840s, following the financial crisis of 1837, Louis T a p p a n e s t a b l i s h e d t h e f i r s t m e r c a n t i l e cr e d i t a g e n cy i n N e w Y o r k i n 1 8 4 1 . T h e a g e n cy r a t e d t h e a b i l i t y o f m e r c h a n t s t o p ay t h e i r f i n a n c i a l o b l i g a t i o n s . I t w a s s u b s e q u e n t l y a c q u i r e d by R o b e r t D u n a n d i t s f i r s t rating guide was published in 1859. Another similar agency was set up by John Bradstreet in 1849, which published a rating book in 1857.These two agencies w e r e me r g e d t o g e t h e r t o f r o m D u m & B r a d s t r e e t i n 1 9 3 3 , w h i c h b e c a me t h e o w n e r o f M o o dy s I n v e s t o r s Service in 1962. The history of Moodys itself goes b a c k a b o u t 1 0 0 y e ar s J o h n M o o d y f o u n d e d M o o dy s Investors Service, and in 1909 published his Manual o f R a i l r o a d S e c u r i t i e s w i t h c o mm e n t s o n 2 0 0 ma j o r r a i l r o a d c o mp a n i e s b y J o h n M o o d y . T h i s ma n u a l c o v e r e d t h e r a i l r o a d c o mp a n i e s o p er a t i n g t h e n i n t h e
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U n i t e d S t a t e s . T h i s w a s f o l l o w e d by o t h e r r e p o r t s wherein John Mood assigned ratings to all types of i s s u e r s . T h i s w a s f o l l o w e d by t h e r a t i n g o f u t i l i t y and industrial bounds in 1941, and the rating of b o u n d s i s s u e d by U S c i t i e s a n d o t h er m u n i c i p a l i t i e s in the early 1920s. Further expansion of the credit rating industry took p l a c e i n 1 9 1 6 , w h e n t h e P o or s p u b l i s h i n g C o m p a n y a n d t h e P o o r s p u bl i s h i n g c o mp a n y m e r g e d i n 1 9 4 1 to form Standard and Poors which was subsequently taken over by McGraw-Hill in 1966. I n 1 9 4 1 S t a n d a r d a n d P o or s C o r p o r a t i o n s t a r t e d c r e d i t r a t i n g o p er a t i o n a n d o v er a p e r i o d o f t i me M o o d y a n d S t a n d a r d s & p o o r c a me t o b e w i d e l y recognized for rating business as international rating a g e n c y i n J a p a n w h i c h h a d a m a j o r i n v e s t o r ma r k e t . Other agencies such as Japan Bond Research Institute, Japan credit Rating Agency and Nippon I n v e s t o r s S e r v i c e s c a me t o b e e s t a b l i s h e d s o o n thereafter. F o r a l mo s t 5 0 y e ar s , s i n c e t h e s e t t i n g u p o f F i t c h Publishing in 1924, there were no major new entrants i n t h e f i e l d o f cr e d i t r a t i n g a g e n c i e s c o mm e n c e d operation all over the world.
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CONCEPT OF CREDIT RATING

R a t i n g s , u s u a l l y e x p r e s s e d i n a l p h a b e t i c a l sy mb o l s , a r e a s i mp l e a n d e a s i l y u n d er s t o o d t o o l e n a b l i n g t h e i n v e s t o r t o d i f f e r e n t i a t e b e t w i n s t r u me n t s o n t h e basis of theit credit quality. Credit ratingis the s y mb o l i c i n d i c a t o r o f t h e c u r r e n t o p i n i o n o f t h e relative birity of1fi to service debt obligations in a t i me l y fashion with specific It reference is to the on i n s t r u me n t the different i n s t r u me n t s . T h e t e r m C r e d i t R a t i n g c o mp r i s e s t w o w o r d s : credit and rating. Credit is trust in a persons a b i l i t y a n d i n t e n t i o n t o p a y or r e p u t a t i o n o f s o l v e n c y a n d h o n e s t y . R a t i n g me a n s e s t i t h o f , o r t o a s s i g n I i i e tOlassifying a persons position with reference to a p a r t i c u l a r s u b j e c t m a t t e r . I n o t h er w or d s , c r e d i t i s a n act of assigning values by e s t i ma t i n g worth or r e p u t a t i o n o f s o l v e n cy a n d h o n e s t y s o a s t o r e p o s e trust in a persons ability and intention to repay. T h u s , c r e d i t r a t i n g c o u l d b e d e f i n e d a s a n e x pr e s s i o n o f a n o p i n i o n t h r o u g h s y mb o l s a b o u t c r e d i t q u a l i t y o f
5
being
rated.
focused
c o mm u n i c a t i n g t o i n v e s t o r s t h e r e l a t i v e r a n k i n g o f loss probability for a given fixed i n c o me i n v e s t me n t , i n c o mp a r i s o n w i t h o t h e r r a t e d
t h e i s s u e r o f s e c u r i t i e s or c o mp a n y w i t h r e f e r e n c e t o s e l l t h a t s e c u r i t y . I t pr o v i d e s r i s k w h i c h i s o n e o f t h e several factors in investor decision making. It does not indicate market risk or forecast future market p r i c e . I t i s a l w ay s a s p e c i f i c e v a l u a t i o n d o n e f o r a p a r t i c u l a r i n s t r u me n t . T h e r a t i n g p r o c e s s i s i t s e l f b a s e d o n c e r t a i n g i v e n s . T h e a g e n cy , f o r i n s t a n c e , does not perform an audit. Instead it: s required rely i n f o r ma t i o n a n d o pi n i o n pr o v i d e d b y t h e i s s u e r a n d collected In by analysts rating, from b ot h different sources, and including personal interaction with various entities. d e t e r mi n i n g quantitative q u a l i t a t i v e a n a l y s e s a r e e mp l o y e d . T h e j u d g me n t i s qualitative it nature and the use of quantitative analysis is to ma k e the best possible overall q u a l i t a t i v e j u d g me n t b e c a u s e u l t i ma t e l y t h e r a t i n g i s an opinion.
ORIGIN OF CREDIT RATING

C r e d i t r a t i n g h a d i t s o r i g i n i n t h e f i n a n c i a l cr i s i s o f t h e U . S . i n 1 8 3 7 . T h e f i r s t me r c a n t i l e c r e d i t : R a t i n g agency was set up in New York in 1841 to rate the a b i l i t y o f t h e m e r c h a n t s t o p ay f i n a n c i a l o b l i g a t i o n s . T h i s a g e n c y w a s l a t e r a c q u i r e d by R o b e r t D u n . I t published its first Rating Guide in 1859. John B r a d s t r e e t s e t u p t h e s e c o n d c r e d i t r a t i n g a g e n cy i n 1849. It published a rating book in 1857. In 1933, t h e s e t w o a g e n c i e s w er e m e r g e d t o f o r m D u n & Bradstreet. Manual of In 1900, John M o o dy established further M o o d y s I n v e s t o r S er v i c e . H e p u b l i s h e d i n 1 9 0 9 t h e Railroad Securities. Moodys published a rating of utility and industrial bonds in 1914 and the rating of bonds issued by U.S. cities a n d o t h e r m u n i c i p a l i t i e s i n t h e e ar l y 1 9 2 0 s . I n 1 9 1 6 , P o o r s P u b l i s h i n g C o mp a n y p u bl i s h e d t h e i r first rating. This was followed by Standard Statistics C o mp a n y i n 1 9 2 2 . T h e s e t w o w e r e m e r g e d i n 1 9 4 1 t o form Standard & Poors which was subsequently t a k e n o v e r b y M c G r a w H i l l i n 1 9 6 6 . A n u mb e r o f credit rating Agencies were set up in the 1970s. T h e s e i n c l u d e d t h e C a n a d i a n B o n d R a t i n g S er v i c e s . T h o mp s o n
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Bankwatch,
Japanese
Bond
Rating
I n s t i t u t e , M c C a r t h y C r i s t a n i a n d M a f f e i , D o mi n i c a n Bond Rating Service, IBCA Ltd., and Duff & Phelps Credit Rating Company. In India, the first credit rating agency, viz., the Credit Rating and Information Services of India Ltd., (CRISIL), was set up in 1987. This was followed by the setting up o f I C R A L t d . , i n 1 f o r m e r l y c a l l e d a s I n v e s t me n t I n f o r m a t i o n a n d C r e d i t R a t i n g A g e n cy o f I n d i a L t d . Credit Analysis and Research Ltd. (CARE), was set up in 1994. In 1996, Duff & Phelps Credit Rating (P) Ltd., was set up by Duff & Phelps in association with Indian non-banking finance Companies (NBFCs).
IMPORTANCE OF CREDIT RATING

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Credit rating is highly useful to Investors, Issuers, I n t e r me d i a r i e s a n d R e g u l a t o r s . T h e m e r i t s o f c r e d i t rating . Advantages to Investors: ( i ) C r e d i t r a t i n g p r o vi d e s s y mb o l s w h i c h r e p r e s e n t degree of risk involved. ( i i ) A b s e n c e o f a ny l i n k b e t w e e n t h e i s s u e r a n d r a t i n g a g e n c y e n s u r e s f a i r a s s e s s m e n t o f cr e d i b i l i t y o f I s s u e r C o mp a n y . (iii)It tells the investor about safety and risks as related to each of these gr o u p s are discussed hereunder
involved. (iv)It saves time and energy and thus, relieves the investor from the burden of getting first-hand correct i n f o r ma t i o n a b o u t t h e i n s t r u me n t a n d t h e i s s u e r . (v)Quick decisions and easy understanding of
i n v e s t me n t o p p or t u n i t i e s .
Advantages to Issuers:
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(i)Wider investor base is exposed. (ii) Rating acts as a marketing tool. ( i i i ) I t r e d u c e s t h e c o s t o f b or r o w i n g a s a h i g h l y rated instrument may carry lesser returns or interest. ( i v ) E n h a n c e me n t goodwill. in c o mp a n y s reputation and
A d v a n t a g e s t o I n t e r me d i a r i e s : ( i ) I t i s a u s e f u l t o o l i n t h e pr o c e s s f n m r a c i n g u n d e r w r i t i n g , p l a c e me n t , a n d p r o mo t i o n o i s s u e s . (ii) The brokers, dealers and merchant bankers could u s e r a t i n g a s a n i n p u t f o r t h e i r mo n i t o r i n g . (iii) The me r c h a n t use cr e d i t r at i n g for pr e -
p a c k a g i n g o f i s s u e s by w a y o f a s s e t s e c u r i t i z a t i o n .
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A d v a n t a g e s t o R e g u l at o r s : ( i ) T h e r e g u l a t or s h a v e p r o mo t e d t h e u s e o f c r e d i t r a t i n g b y ma k i n g i t o b l i g a t or y f o r I s s u e r s . ( i i ) T h e r e g u l a t or s r e s t r i c t e n t r y i n t o t h e m a r k e t o f n e w i s s u e s r a t e d b e l o w a p a r t i c u l a r gr a d e . (iii) The r e g u l a t or s for stipulate of different rated and margin u nr a t e d
r e q u i r e me n t s
mortgage
i n s t r u me n t s a n d pr e v e n t i n s t i t u t i o n a l i n v e s t o r s f r o m p u r c h a s i n g o r h o l d i n g o f i n s t r u me n t s r a t e d b e l o w a particular level. In India, as per the regulations of the Securities and Exchange Board of India, public issues of debentures a n d b o n d s r e d e e m a b l e b e y o n d a p er i o d o f 1 8 mo n t h s need credit rating.
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CREDIT RATING THE INDIAN SCENARIO

Credit rating is of recent origin in India. The first credit rating institution in India was setup in 1988. It w a s c h r i s t e n e d a s C r e d i t R a t i n g a n d I n f o r ma t i o n S e r v i c e s o f I n d i a L t d . ( C R I S I L ) i n a l l t h er e ar e f o u r credit rating agencies functioning in the country. C r e d i t R a t i n g a n d I n f o r m a t i o n S er v i c e s o f I n d i a L t d . , was p r o mo t e d by the Industrial Credit and Investment Corporation of India, Nationalized Banks, F o r e i g n B a n k s a n d I n s u r a n c e C o mp a n i e s i n 1 9 8 8 . I t floated an equity issue in 1992 and is, now, a listed c o mp a n y . It entered a strategic alliance with Standard and Poors in 1995. Its services offered c o mp r i s e r a t i n g , I n f o r m a t i o n i n f r a s t r u c t u r e s e r v i c e s and consults. Its rating services of long, medium and short term debt instrument and securitized assets and 500 constructions. Index. Its Its i n f o r ma t i o n services offer c o r p o r a t e r e s e a r c h r e p o r t s . I t a l s o pr e p a r e s C R I S I L c o n s u l t a n cy division pr o v i d e s assistance to infrastructure industries, viz., power, telecom and infrastructure financing. I C R A L t d . w a s p r o mo t e d by t h e I n d u s t r i a l F i n a n c e Corporation of India, nationalized banks, foreign
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b a n k s , a n d i n s u r a n c e c o mp a n i e s i n 1 9 9 1 . I t p r o v i d e s services rating 0f dealing debt with advisor and and i n v e s t me n t crea1tiiii regard ports c to and a i n f o r ma t i o n ma t t e r s . I t s . a n a l y t i c a l s e r v i c e s i n c l u d e i n s t r u me n t s isesifagiccounselling, as for power, ratings. assessment
restructuring advice for sector specific services such t e l e c o mm u n i c a t i o n , In 1994, ICRA municipal negotiated
s t r a t e g i c a l l i a n c e w i t h F i n a n c i a l P r o g r a mm e d I n c . , w h i c h i s a s u b s i d i a r y o f M o o dy s , o f f e r i n g s e r v i c e s o n s o f t w a r e a n d r i s k ma n a g e me n t t r a i n i n g . The Credit Analysis and Research Ltd., (CARE), was p r o mo t e d b y t h e I n d u s t r i a l D e v e l o p m e n t B a n k o f India and several banks and insurance Companies in 1992; it offers services concerning rating of debt i n s t r u me n t s . I t a l s o pr e p a r e s s e c t o r - s p e c i f i c i n d u s t r y reports. During 1996, the fourth credit rating agency was setup in India as a joint venture between Alliance Capital Ltd., Calcutta, and Duff and Phelps, US.
FATCORS CONTRIBUTING TO SUCCESS

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A n u mb e r o f f a c t o r s c o n t r i b u t o r t o t h e s u c c e s s o f c r e d i t r a t i n g . H o w e v e r , t h e mo s t d o mi n a t i n g f a c t o r s i s t h e r e p u t a t i o n o f t h e c r e d i t r a t i n g a g e n cy a n d i t s analytical as below: ( I ) C r e d i b l e a n d I n d e p e n d e n t S t r u ct u r e s a n d Procedures:T h e c r e d i b i l i t y o f t h e c r e d i t r a t i n g a g e n cy d e p e n d s o n t h e o b j e c t i v i t y w h i c h r e s u l t s f r o m t h e r a t er b e i n g independent of the issuers business. A s c r e d i b i l i t y i s a p r i ma r y i n g r e d i e n t o f cr e d i t r a t i n g , a g e n c y , i t mu s t ma i n t a i n i n d e p e n d e n c e f r o m all interested ma r k e t forces viz., issuers, u n d e r w r i t e r s a n d G o v e r n me n t . S o me o f t h e f a c t o r s that could enhance the credibility of a rating agency include o and i mp a r t i a l i t y of opinions, expertise professionalism, consistency, relevant credibility. S o me of the factors c o n t r i b u t i n g t o s u c c e s s o f c r e d i t r a t i n g ar e di s c u s s e d
across relating to the sensitive and confidential i n f o r ma t i o n o f t h e i s s u e r , t i me l i n e s s o f r a t i n g r e v i e w a n d a n n o u n c e me n t o f c h a n g e s a n d a c t i v i t y t o r e a c h a w i d e r a n g e o f i n v e s t o r s by me a n s o f p r e s s r e p or t s , print or electronic and more friendly research services. ( i i ) R e l i a n c e o n t h e M a r k e t M e c h a n i s m: 14
Reliance
on
the
capital
ma r k e t
for
resource
a l l o c a t i o n g e n e r a t e s a s t r o n g d e ma n d f o r i n v e s t m e n t r e l a t e d i n f o r ma t i o n . R a t i n g a g e n c i e s pr o v i d e t h i s i n f o r ma t i o n . ( i i i ) C o r p o r a t e D i s c l o s u r e a n d C r e d i t E d u c a t i on : As a part of corporate disclosure and credit education, it is n for rating agencies to ensure that t h e i n f o r ma t i o n a b o u t t h e r e g u l a t o r y g u i d e l i n e s f o r mandatory disclosures of ratings reaches the users. However, the rating should not be taken as the final word about financial health. The users should be intelligent enough to ar r i v e at meaningful and c o n c l u s i o n s b y i n t e r p r e t i n g t h e a s s i g n e d r a t i n g . T h ey s h o u l d a l s o b e a w a r e o f t h e l i mi t a t i o n s o f c r e d i t r a t i n g a n d n o t t a k e c r e d i t r a t i n g a s a s y n o ny m f o r insurance or guarantee against default or risk. ( i v ) E x i s t e n c e o f D e b t M a r ke t : T h e p h e n o me n a l g r o w t h o f t h e d e b t ma r k e t h a s r e s u l t e d i n t r e m e n d o u s d e ma n d f o r t h e c r e d i t r a t i n g business. The rating agencies in order to continue to p r o v i d e t h e i r s e r v i c e s n e e d a n a c t i v e p r i ma r y a n d secondary debt market.
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Analytical Factors Considered by Indian Agencies

T h e a n a l y t i c a l f r a me w o r k o f t h e r a t i n g me t h o d o l o g y a d o p t e d b y f o u r I n d i a n cr e d i t r at i n g a g e n c i e s v i z . , CRISIL, ICRA, CARE and Fitch includes analysis and appraisal of all the relevant factors that affect t h e c r e d i t w o r t h i n e s s o f t h e b or r o w i n g e n t i t y . T h e analytical framework for rating agencies is divided into two interdependent with operational segments dealing and respectively i n s t r u me n t s . factors, characteristics and
financial characteristics of the issuers of the debt Besides quantitative aspects like objective of qualitative assessment
m a n a g e me n t c a p a b i l i t i e s p l a y a v e r y i mp o r t a n t r o l e i n a r r i v i n g a t t h e f i n a l r a t i n g f o r a n i n s t r u me n t . T h e r e l a t i v e i mp o r t a n c e o f q u a n t i t a t i v e a n d q u a l i t a t i v e c o mp o n e n t s o f a n a l y s i s v a r y w i t h t h e t y p e o f i s s u e r and is analyzed independently and collectively. The key factors considered for the assessment of
(i) M a n u f a c t u r i n g c o mp a n i e s
( i i ) F i n a n c i a l c o mp a n i e s
(ii) I n d i a n s t a t e s (iii)
Banks and
(iv) B o n d f u n d r a t i n g s
16
M a n u f a c t u r i n g C o mp a n i e s : T h e a n a l y t i c a l f r a me w o r k c o n s i s t s o f t h r e e br o a d s e t s of factors, i.e. business analysis, financial analysis a n d m a n a g e me n t e v a l u a t i o n . (1)Business Analysis:This includes an analysis of industry risk, market position, operating efficiency and legal risk of the c o mp a n y . T h e m a i n e l e m e n t s o f t h e s e c o mp o n e n t s o f B u s i n e s s a n a l y s i s ar e a s u n d e r : ( i ) I n d u s t r y R i s k: Industry Risk is analysed with reference to the e s t i ma t e d c u r r e n t d e ma n d / s u p p l y a n d i n d u s t r i a l g r o w t h p r o s p e c t ; i n t e n s i t y o f c o mp e t i t i o n i n t h e i n d u s t r y ; e n t r y b a r r i e r s a n d t hr e a t s o f n e w e n t r a n t s i n t h e i n d u s t r y ; g o v er n me n t r e g u l a t i o n s a n d p o l i c i e s relating cyclicality weakness. ( i i ) M a r ke t P o s i t i on : Market Position is evaluated from different angles v i z . , ma r k e t
17
to /
the
industry; and
vulnerability to and
to
technological
changes seasonality
substitutes; principal
factors
c o mp a n i e s i n t h e i n d u s t r y a n d t h e i r s t r e n g t h s a n d
s h a r e a n d i t s s t a b i l i t y , c o mp e t i t i v e
p o s i t i o n i n m a r k e t S e g me n t s , c o mp e t i t i v e a d v a n t a g e s a n d d i s a d v a n t a g e s v i s - v i s t h e n e a r e s t c o mp e t i t o r s , d i v e r s i t y o f p r o d u c t s a n d c u s t o me r s , s e l l i n g a n d distribution arrangements and research and d e v e l o p me n t w i t h l i n k a g e t o pr o d u c t o b s o l e s c e n c e . (iii)Operating Efficiency:Operating Efficiency is assessed with reference to production process indicating strength/weakness vis-vis the nearest labour c o mp e t i t o r s , to o t h er productivities p l a y er s , product and cost efficiencies advantages, c o mp a r e d location
relationships,
s t r u c t u r e a n d m a n u f a c t u r i n g e f f i c i e n c y a s c o mp a r e d t o t h e n e a r e s t c o mp e t i t o r s , l e v e l o f c a p i t a l a n d e mp l o y e e p r o d u c t i v i t y , e n e r g y c o s t s a n d c o m p l i a n c e o f p o l l u t i o n c o n t r o l r e q u i r e me n t s . (iv)Legal Position:L e g a l P o s i t i o n c o n s i d e r s a s p e c t s s u c h a s t er ms o f o f f e r d o c u m e n t - pr o s p e c t u s o r l e t t e r o f o f f e r , t e r m s of debenture of trust their deed, trustees and defined p a r a me t e r s responsibilities, pr o t e c t i o n
a g a i n s t f o r g e r y , mo d a l i t i e s a n d ar r a n g e m e n t s f o r buy-back facilities.
18
( 2 ) F i n a n c i a l An a l y s i s : All relevant aspects which include connected with the business quality, earnings a n d f i n a n c i a l p o s i t i o n s o f t h e c o mp a n y a r e a s s e s s e d accounting protection, adequacy of cash flows and financial flexibility. (i)Accounting Quality:Accounting qualification, Quality depends / on a u d i t or s of overstatement u n d e r s t a t e me n t
p r o f i t s , me t h o d o f i n c o me r e c o g n i t i o n , i n v e n t o r y v a l u a t i o n a n d d e pr e c i a t i o n p ol i c i e s , u n d e r v a l u a t i o n overvaluation of fixed assets, off -balance sheet liabilities and the like. ( i i ) E a r n i n g s P r ot e c t i o n : E a r n i n g s P r o t e c t i o n i s a s s e s s e d t h r o u g h pr o f i t a b i l i t y ratios, pre-tax coverage ratios, earnings in relation t o f i x e d i n c o m e c h a r g e s , s o u r c e s o f f u t u r e e a r ni n g s growth and so on. (iii)Adequacy of Cash:Flows is appraised in relation to debt and fixed and w o r k i n g c a p i t a l r e q u i r e me n t s , v a r i a b i l i t y o f F u t u r e cash flows, capital spending flexibility, working c a p i t a l ma n a g e me n t e t c .
19
(iv)Financial Flexibility:Financial to raise Flexibility funds or is raise e x a mi n e d capital to in t e r ms of a l t e r n a t i v e f i n a n c i n g p l a n s i n t i me s o f s t r e s s , a b i l i t y meet stress r e q u i r e me n t s , a s s e t r e d e p l o y me n t p o t e n t i a l , a n d d e b t service schedule and so on. ( 3 ) M a n a g e me n t E v a l u a t i on : T r a c k R e c o r d o f t h e ma n a g e m e n t i s e v a l u a t e d w i t h r e f e r e n c e t o g o a l s , p h i l o s o p hy , s t r a t e g i e s a n d a b i l i t y to o v e r c o me is adverse judged Other of caliber situations. from past aspects Management operating considered and for c o mp e t e n c e financial judging the
results.
ma n a g e m e n t
include
c o n s e r v a t i v e o u t l o o k or a g g r e s s i v e n e s s w i t h r e s p e c t t o f i n a n c i a l r i s k , p l a n n i n g a n d c o n t r o l sy s t e m, d e p t h of managerial talents and succession plans, c o mm i t m e n t , c o n s i s t e n c y & c r e d i b i l i t y . ( i ) F i n a n c i a l C o mp a n i e s : The assessment on and the of financial c o mp a n i e s e n v i r o n me n t as l ay s and e mp h a s i s analysis discussed. the
20
r e g u l a t or y
f u n d a me n t a l a n a l y s i s i n a d d i t i o n t o t h e f i n a n c i a l ma n a g e m e n t evaluation is and already in in
Regulatory financial
E n v i r o n me n t system
evaluated trends
r e l a t i o n t o s t r u c t u r e a n d r e g u l a t or y f r a m e w o r k o f
r e g u l a t i o n / d e r e g u l a t i o n a n d t h e i r i mp a c t o n t h e c o mp a n y . and F u n d a me n t a l A n a l y s i s c o v er s a s p e c t s s u c h a s financial position and i n t er e s t and tax l i q u i d i t y m a n a g e me n t , a s s e t q u a l i t y , pr o f i t a b i l i t y s e n s i t i v i t y o f t h e c o mp a n y . L i q u i d i t y M a n a g e m e n t : i s a n a l y s e d i n t er ms o f c a p i t a l s t r u c t u r e , t e r m- m a t c h i n g o f a s s e t s a n d l i a b i l i t i e s , p ol i c y o n l i q u i d a s s e t s i n r e l a t i o n t o f i n a n c i n g c o mm i t me n t s a n d ma t u r i n g d e p o s i t s .
Asset Quality: is reflected in the quality of
t h e c o mp a n y s c r e d i t r i s k ma n a g e me n t , s y s t e m s f o r mo n i t o r i n g c r e d i t , s e c t o r r i s k , e x p o s u r e t o individual credits etc. Profitability and financial position: is e x a mi n e d o n t h e b a s i s o f h i s t o r i c p r o f i t s , s p r e a d s o n f u n d d e p l oy me n t , r e v e n u e s o n n o n - f u n d b a s e d services, accretion to reserves and so on. Interest and Tax Sensitivity: refers to exposure to interest rate changes, hedge against interest rate and tax law changes and the like. The evaluation is carried out by a team of professionally qualified persons and includes data c o l l e c t i o n , a n a l y s i s a n d m e e t i n g s w i t h k ey p er s o n n e l i n t h e c o mp a n y t o di s c u s s s t r a t e g i e s , p l a n s a n d o t h er
21
b or r o w e r s ,
ma n a g e m e n t
Of
pr o b l e m
i s s u e s t h a t ma y i n f l u e n c e c r e d i t e v a l u a t i o n o f t h e c o mp a n y . D i s c u s s i o n s a l s o i n c l u d e t h e c o mp a n y s f o r e c a s t e d b u s i n e s s a n d f i n a n c i a l p l a n s . T h e pr o c e s s g t a k e s f o u r t o s i x w e e k s . I n a d d i t i o n , t h e i ni t i a l a s s i g n e d r a t i n g s ar e mo n i t o r e d o n c o n t i n u o u s b a s i s by analyst. Credit Rating Agencies T h e c o n c e p t o f cr e d i t
rating
has
been
widely
discussed and debated in India in recent times. Since the setting up of the first credit rating agency Credit Raring and I n f o r ma t i o n S er v i c e s of India Ltd. (CRISIL) in India in 1987, there has been a rapid g r o w t h o f c r e d i t r at i n g a g e n c i e s i n I n d i a . T h e m a j o r players in the Indian market, apart from CRISIL i n c l u d e I n v e s t me n t I n f o r ma t i o n a n d C r e d i t R a t i n g A g e n c y o f I n d i a L t d . ( I C R A ) , pr o mo t e d by I D B I i n 1991 and Credit Analysis and Research Ltd.(CARE), p r o mo t e d b y I F C I i n 1 9 9 4 . D u f f a n d P h e l p s h a s t i e d up with two Indian NBFCs to set up Duff and Phelps c r e d i t R a t i n g I n d i a ( pr i v a t e ) L t d i n 1 9 9 6 .
Rating Services
The primary objective of CRISIL is to rate debt o b l i g a t i o n s o f I n d i a n c o mp a n i e s . T h e i n s t r u m e n t s r a t e d b y i t a r e l o n g- t e r m s u c h a s d e b e n t u r e s I b o n d s and preference shares, me d i u m- t e r m including c e r t i f i c a t e s o f d e p o s i t s , f i x e d d e p o s i t s a n d s h o r t - t er m
22
i n c l u d i n g c o m me r c i a l p a p e r . C R I S I L a l s o r a t e s o t h e r new Its and rating innovative services parallel i n s t r u me n t s also extend including to of real assetestate b a c k e d s e c u r i t i e s , mu n i c i p a l b o n d s a n d b o n d f u n d s . developers, ma r k e t e r s Liquefied
P e t r o l e u m G a s ( L P G) , c h i t f u n d s , b a n k s a n d s t a t e s . Credit Rating Services Operations
Rating
Rating Watch
Rating Update
Coverage -Manufacturing Cos. - F i n a n c e C o mp a n i e s -Banks
Instruments Rated -Debt investment-Structure obligation -Fixed Deposits P r o gr a mm e -Commercial Papers -Project Report -Builders rating
23
CRISIL Research and Inform ation Services (CRIS)

A l t h o u g h c r e d i t r a t i n g r e ma i n s i t s p r i ma r y b u s i n e s s , C R I S I L h a s a l s o d i v e r s i f i e d i n t o i n f o r ma t i o n s e r v i c e s as a thrust ar e a : Tor future. The extensive c o mp i l a t i o n a n d a n a l y s i s o f d a t a by e C R I S I L f o r rating business is also used to provide: services to the corporate CRISIL of clients. Judge, T h ey and provide CRISIL is services ,the by t h r o u g h C R I S I L C a r d , C R I S I L S e c t or v i e w , C R I S I L View, analysis CR1SIL Index p r o vi d e d c o r p o r a t e a n d b a l a n c e s h e e t d a t a , f o r mu l a t e d f o r e a s y selected The c o mp a n i e s CRISIL Card. V i ew Supplied
i n f o r ma t i o n t o t h e f u n d m a n a g e r s , i n v e s t o r s a n d lenders on the basis of published data relating to the i n d u s t r y a n d c o mp a n i e s , o n t h e o u t l o o k a n d s o l v e n c y o f t h e C o n c e r n e d c o mp a n i e s . C R I S I L S e c t o r V i ew p r o v i d e s a n i n - d e p t h a n a l y s i s o f t h e i mp o r t a n t a n d potential growth industries India on the industry structure, the present on the industry dy n a mi c s and CRISILs outlook industry. The CRISLL
Judge is a software package with data and analysis o f I n d i a n c o r p o r a t e . I t a l s o h a s a c o mp r e h e n s i v e value added data-base on India which is available on
24
wire
services and Riddes
BLOOMBERG c o r p or a t e also also carry .J
catering data-base
to on
60,000 and their
i n v e s t me n t Knight screens.
clients.
Recurred
CRISIL
launched
the CRISIL500
e q u i t y i n d e x , a m a r k e t v a l u e w e i g h t e d c o mp o s i t e i n d e x o f 5 0 0 c o mp a n i e s , r e pr e s e n t i n g a b o u t 7 3 % f the market capitalisation of the M u mb a i stock exchange, and77 industry group. T h e ma i n o b j e c t i v e o f t h e br o a d b a s e d C R I S I L - 5 0 0 e q u i t y I n d e x i s t o c a p t u r e t h e ma r k e t mo v e me n t o f t h e : I n d i a n s t o c k m a r k e t s i n a c o mp r e h e n s i v e ma n n e r a n d t h u s? P r o v i d e t h e i n v e s t me n t c o m mu n i t y w i t h a n a c c u r a t e p e r f o r m a n c e b e n c h ma r k a g a i n s t w h i c h t h e y can measure Portfolio p e r f o r ma n c e . 200 about medium 8 6% of CRISIL has recently launched the CRISIL Midcap 200 Equity Index, c o mp r i s i n g captures capitalized the market c o mp a n i e s ,
capitalisation. The CRISIL Research and I n f o r ma t i o n Services and
(CRIS) Indian
d i s s e mi n a t e s e c o n o my ;
value-added capital
research markets;
u n d e r t a k e s c u s t o mi z e d s t u d i e s i n f o u r a r e a s v i z . , Indian Indian Industries and the Indian corporate sector. CRIS has a l a r g e c l i e n t b a s e , i n I n d i a a n d o v e r s e a s , c o mp r i s i n g institutional
25
investors,
investment
bankers,
c o mm e r c i a l b a n k s , f i n a n c i a l i n s t i t u t i o n s , c o r p o r a t e p l a n n e r s , mu t u a l f u n d s a n d a s s e t m a n a g e me n t . T h e s e r v i c e s r e n d e r e d by C R I S I L e a r l i e r a s C R I S I L , C a r e d S e r v i c e s a n d C R I S I L s E c o n o mi c S er v i c e s h a v e b e e n . R e o r g a n i s e d a n d a s s i mi l a t e d u n d e r C R I S . CRIS renders the following set of services: 1 . C R I S I L S e c t or v i e w 2. CRISIL View 3 . I n t e r n a t i o n a l I n f o r ma t i o n V e n d i n g 4. CRISIL Index Services ( 1 ) C R I S I L S e c t o r v i ew : C R I S I L s e c t o r v i e w i s a n i n- d e p t h a n a l y s i s o f t h e i mp o r t a n t a n d p o t e n t i a l gr o w t h i n d u s t r i e s i n I n d i a . CRISIIL considers the quality of research and analysis as its forte. Contents of CRISIL Sectorview i n c l u d e s t h e f o l l o w i n g : A br i e f o f t h e i n d u s t r y ; Structure of the industry and its characteristics; An analysis of the different products in the industry based on factors like Product Specifications, Cost Structure, analysis of Capacities, the ma j o r Technology, p l ay e r s Industry in Key S e c t or the Use; D e ma n d S u p p l y A n a l y s i s b o t h pr e s e n t a n d f u t u r e ; A n industry; and G o v e r n me n t International policies; Risks/Constraints; Factors;
C o mp e t i t i v e n e s s ;
CRISILs Outlook on the industry.
26
A monthly update is also provided for all the CRJSIL Sector views. Client S e g me n t s utilizing CRISIL Sector view Includes Financial Institutions; Mutual Funds; Corporate Bodies; Merchant Banks; Banks; Investment Leasing Institutions; C o mp a n i e s ; Asset Management Brokers, C o mp a n i e s ; F i n a n c e C o mp a n i e s ; Constituencies; Foreign G o v e r n me n t D e p a r t me n t s ; Institutional
Investors; Industry Associations; and Academicians and Industry Analysis. The following from industry classifications research Two vehicles & are also viz., Cars; alkyl available A l u mi n u m ; A u t o mo b i l e s p o l y me r s , CRISILs desk, &
A u t o mo b i l e s
wheelers;
C o m me r c i a l i n t er me d i a r i e s
C e me n t ; P e t r o c h e mi c a l s ( C o v e r i n g B a s i c c h e mi c a l s , fiber Linear b e n z e n e / A n h y d r i d e / O r t h o xy l e n e ) , P o l y e s t e r S t a p l e f i b r e / P o l y e s t e r F i l a me n t Y a m; P o w e r ; S o d a A s h ; Software; Steel (covering flats and longs); Tractors. (2)CRISILVIEW: C R I S I L V I E W pr o v i d e s C R I S I L s a n a l y s i s o f a n d opinion on the business and financial outlook of c o mp a n y , decisions based having on which investors to can take risk regards individual
preferences. It also provides a useful basis for fund

27
managers Medium
in term
their
portfolio can
allocation use these
decisions. reports to
lenders
b e n c h ma r k t h e i r e x p o s u r e l i mi t s . C R I S I L VI E W is based on CRISILs in-depth
understanding of the industry in which the company o p e r a t e s , a s w e l l a s C R I S I L s u n d er s t a n d i n g o f t h e relevant qualitative and quantitative factors affecting t h e c o mp a n y s p e r f o r ma n c e . The CRISILVIEWs and to is a c o mp r e h e n s i v e Decision. pr o d u c t and
interactive tool for Business Managers, Investors, Creditors According C o r p or a t e CRISIL, the Makers. has been
s t r u c t u r e d s p e c i f i c a l l y t o c a t e r t o t h e i n f o r ma t i o n n e e d s o f a d e c i s i o n ma k e r . I t s t a r t s w i t h a br i e f i n t r o d u c t i o n t o t h e c o mp a n y , g i v e s a n o v e r vi e w o f t h e i n d u s t r y i n w h i c h t h e c o mp a n y o p e r a t e s , a n a l y s e s the business and financial outlook, and deals with detailed financial in the both actual t e r m. till The date and projections me d i u m financial
projections are for two years in the future and are based on certain assumptions and underlying logic, all of which are outlined.
28
( 3 ) O n - l i n e S e r v i c e s : I n t e r n a t i o n al I n f o r ma t i o n Vending To make the CRISILs research available to its international clients as well as to reach a wider potential client base, its research and analysis is also a v a i l a b l e v i a T h e B l o o mb e r g . T h e m e n u s t h a t i t offers cover the rating and advisory assignments c a r r i e d o u t a s w e l l a s r e s e a r c h u n d er t a k e n i n t h e t h r e e D i v i s i o n o f C R I S I L . T h e B l o o mb e r g c a r r i e s extensive research and analysis in the following a r e a s ; I n d i a n E c o n o my , I n d i a n C a p i t a l M a r k e t s , K e y I n d u s t r i e s a n d I n d i a n C o r p or a t e s . T h e c l i e n t b a s e f o r this service include Banks, tie-ups Fund Managers, F or e i g n Bankers, Institutional C o m me r c i a l also has Investors, Investment
Multilateral all the Inc.
Development o t h er (The leading Dialog
Agencies, Constituencies, etc. In addition CRISIL with international information vendors like Reuters Inc., Knight-Ridder I n f o r ma t i o n C o r p o r a t i o n ) , I nt e r n e t S e c u r i t i e s I n c . , a n d M a t r i x Services Pvt. Ltd. to disseminate its research and analysis world-wide.
29
(4)CRISIL Index Services C R I S I L o f f e r s t h e f o l l o w i n g I n d e x S er v i c e s w h i c h are available online also. (i)CRISIL 500 Equity Index: T h e C R I S I L - 5 0 0 E q u i t y I n d e x i s a br o a d - b a s e d , market value weighted Index c o mp r i s i n g 500 c o mp a n i e s a c r o s s 7 9 i n d u s t r i e s a n d r e p r e s e n t s a b o u t 7 4 % o f t h e ma r k e t c a p i t a l i s a t i o n a n d m o r e t h a n 9 5 % o f t h e t u r n o v e r o n T h e S t o c k E x c h a n g e , M u mb a i . T h e m a i n o b j e c t i v e o f C R I S I L 5 0 0 i s t o pr o v i d e t h e Investment is c o mm u n i t y to a ma r k e t with a more accurate as it is The reflection of the stock market movement. The Index responsive by d e v e l o p me n t s maintained by a dedicated team Of professionals supported sophisticated c o mp u t e r i z e d : i n d e x i s c o mp u t e d d a i l y a n d d a i l y h i s t o r i c a l a n ar e available from 1991 onwards. (ii) CRISJL-Midcap 200 Equity Index: The CRISIL midCap 200 Equity index is a benchmark f o r t h e mi d c a p c t h e ma r k e t . C o m p r i s i n g 2 0 0 mi d c a p s t o c k s l i s t e d o n t h e s t o c k E x c h a n g e M u mb a i . T h e C R I S I L M a d c a p 2 0 0 r e pr e s e n t s 7 4 % a n d 8 0 % o f t h e turnover of medium capitalized segment of the marlet
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c o mp u t e d d a i l y , hi s t o r i c a l e a v a i l a b l e . f r o m 1 9 9 3 onwards. ( i i i ) C R I S I L I n d u s t ry I n d i c e s : CRISILs 79 Industry Indices serve as a standard for c o mp a r i s o n of the stock Market performance of I n d i v i d u a l c o mp a n i e s v i s - - v i s t h e i r G r o u p a n d a l s o e n a b l e f u n d m a n a g e r s t o - N A V p er f o r ma n c e v s . s p e c i f i c i n d u s t r i e s . I t i s C o mp u t e d d a i l y , h i s t o r i c a l value of the indices are available m 1991 onwards. ( i v ) C R I S I L I n d u s t ry I n d i c e s : W i t h a v i e w t o p r o v i d e r - e i n v e s t o r s , f u n d ma n a g e r s a n d ma r k e t i n t e r me d i a r i e s w i t h a b e t t er p e r s p e c t i v e o f t h e r e l a t i v e s t o c k m a r k e t p er f o r ma n c e o f t h e v a r i o u s s e g me n t s i n t h e c or p o r a t e s e c t o r . C R I S I L h a s d e v e l o p e d 3 s e g m e n t b e n c h ma r k i n d i c e s
C R I S I L M N C I n d e x , a ma r k e t c a p i t a l i z e w e i g h t e d i n d e x c o mp r i s i n g 5 0 M N C s l i s t e d o n t h e S t o c k E x c h a n g e , M u mb a i .
CRISIL Indian Business Groups Index c o mp r i s i n g 2 5 0 l i s t e d c o mp a n i e s o n T h e S t o c k E x c h a n g e , M u m b a i r e pr e s e n t i n g 1 0 7 I n d i a n Business Group. C R I S I L P S E I n d e x , a ma r k e t c a p i t a l i s a t i o n w e i g h t e d i n d e x c o mp r i s i n g 2 0 P S E s t o c k s l i s t e d o n t h e S t o c k E x c h a n g e , M u mb a i .

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( v ) C u s t o mi z e d I n d i c e s : C u s t o mi z e d I n d i c e s C R I S I L s e mp h a s i s o n s c i e n t i f i c methodology CRIS has of Index construction requests for and dy n a mi c i n d e x ma i n t e n a n c e i s r e c o g n i s e d by t h e m a r k e t a n d received developing and b e n c h ma r k a s w e l l a s c u s t o m i z e d i n d i c e s . C R I S I L undertakes as offers d e v e l o p me n t , c o n s u l t a n cy c o mp u t a t i o n for m a i n t e n a n c e o f c u s t o mi z e d i n d i c e s f o r c l i e n t s a s w e l l services developing indices. (iv)CRISIL Index Bulletin: The CRISIL Index constituents business is of B u l l e t i n i s a mo n t h l y ma r k e t CRISIL the Indices.CRISIL ma r k e t leader in with the a c t i v i t y u p d a t e a n d c o v e r s t h e ma r k e t p e r f o r m a n c e o f approximate seven-tenth share of the credit rating evidently d o me s t i c r a t i n g i n d u s t r y . I t a l s o f e a t u r e s a mo n g t h e t o p f i v e r a t i n g a g e n c i e s i n t h e w or l d i n t e r m s o f b o t h its coverage and analytical for the strength. The rating of its into other business operating accounts i n c o me a l mo s t nine-tenth
diversification
i n f o r ma t i o n a n d a d v i s o r y s e r v i c e s n o t w i t h s t a n d i n g .
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( v ) C R I S I L A d v i s o ry S e r v i c e s CRISIL provides the financial advisory services to the G o v e r n me n t , g o v e r n me n t banks, bodies. Public CAS S e c t or also Units, f i n a n c i a l i n s t i t u t i o n s a n d o t h e r s e m i - g o v er n me n t a n d quasiundertakes c u s t o mi z e d s t u d i e s f o r n a t i o n a l a n d i n t e r n a t i o n a l project developers; multilateral lending agencies like the World Bank, International Finance Corporation, and other experts. The objective of these services is t o i d e n t i fy r i s k s , mi t i g a t i n g r i s k s a n d f o r mu l a t i n g and executing strategies for the same. The activities of the group cover two main and ar e a s , viz., sector infrastructure R e f o r ms . ( a ) I n f r a s t r u c t u r e S e ct o r S e r v i c e s : I t s u p p o r t a n d p r o vi d e c o u n s e l i n g o n a s p e c t s , s u c h a s privatization of public sector undertakings, debt s e c u r i t i z a t i o n , cr e d i t e v a l u a t i o n sy s t e m a n d s o o n . (b)Financial Sector Services: CRISIL focus on the banking sectors and the capital markets. Advisory services of this category are provided at two levels: Strategic and Functional. Strategic assistance includes diagnostic studies and business
33
development
financial
process
r e- e n g i n e e r i n g
or
restructuring
studies based on a diagnostic analysis. Functional a s s i s t a n c e c o v e r s ar e a s s u c h a s cr e d i t m a n a g e me n t ; r e s o u r c e mo b i l i z a t i o n ; r i s k ma n a g e m e n t e t c . C A S a l s o a d v i s e s c e n t r a l a n d s t a t e g o v e r n me n t s o n t h e i r d i s i n v e s t me n t p r o gr a mm e r s . I t h a s a l s o c o l l a b o r a t e d with up credit rating agencies in the neighboring countries.
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Rating Processes The Indian Companies

A b r i e f d e s c r i p t i o n o f v ar i o u s r a t i n g p r o c e s s e s followed by the Indian rating agencies is mentioned below. CRISIL:CRISIL a d j u s t me n t s follows ma d e the r at i n g pr o c e s s by to as per mi n o r international standards accompanied suiting
therein
domestic
c o n d i t i o n s . C R I S I L h a s p u b l i c i s e d t h e w o r ki n g o f i t s rating process on the lines of S & Ps. CRISILs rating process is described below: (a) Rating A g r e e me n t and A s s i g n me n t of the
A n a l y t i c a l T e a m: The process of rating starts with the issue of the R a t i n g R e q u e s t l e t t e r by t h e i s s u e r a n d t h e s i g n i n g o f t h e R a t i n g a g r e e me n t . O n r e c e i p t o f t h e r e q u e s t , CRISIL assigns an analytical team comprising of at least two analysts of whom one would be the lead a n a l y s t a n d w o u l d s e r v e a s t h e i s s u e r s p r i ma r y contact. The analysts who have expertise in relevant business areas will be responsible for carrying out the rating assignment.
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( b ) M a n a g e me n t M e e t i n g: Prior to meeting with the: issuer, the analytical team o b t a i n s a n d a n a l y s e s i n f o r ma t i o n R e l a t i n g t o t h e i s s u e r s f i n a n c i a l s t a t e me n t s , c a s h f l o w p r o j e c t i o n s and other relevant information. T h e a n a l y t i c a l t e a m t h e n pr o c e e d s t o h a v e d e t a i l e d m e e t i n g s w i t h t h e c o mp a n y s m a n a g e me n t . C R I S I L s t r o n g l y b e l i e v e s t h a t i n t e r e s t o f i n v e s t o r s ar e b e s t s e r v e d i f a d i r e c t d i a l o g u e i s ma i n t a i n e d w i t h t h e i s s u e r , a s t h i s e n a b l e s C R I S I L t o i n c o r p or a t e n o np u b l i c i n f o r ma t i o n i n a r a t i n g d e c i s i o n a n d a l s o enables the rating to be forward looking. T o p i c s d i s c u s s e d d u r i n g t h e ma n a g e m e n t m e e t i n g a r e wide-ranging, and near and including longterm c o mp e t i t i v e finance and position, business s t r a t e g i e s , f i n a n c e d p o l i c i e s , h i s t o r i c a l p e r f o r ma n c e , o u t l o o k . E q u a l i mp o r t a n c e i s p l a c e d o n d t h e i s s u e r b u s i n e s s r i s k pr o f i l e a n d s t r a t e g i e s . A d d i t i o n t o r e v i e w i n g f i n a n c i a l d a t a . T h e r a t i n g pr o c e s s e n s u r e s c o mp l e t e c o n o f t h e i n f o r ma t i o n pr o v i d e d b y t h e c o mp a n y . All i n f o r ma t i o n is kept strictly c o n f i d e n t i a l b y t h e r at i n g s g r o u p a n d i s n o t u s e d f o r a n y o t h e r p u r p o s e , o r b y a n y t h i r d p a r t y ot h e r t h a n CRISIL.
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( c ) R a t i n g C o mmi t t e e : A f t e r me e t i n g w i t h ma n a g e m e n t , t h e a n a l y s t s p r e s e n t their report to a Rating C o m mi t t e e which then d e c i d e s o n t h e r at i n g . T h e R a t i n g C o mm i t t e e M e e t i n g is the only aspect of the process in which the issuer does not participate directly. The rating is arrived at after a composite a s s e s s me n t of all the factors c o n c e r n i n g t h e i s s u e r , w i t h t h e k ey i s s u e s g e t t i n g g r e a t e r a t t e n t i o n f r o m t h e R a t i n g C o m mi t t e e . ( d ) C o mmu n i c a t i o n t o t h e I s s u e r : A f t e r t h e c o m mi t t e e h a s a s s i g n e d t h e r a t i n g , t h e r a t i n g d e c i s i o n i s c o m mu n i c a t e d t o t h e i s s u e r a l o n g w i t h t h e r e a s o n s or r at i o n a l e s u p p o r t i n g t h e r a t i n g . For a rating to have value to an issuer or to an i n v e s t o r , t h e r a t i n g a g e n c y mu s t h a v e c r e d i b i l i t y . The thoroughness and transparency of CRISILs rating methodology and the integrity and fairness of i t s a p p r o a c h a r e i mp o r t a n t f a c t o r s i n e s t a b l i s h i n g a n d m a i n t a i n i n g c r e d i b i l i t y ? C R I S I L i s t h er e f o r e a l w a y s w i l l i n g t o d i s c u s s w i t h t h e m a n a g e m e n t , t h e cr i t i c a l a n a l y t i c a l f a c t o r s t h a t t h e c o m mi t t e e f o c u s e d o n w h i l e d e t e r mi n i n g t h e r a t i n g a n d a l s o a n y f a c t o r s t h a t t h e c o mp a n y f e e l s m a y n o t h a v e b e e n c o n s i d e r e d while assigning the rating.
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I n c a s e t h e i s s u e r d i s a g r e e s w i t h t h e r a t i n g o u t c o me , they appeal ma y and in appeal the decision addresses rationale; for the which concerns to be n e w / a d d i t i o n a l i n f o r ma t i o n , w h i c h i s m a t e r i a l t o t h e specifically the rating expressed need
s u b mi t t e d t o t h e a n a l y s t . S u b s e q u e n t l y , a n o t e i s p u t up once again before the Rating Committee where the r a t i n g ma y o r ma y n o t u n d er g o a c h a n g e . T h e c l i e n t has the right to reject the rating and the whole exercise is kept confidential. T h e r a t i n g p r o c e s s , f r o m t h e i n i t i a l ma n a g e me n t m e e t i n g t o t h e a s s i g n m e n t o f t h e r a t i n g , n o r ma l l y takes three to four weeks. However, when required CRISIL has been able to deliver rating decisions in s h o r t e r t i me f r a m e s . ( e ) D i s s e mi n a t i o n t o t h e P u b l i c: Once the issuer accepts the rating, CRISIL then d i s s e mi n a t e s i t a l o n g w i t h t h e r a t i o n a l e t hr o u g h pr i n t media including Reuters. The ratings are also d i s s e mi n a t e d t h r o u g h C R I S I L s m o n t h l y p u b l i c a t i o n CRISIL Rating Scan. The Financial Times, UKs quarterly publication FT CREM, and is also available o n o t h e r i n t e r n a t i o n a l s e r v i c e s l i k e B l o o mb e r g a n d K n i g h t - R i d e r S er v i c e s .
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Credit rating in India (f)
Surveillance and Annual Review:-
After a rating has been assigned, CRISIL is required t o mo n i t o r t h e r a t i n g o v e r t h e l i f e o f t h e d e b t i n s t r u me n t . CRISIL keeps the rating u n d er c o n t i n u o u s s u r v e i l l a n c e , m o n i t o r i n g b ot h t h e o ng o i n g p e r f o r ma n c e o f t h e i s s u e r a n d t h e e c o n o mi c environment in - which it operates. CRISIL typically c o n d u c t s a f o r ma l A n n u a l r e v i e w o f t h e r a t i n g w h i c h i n v o l v e s a me e t i n g w i t h t h e i s s u e r . T h e s e r e v i e w me e t i n g s f o c u s o n d e v e l o p me n t s o v e r t h e p e r i o d s i n c e t h e l a s t me e t i n g a n d o u t l o o k f o r t h e c o mi n g y e a r , e n a b l i n g a n a l y s t s t o s t ay a b r e a s t o f current developments, discuss potential problem areas, and be appraised of any changes in issuers plan. Following a full review, the rating may either b e a f f i r me d o r c h a n g e d . A ny c h a n g e e f f e c t e d i s ma d e p u b l i c b y C R I S I L . I n s o me i n s t a n c e s , a c r e d i t r a t i n g may be placed on Rating Watch. A Rating Watch listing highlights an emerging situation which may materially affect the profile of a rated entity and can be designated with positive, developing, or negative i mp l i c a t i o n s . I n s t a n c e s w h er e a n e n t i t y s r a t i n g m a y be placed on Rating Watch include the announcethent o f a m e r g e r o r a c q u i s i t i o n or t h e o c c u r r e n c e o f a n event that could result in a substantial change in the issuing entity risk, profile.
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CRAMEL Model
CRISIL and ICRA conduct rating of banks also. These Rating agencies typically follow the CRAMEL model under Which banks are evaluated on six d i f f e r e n t p a r a me t e r s ? C ( c a p i t a l a d e q u a cy ) R (resource raising ability) A (asset quality) M ( ma n a g e me n t e v a l u a t i o n ) E (earnings potential) L (liquidity) Capital Adequacy:It gives an indication about the kind of cushion the b a n k h a s t o a b s o r b f u t u r e l o s s e s . A mi n i mu m c a p i t a l adequacy ratio of 8 per cent is mandatory for all banks in India Resource Raising Ability:T h e m a i n a s p e c t s o f r a i s i n g r e s o u r c e s by b a n k s i n their rating are: Trends and diversity of deposits base; Trends in cost of funds; F u n d i n g p o l i c i e s , n a me l y , t e n u r e ma t c h i n g a n d interest rate sensitivities; and Future plans.
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Asset Quality:T h e i mp o r t a n t e l e me n t s i n t h e e v a l u a t i o n o f t h e a s s e t q u a l i t y o f b a n k s i n c l u d e , i n t er a l i a , Q u a l i t y o f c r e d i t r i s k ma n a g e m e n t o f b a n k s a s r e f l e c t e d i n t h e a p p r a i s a l s y s t e m a n d pr u d e n t i a l norms prescribed by the RBI; Quality of loan portfolio in terms of concentration, diversity, recovery and overdue positions and r e l a t i v e s h a r e o f n o n - p e r f o r mi n g a s s e t s ; Specific steps to expedite recovery; and P l a n s t o i mp r o v e a s s e t q u a l i t y . M a n a g e me n t E v a l u at i o n : T h e t w o c r u c i a l a s p e c t s o f ma n a g e me n t e v a l u a t i o n o f b a n k s a r e ( 1 ) m a n a g e m e n t s t y l e a n d ( 2) i n - d e p t h s t u d y o f t h e t e n ur e o f p e r s o n n e l . Earnings Potential of banks is analysed on the basis of a Consideration of the following factors; D i v e r s i t y o f i n c o me p r o f i l e ; Trends in lending spreads; T r e n d s i n i n v e s t me n t s y i e l d s ; T r e n d s i n f e e - b a s e d i n c o me ; a n d Expense level.
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L i q u i d i t y o f b a n k s i s e x a mi n e d w i t h r e f e r e n c e t o t h r e e F a c t o r s , n a me l y ; Liquid assets; Dependence on volatile funds; and Unutilized line of credit. Bond Fund C R I S I L h a s i n t r o d u c e d c r e d i t q u a l i t y r at i n g s f o r bond funds to evaluate credit quality of the funds u n d e r l y i n g p o r t f o l i o h o l d i n g s . U n d e r t h e s c h e me , only pure bonds whose portfolio consist entirely of fixed i n c o me securities, a p ar t from a s ma l l p e r c e n t a g e o f m o n e y m a r k e t i n s t r u me n t s h e l d f o r liquidity will be rated. CRTSIL methodology for bond fund ratings covers the following aspects: (i)Consistency rating. ( i i ) E x a mi n a t i o n o f v a r i o u s sy s t e ms a n d p r o c e d u r e s s u c h a s sy s t e m f o r ma k i n g a n d e x e c u t i n g i n v e s t me n t decisions, back office systems, reconciliation with custodians and registrars, calculation of net asset v a l u e , t r a c k i n g o f p ay me n t s , r e c e i v a b l e s e t c . ( i i i ) E v a l u a t i o n o f m a n a g e me n t s t r a c k r e c or d i n t h e funds so on.
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of
cr e d i t
risk
associated
with
particular security of fund with the overall fund
m a n a g e me n t
business,
quality
of
key
p e r s o n n e l , a n d i n v e s t m e n t s t r a t e gy f o r t h e f u n d a n d
Rated Instrument and Rating Sym bols

T h e r a t i n g sy mb o l . Ar e sy mb o l i c e x p r e s s i o n s o f t h e o p i n i o n a s s e s s m e n t o f t h e c r e d i t r a t i n g a g e n cy w i t h r e g a r d t o t h e i n v e s t m e n t / c r e d i t q u a l i t y / gr a d e o f t h e debt/obligation i n s t r u me n t . They group together s i mi l a r , t h o u g h n o t n e c e s s a r i l y i d e n t i c a l , e n t i t i e s i n t e r m s o f t h e i r r e l a t i v e c a p a c i t y o f t i me l y s e r v i c i n g o f t h e o b l i g a t i o n s a s p e r t h e t er ms o f t h e c o n t r a c t . T h e s u f f i x e s p l u s ( + ) o r mi n u s ( - ) a r e a d d e d t o t h e s y mb o l s t o i n d i c a t e t h e r e l a t i v e p o s i t i o n o f t h e i n v e s t me n t w i t h i n t h e gr o u p c o v e r e d b y t h e sy mb o l . Appropriate prefixes and suffixes such as (FD) and ( C D ) a r e u s e d t o d e n o t e s p e c i f i c i n s t r u me n t s s u c h a s fixed deposits, certificates of deposits and so on. T h e r a t i n g sy mb o l s a s t h e f i n a l e x p r e s s i o n o f t h e i n v e s t me n t q u a l i t y o f a f i n a n c i a l i n s t r u m e n t s u s e d b y t h e I n d i a n r a t i n g a g e n c i e s ar e i l l u s t r a t e d i n t h i s section.
L o n g - t e r m I n s t r u me n t s : -
D e b e n t u r e s a n d b o n d s ar e m a n d a t o r y r a t e d b y a l l t h e three rating agencies, i.e. CRISIL, ICRA and CARE
C R I S I L S y mb o l s : -
C a t e g o r i e s d e b e n t u r e s i n t o t h r e e i n v e s t m e n t gr a d e s l i s t e d a s u n d e r : F o r p r e f e r e n c e s h a r e s , t h e l e t t er s ( p f ) a r e p r e - f i x e d a n d f o r s t r u c t ur e d o bl i g a t i o n s , l e t t e r s ( s o ) a r e a f f i x e d t o t h e d e b e n t u r e r a t i n g sy mb o l s ; T h e
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s t r u c t u r e d o b l i g a t i o n s m e a n pr o c u r i n g o f a d e s i r o u s rating by fulfilling the essential formalities for the p r o p o s e d r a t i n g . A n e x a mp l e o f s u c h r a t i n g i s t h e rating by CRISIL of the securitization of the car hire-purchase receivables (asset- based securities) of the Gujarat Lease Finance Ltd which was given a triple A rating. ( A ) H i g h I n v e s t me n t G r a d e s AAA ( T r i p l e A ) :H i g h e s t S a f e t y . D e b e n t u r e s r a t e d A A A ar e j u d g e d t o o f f e r t h e h i g h e s t s a f e t y o f t i me l y p a y me n t o f i n t e r e s t a n d p r i n c i p a l . T h o u g h t h e c i r c u ms t a n c e s providing these degrees of safety ar e likely to c h a n g e , s u c h c h a n g e s a s c a n b e e n v i s a g e d ar e m o s t unlikely to affect adversely the fundamentally strong position of such issues.
AA (Double A):High Safety. Debentures rated AA are judged to o f f e r h i g h s a f e t y o f t i me l y p ay me n t o f i n t er e s t a n d principal. They differ in safety from AAA issues only marginally. (B) I n v e s t me n t G r a d e s
A:
A d e q u a t e S a f e t y . D e b e n t u r e s r a t e d A a r e i n d i c a t o r o f O f f e r i n g a d e q u a t e s a f e t y o f t i me l y p ay m e n t o f interest and pr i n c i p a l . However, changes in
44
circumstances can adversely affect such issues more than those in the higher rated categories. BBB (Triple B):M o d e r a t e S a f e t y . D e b e n t u r e s r a t e d B B B ar e j u d g e d to offer sufficient safety o f t i me l y p a y me n t of interest and principal for the present. However, c h a n g i n g c i r c u m s t a n c e s ar e m o r e l i k e l y t o l e a d a weakened principal categories. (C) Speculative Grades BB (Double B):Inadequate Safety. Debentures rated BB are judged t o c a r r y i n a d e q u a t e s a f e t y o f t i me l y p a y me n t o f interest and principal; while they are less susceptible t o d e f a u l t t h a n o t h e r s p e c u l a t i v e gr a d e d e b e n t ur e s i n the i m me d i a t e future, the uncertainties that the issuer faces could lead to inadequate capacity to m a k e t i me l y i n t e r e s t a n d pr i n c i p a l p a y me n t s . B: High Risk D e b e n t u r e s r a t e d B a r e i n d i c a t o r o f h a v i n g g r e a t e r s u s c e p t i b i l i t y t o d e f a u l t ; w h i l e c u r r e n t l y i n t er e s t a n d p r i n c i p a l p a y me n t s ar e m e t , a d v e r s e b u s i n e s s or e c o n o mi c c o n d i t i o n s w o u l d l e a d t o l a c k o f a b i l i t y o r w i l l i n g n e s s t o p a y i n t e r e s t or p r i n c i p a l . C: Substantial Risk
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capacity than for
to
pay
i n t er e s t in
and h i g h er
r e p ay rated
debentures
D e b e n t u r e s r a t e d C a r e j u d g e d t o h a v e f a c t o r s p r e s e n t t h a t ma k e t h e m v u l n e r a b l e t o d e f a u l t ; t i me l y p a y me n t o f i n t e r e s t a n d pr i n c i p a l i s p o s s i b l e o n l y i f favorable factors / circumstances continue. D: Default D e b e n t u r e s r a t e d D ar e i n d e f a u l t a n d i n a r r e a r s o f i n t e r e s t / p r i n c i p a l p a y me n t s or a r e e x p e c t e d t o d e f a u l t o n m a t u r i t y . S u c h d e b e n t ur e s a r e e x t r e me l y s p e c u l a t i v e a n d r e t u r n s f r o m t h e s e d e b e n t u r e s ma y b e realized only on reorganization / liquidation.
Problem Faced by CRISIL

(i)The major problem faced by CRISIL was said to be t h e n o n - a v a i l a b i l i t y o f a d e q u a t e i n f o r ma t i o n ( b o t h from primary and secondary sources) from the c o mp a n y I t i s f e l t t h a t a v a i l a b i l i t y o f i n f o r m a t i o n i s a function of co operation from the client and the level of data base built for the industry supported by extensive research. (ii)The analysts evaluation is based on information c o l l e c t e d f r o m a n n u a l r e p or t s o f c o mp a n i e s w h i c h ar e neither sufficient nor adequate for any rating work. B a n k e r s a n d a u d i t o r s a r e s e l d o m f o r t h c o mi n g t o p r o v i d e r e q u i s i t e i n f o r ma t i o n a b o u t t h e c o mp a n y .
46
(iii)The
rating
analysts
feel
that
the
c o mp l e t e
i n f o r ma t i o n i s n o t p r o v i d e d b y t h e c o mp a n i e s . T h e r e n e i t h e r p r o p e r f l o w o f i n f o r ma t i o n n or t h e a d e q u a t e t r a n s p a r e n c y w h i c h ma k e t h e p r o p er r a t i n g s by t h e analysts difficult. It needs special me n t i o n that rating analysts cannot be expected to do a justice unless the rating agencies have access to the reliable data to carry out an unbiased and fair rating process.
( i v O n e o f t h e ma i n p r o b l e m s f a c e d by c r e d i t r a t i n g had been that the firms were under no Obligation notifies the rating given to them as it was d i s c r e t i o n a r y . A s s u c h , f i r ms w h i c h a r e d i s s a t i s f i e d with the rating assigned by an agency are under no obligation to publish such a rating. Rating analysts also face specific problems relating t o r a t i n g o f d i f f e r e n t i n s t r u me n t s . T h e e s t i m a t i o n o f drawing powers and short-term volatility of cashf l o w i n c o m me r c i a l p a p e r , d e p o s i t s r e n e w a l r at e s i n case of fixed deposit problem regarding uncertainty a b o u t f u t u r e g o a l s a n d s t r a t e g i e s o f t h e f i r ms .
47
DRAWBACKS OF CREDIT RATING I n s p i t e o f t h e a d v a n t a g e s t h a t t h e r at i n g o f f e r s , several drawbacks are: (i) The ratings process to attempts to provide guidance i n s t r u me n t / to investors/ c r e d i t or s in d e t e r mi n i n g t h e r i s k s a s s o c i a t e d w i t h t h e credit obligation. It does not a t t e mp t t o p r o v i d e a r e c o m me n d a t i o n a n d does not take in to account factors like market decision. (ii) The rating pr o c e s s is based on certain p r i mi t i v e s . T h e a g e n cy , f o r i n s t a n c e , d o e s n o t perform an audit. Instead, it has to rely s o l e l y o n i n f o r m a t i o n p r o v i d e d by t h e i s s u e r . Consequently, i n f o r ma t i o n i n c o mp l e t e , c o mp r o m i s e d . ( i i i ) T o t h e e x t e n t t h a t a c e r t a i n i n s t r u me n t o f a s p e c i f i c c o mp a n y a t t r a c t s a l o w er r a t i n g , t h e c o mp a n y h a s a n i n c e n t i v e t o s h o p a r o u n d f o r t h e b e s t p o s s i b l e r a t i n g , c o mp r o mi s i n g t h e a u t h e n t i c i t y o f t h e r a t i n g pr o c e s s i t s e l f . to the the is extent that the and is provided inaccurate process prices, personal risk/ reward p r e f e r e n c e s t h a t m i g h t i n f l u e n c e i n v e s t me n t
ratings
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S E B I G UI D E L I N E S F O R C R E D I T R A T I N G Disclosure of unaccepted rating to investors has b e e n ma d e C o m p u l s o r y . I t h a s b e e n ma d e m a n d a t o r y t o o b t a i n d u a l r a t i n g s from different recognized agencies for all public a n d r i g h t i s s u e s o f d e b t i n s t r u me n t s gr a t e r t h a n or equal to and RS. 100 corers. pr o t e c t i o n Accordingly guidelines disclosure investor
have been amended. Rating agencies have been debarred from rating d e b t i n s t r u me n t s o f t h e i r p r o mo t e r i n s t i t u t i o n s . R e s t r i c t i o n s h a v e b e e n i mp o s e d o n r a t i n g a d e b t i n s t r u me n t o f a c or p o r a t e f i r m i f i t h a s a ny c o mm o n director with the rating agencys p r o mo t e r i n s t i t u t i o n . T h e g u i d e l i n e s c o v e r e v e n the borrowers of their bodies. R a t i n g a g e n c i e s a r e m o s t l y p r o mo t e d b y l ar g e f i n a n c i a l i n s t i t u t i o n s or f i r m s . T h i s c a n c a u s e a n evaluation bias as these rating agencies can not afford to give since correct these rating are p ar t to of the the weaker f i r ms c o mp a n i e s
sponsoring rating agencies so that SEBI guideline

49
w h i c h s p e c i f i e s t h a t n o c r e d i t r a t i n g a g e n cy s h a l l r a t e a s e c u r i t y i s s u e d by i t s p r o mo t e r . R a t i n g i n I n d i a h a s b e e n m a d e c o mp u l s o r y f o r a ny c o mp a n y t h a t c h o o s e s t o r a i s e mo n e y t h r o u g h a public issue of d e b e n t ur e s with conversion, c o mm e r c i a l p a p e r s ,
50
CONCLUSION
The outlook for the credit rating industry is positive. Credit ratings a leading role in the development of the debt markets in India. The Rating Criteria & Product Development Centre, responsible for policy research, quality new pr o d u c t has d e v e l o p me n t developed and new ratings' ratings assurance,
m e t h o d o l o g i e s . T h e r e a r e n u mb e r o f a r e a s w h e r e r a t i n g a g e n c i e s w i l l h a v e t o c o v er n e w gr o u n d i n t h e c o mi n g f u t u r e . T h e r a t i n g o f mu n i c i p a l b o n d , s t a t e g o v e r n m e n t b o r r o w i n g , c o mm e r c i a l b a n k s a n d p u b l i c sector undertaking etc, will be covered in the near f u t u r e . C r e d i t r a t i n g p l a y v e r y i mp o r t a n t r o l e i n i n t e r n a t i o n a l l a n d i n g . T h e i mp o r t a n c e o f cr e d i t r a t i n g i s b e i n g i n c r e a s i n g l y r e c o g n i z e d i n t h e E ur o - m a r k e t s . Rating is marketing too which indicate relative c a p a c i t i e s o f c o mp a n i e s t o ma k e t i me l y r e p ay m e n t o f interest and principal on debt. CRISIL inspires trust and confidence across industry for upholding values that serve as tenets across the Group Companies. The Indian credit rating agencies have made strategic alliance Agencies with are reputed adopting which international l ar g e extent by adopted agencies. the rating western
methodologies counterparts.
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S o , I h e r e b y c o n c l u d e d t h a t cr e d i t r a t i n g i n I n d i a having bright future.
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