TABLE OF CONTENTS

S.NO. PARTICULAR
1. ABSTRACT
2. INTRODUCTION
3. REVIEW OF LITERATURE
4. RESEARCH METHODOLGY
5. SUGGESTIONS AND FINDINGS
6 BIBLOGRAPHY
7. QUESTIONAIRE





ABSTRACT

Credit rating is the symbolic indicator of the current opinion of
rating agencies regarding the relative capability of issuer of debt
instrument, to service the debt obligations as per contract. The
credit rating agencies today have ample opportunities to play a
unique role in strengthening the capital market and building
the investors confidence in the financial system. So, considering
the importance of credit rating, the present research work has
been undertaken to study the regulatory environment affecting
the credit rating activities in India, to examine the operational
performance of four SEBI recognized credit rating agencies, viz.
CRISIL, ICRA, CARE and FITCH, to assess the consistency in rating
methodology and to examine rating variability in grades assigned by
these agencies, to study the post-rating performance of various
companies rated by these agencies and to study the investors opinion
regarding the credit rating practices in India.
The credit rating agencies in India are regulated by the Securities and
Exchange Board of India under the SEBI (Credit Rating Agencies)
Regulations, 1999 of the Securities and Exchange Board of India Act,
1992.
As far as the consistency in rating methodology of each rating agency
by taking companies belonging to the same rating class is concerned,
it has been found that there has been consistency to a large extent in
the methodology of all the rating agencies while assigning a particular
rating grade whereas there has been inconsistency in the methodology
adopted by all the four rating agencies while assigning different rating
analysis provides that as far as the rating change ratio is concerned,
the largest number of rating change cases is related to FITCH followed
by CARE,ICRA and CRISIL.
However, the analysis regarding the post-rating performance of
companies, rated by all the agencies, reveals that the companies rated
by CARE have shown more stability in their performance as compared
to the companies rated by other rating agencies. The least stability
was found inthe performance of companies rated by ICRA.
The results of the study show that majority of the respondents have
full awareness about the purpose of credit rating and a higher
percentage of them was satisfied by the guidance of credit rating
agencies.

















INTRODUCTION
A financial system, comprising of financial institutions, financial
services, financial markets and financial instruments, aims at
establishing and providing a regular, smooth, efficient and cost
effective linkage between depositors and investors. All the components
of a financial system work in connection with each other as financial
institutions operate in financial market by generating, purchasing and
selling financial instruments and rendering various financial services.
Thus, financial institutions allocate savings of the economy to useful
investments.
The financial markets on the other hand facilitate buying and
selling of financial claims, assets, services and securities. These
financial claims, assets, services and securities are the financial
instruments which are periodical payments of certain sum of money
by way of principal, interest or dividend. The financial services, dealt
within the financial system, not only help in raising the required
funds but also in ensuring their efficient distribution. Financial
services are at heart of every economy. They are regarded as an engine
of growth since financial globalization can contribute significantly to
promote growth both in developing countries and countries in
transition by augmenting domestic savings, reducing cost of capital,
transferring technology, developing domestic financial sector and
fostering human capital formation. Two characteristics of financial
services must be emphasized at the outset. One is that the financial
services involve the creation, dissemination and use of information.
This is an information-based industry that has been transformed by
the information revolution. The second common characteristic is
that financial services require huge amounts of high quality labour to
deal with information and communication with the market. Financial
services involve at least two people or firms, the service provider and
the user. Often financial relationships will involve many parties as
with securities offerings. It is the differences in these parties that
make financial services valuable (Bhalla, 2005).
The financial services industry serves the primary sectors of the
economy by intermediating the flow of funds and providing financial
services. Nationally and internationally, this industry is huge, growing
and of critical significance to the health of global economy as well as
that of individual business, investors, consumers and employees. The
industry dominated the commanding heights of the Indian economy in
the 1990s. Financial services are provided by stock exchanges,
specialized and general financial institutions, banks and insurance
companies. Each of the financial services can be defined to include
the provision of a financial service or the sale of a financial product or
both. The products and services can be grouped under the sections:
banking and credit; insurance and securities and brokerage.
Historically, there are four classes of financial services firms: 1)
deposit taking firms; 2) insurance type firms; 3) investment
companies; and 4) securities firms (Bhalla, 2005).








Following are some of the examples of financial services:
1. Leasing, credit cards, factoring, portfolio management, technical
and economic consultancy, credit information.
2. Underwriting, discounting and rediscounting of bills
3. Acceptances, brokerage and stock holding
4. Depository, housing finance and book building
5. Hire-purchase and instalment credit
6. Deposit insurance
7. Financial and performance guarantee
8. E-commerce and securitization of debts
9. Loan syndicating and credit rating (Gurusamy, 2004).
Among the other financial services, credit rating is of most
recent origin. Credit rating is a financial service which is helpful to
investors in taking their investment related decisions. As the investors
in search of profitable investment avenues have recourse to various
sources of information, such as research reports of market
intermediaries, offer documents of the issuer(s), media reports, etc.
but in addition they can also base the investment decision on the
grading offered by Credit Rating Agencies. Rating agencies are
independent third parties that are consulted in the course of a market
transaction. Their goal is to assess the probability whether an issuer
will meet its debt services obligations in time by overcoming
asymmetric information between both market sides by evaluating
financial claims according to standardized quality categories
(Christoph, 2001).



1.1: AN CREDIT RATING OVERVIEW
The expansion of financial markets and ever increasing number
of financial instruments provide both borrowers and investors with
large number of funding and investing options. As the number of
companies borrowing directly from the capital market increases and
as the industrial environment becomes more and more competitive
and demanding, it is difficult for investors to make a right choice
among the multiplicity of instruments and fund raisers particularly
where all the borrowers have a good name and reputation. Further,
the growing number of cases of defaults and frauds in payment of
interest and repayment of principal sum borrowed has increased the
importance of credit rating. Therefore, investors feel a growing need
for an independent and credible agency which judges impartially, the
credit quality of debt obligations of different companies and assist
investors, individuals and institutions in making investment decisions
(Singh, 1996). Thus, Credit Rating Agencies fulfil this need of
investors as the main purpose of credit rating is to provide investors
with comparable information on credit risk based on standard rating
scales regardless of the specifics of the companies. According to
Roman Kraussl, Professor of Economics at University of Crete, The
historical logic underlying the existence of credit rating agencies has
clearly resided within the basic problems of financial markets:
Asymmetric information. Credit Rating agencies supply market
participants with a system of relative creditworthiness of all bond
issues by incorporating all the components of default risk into a single
code: The credit rating (Jutur, 2005).


Further, the following developments also contributed to
emergence of credit rating industry all over the world.
- The increasing role of capital and money markets consequent to
disintermediation;
- Increased securitization of borrowing and lending consequent to
disintermediation;
- Globalization of credit market;
- Continuing growth of information technology;
- Growth of confidence in the efficiency of the open market
mechanism;
- Withdrawal of Government safety nets and the trend towards
privatization (Arora, 2003).
Thus, in the changed scenario where corporates are increasingly
dependent on public, the removal of restrictions on interest rates and
stipulation of a mandatory credit rating of a number of instruments
since 1991 by the government / SEBI, credit rating has emerged as a
critical element in the functioning of Indian debt or financial markets.
It is useful to safeguard the interest of investors by guiding them
towards the right path. Credit rating is desirable and mandatory for
certain instruments worldwide to caution the investors in advance
about the strength and weaknesses of a fund raising company.
Credit rating is the symbolic indicator of the current opinion of
rating agencies regarding the relative capability of issuer of debt
instrument, to service the debt obligations as per contract. Rating is
an independent, professional and impartial assessment of default risk
in debt obligation. It is a qualified assessment and formal evaluation
of companys credit history and capability of repaying obligations. This
assessment is based on an objective analysis of the information and
clarifications obtained from different sources including the issuer.
One of the leading Indian Credit Rating Agency CRISIL defines credit
rating as an unbiased, objective and independent opinion as to an
issuers capacity to meet financial obligations. It is the current
opinion as to the relative safety of timely payment of interest and
principal on a particular debt instrument. Thus, rating applies to a
particular debt obligation of the company and is not a rating for the
company as a whole. According to USA based internationally reputed
credit rating agency, Standard and Poors, credit ratings are
judgments of borrowers creditworthiness based on relevant risk
factors, expressed by letter grade rating symbol, which markets have
come to depend on as reliable, user friendly tool for differentiating
credit quality. Thus a rating, according to credit rating agencies
definition, is an opinion on creditworthiness of an obligator with
respect to a particular debt. In other words, the rating is designed to
measure the risk of a debtor defaulting on a debt. Credit rating
establishes a link between risk and return. It provides a yardstick
against which one can measure the risk inherent in an instrument.
The investor uses the rating to assess the risk level and compares the
offered rate of return with his risk return trade off and takes his
investment decision accordingly. Risk evaluation is only one factor
amongst various other factors, which also counts in taking investment
decisions.
Thus, the credit rating agencies evaluate the intrinsic worth of a
company and assign ranks to the companies accordingly. These
agencies have become important in view of the increasing number of
companies going to the public for funds and also due to government
stipulating that corporate bodies wanting to raise funds from the
market should have their debt instrument rated. The main objective
of these agencies is to restore the confidence in the capital market
and to provide unbiased assessment of credit worthiness of the
companies issuing debt instruments. Credit Rating Agencies are
essentially corporations with specialized functions, namely,
assessment of the likelihood of the timely payments by an issuer on a
financial obligation (known as credit rating). Thus, credit rating is
essentially the task of determining the strength and prospects of a
security offered in the market and thereupon place it amongst a band
having predetermined standards called grades (typically these
grades are symbolically represented, viz. A, AA, AAA, etc.) (Jain and
Sharma, 2008).
In underdeveloped markets credit quality is often evaluated by
Name Recognition, which cannot be used as an effective tool for
systematic risk evaluation since it suffers from numerous avoidable
limitations. Because it is not necessary that every venture promoted
by a well-known name will be successful and free from default risk.
Credit rating has eliminated or at least minimized the role of Name
Recognition and replaces it with well researched and scientifically
analyzed opinions as to the relative ranking of different debt
instruments in terms of credit quality. Now, lesser known companies
can also approach market on the basis of their ratings. As a rated
security is placed higher in the estimation of investors than an
unrated security irrespective of better financial standing or reputation
of the Issuer or Sponsor Company or the business house (Verma,
2000). Credit rating reforms the isolated function of credit risk
evaluation and reflects borrowers accountability, expected capability
and inclination to pay interest and principal in a timely manner.
Credit rating provides indicative guidance to the prospective investors
on the degree of risk involved in the timely repayment of principal and
interest thereof. The agencies most important job is evaluation of
various instruments including debentures, bonds, preference shares,
fixed deposits, certificates of deposit, loans, commercial papers, bank
deposits, IPOs, mutual funds and insurance claims, etc. Normally,
Credit Rating Agencies focus their evaluation on the creditworthiness
of a debtor. In most cases, agencies act on the request of the
evaluated firm. A rating mandate is valid for several years, during
which the rating agency monitors the client firm and corrects the
rating decision if there is any significant change in the clients
financial situation (Christoph, 2001).
Credit rating reflects financial, sectoral, operational, legal and
organizational sides of companies which characterize ability and
willingness duly and in full amount to repay debt obligations. Further,
credit rating is a published ranking based on detailed financial
analysis by a credit bureau. Rating is a complex activity requiring
examination and appraisal of seemingly complex factors and
attributes involving a diverse mix of variables ranging from
accounting to financial analysis and risk ascertainment and many
more (Jain and Sharma, 2008). The rating process is a fairly detailed
exercise. It involves among other things, analysis of published
financial information, visits to issuers offices and works, intensive
discussion with the senior executives of issuers, discussions with
auditors, bankers, creditors, etc. It also involves an in-depth study of
the industry itself and the degree of environment scanning. It is,
therefore, in human terms, rather impossible for a solo investor to
undertake to rate a security for chiefly two reasons; (i) lack of effective
access to the information required to make an effective rating, and (ii)
being not in possession of the complex tools required to translate the
data available into effective information required for decision-making
(Jain and Sharma, 2008).
The question Whats in a bond rating? has been asked for at
least since 1909 when such ratings were started in the United States.
Informed persons who answer this question typically admit that
ratings depend in part on readily available statistics on a firms
operations and financial condition. But these individuals also
emphasize that an important, if not the most important, determinant
of corporate bond rating is the raters judgement about the firms
ability to make the scheduled interest and principal or sinking fund
payments on time. This judgement, it is asserted, is based on much
more information than that contained in readily available statistics
(Pogue and Soldofsky, 1969). Bond ratings are the principal source of
investor information about the quality and marketability of various
bond issues (Pinches and Singleton, 1978). Better credit ratings lead
to better capital market access, both in terms of the cost of borrowing
and the amount of debt issued (Tang, 2006). Bond ratings have a
direct and often dramatic impact on the debt market. The cost of the
firm and even the marketability of the issue is in large part,
determined by assigned ratings. The investment community tends to
regard the bond rating as an indication of the firms overall
investment quality; thus bond ratings may influence both the cost of
debt and cost of equity to the firm (Pinches and Mingo, 1975). The
impact of credit rating on capital market can easily be visualized from
the fact that it becomes easier for investors to distinguish the
investment opportunities with different issuers both rated and not
rated going public for raising funds. Investors are prepared about the
risk, whereas the issuers are also free and enthusiastic to go to the
market with confidence created through rating grade. Thus, capital
market is driven to efficiency in true sense where there remains no
place for rumours and fancies of brand names (Verma, 2000).
Further, credit rating has proven itself to be effective instrument of
risk assessment in countries with advanced economies since it
demonstrates transparency of an enterprise. Credit rating facilitates
the company in raising funds in the capital market and helps the
investors to select their risk return trade off (Sarkar, 1994).
Credit ratings are commonly used by lenders to assess the
default risk because every credit is connected with a possible loss. If
the probability of a default is above a certain threshold a credit will
not be provided (Czarnitzki and Kraft, 2007). Thus, bond ratings are
used extensively in the investment community as a surrogate
measure for the riskiness of bonds (Robert and Gabriel, 1979). Rating
evaluates only a specific instrument and indicates risk associated
with such instrument only. Therefore, credit rating is neither a
general purpose evaluation of a corporate entity nor an overall
assessment of credit risk likely to be involved in all the debts or
financial instruments. A credit rating is a rating agencys credit
quality assessment of a debt issuer or a specific debt obligation. A
credit rating consists of both a letter rating (credit category) and (if
provided) commentary. The commentary can include a credit watch
and/or credit outlook modifier, assumptions, criteria and methods
used in determining the rating opinion, conditions under which the
rating may or will be changed and descriptions of the rated company
and its lines of business (Frost, 2006). The involvement of a
specialized agency in this task of rating increases the creditability of
the process, so ratings serve as objective criteria for the market
players to base their self-purchase decision on (Jain and Sharma,)
Credit rating essentially indicates the credit worthiness of the
borrowers and the probability that the borrowers will pay the interest
and principal on due dates. A credit rating system is considered of
good quality if debtors with a lower credit rating default more often
than debtors with a higher credit rating (Lehman, 2003). Here are
some important features/facts about credit rating:
(a) Rating can be revised.
(b) Rating is not based on audit.
(c) Rating only helps in investment decision-making.
(d) Rating is based on current information.
(e) Rating is assigned to specific instrument (Sarkar, 1994).
(f) Rating aims at guiding the investors.
(g) Rating does not provide any recommendation to buy, hold or
sell any instrument.
(h) Rating process is based on broad parameters of information
supplied by the issuer and collected from various other sources.
(i) The rating furnished by the agency does not provide any
guarantee for the completeness or accuracy of information on
which it is based.
(j) In rating business, the users of the rating services such as
investors, financial intermediaries and other end users, do no pay for
it but the issuers, of the financial instrumenot use rating, pay for it.
This is one of the most peculiar feature of credit rating.
(k) A key feature of rating is that they contain a limited number of
categories. Hence, equally rated bonds are not claimed to be of
identical quality and rating cannot be inverted into unique
default probabilities (Kliger and Sarig, 2000).


Thus, Credit rating is expected to improve the quality
consciousness in the market and establish, over a period of time, a
more meaningful relationship between the quality of debt and the
yield from it (Vepa, 2006). Nowadays, the outlook of credit rating
industry appears to be positive but the industry has to continuously
strive to improve the professional capabilities and sustain credibility.
The credit rating agencies today have ample opportunities to play a
unique role in strengthening the capital market and building the
investors confidence in the financial system. Clearly, accurate
assessment of the credit worthiness of obligators is an important
precondition for the stability of a financial system since inadequately
high exposure to credit risk has been one of the leading sources for
problems in financial institutions worldwide for many decades (Hornik
et al., 2006).

DEFINITIONS
Some important definitions of credit rating given by various
national and international rating agencies are as under:
Moodys Investor Service
Ratings are designed exclusively for the purpose of grading
bonds according to their investment qualities.
Investment Information and Credit Rating Agency of India Ltd.
(ICRA)
Credit rating is a simple and easy to understand symbolic
indicator of the opinion of a credit rating agency about the risk
involved in a borrowing programme of an issuer with reference to the
capability of the issuer to repay the debt as per terms of issue. This is
neither a general purpose evaluation of the company nor a
recommendation to buy, hold or sell a debt instrument.
Credit Analysis and Research Ltd. (CARE)
Credit rating is, essentially, the opinion of the rating agency on
the relative ability and willingness of the issuer of a debt instrument
to meet the debt service obligations as and when they arise.

1.2 IMPORTANT DETERMINANTS OF CREDIT RATING
The ratings are so devised that they provide investors with a
simple and easily understood indicator expressing the underlying
credit quality and the risk associated with an instrument of debt (Rao
et al., 1996). Each rating assigned to a security issue is a reflection of
various factors. Rating does not come out of a pre-determined
mathematical formula, which fixes the relevant variables as well as
the weights attached to each of them. Rating agencies do a great
amount of number crunching, but the final outcome also takes into
account factors like quality of management, corporate strategy,
economic outlook and international environment.
While assigning ratings the credit rating agencies principally
focus on the following determinants:
(i) The character and terms of the particular security being issued;
(ii) The probability that the issuer will default on the security and
the ability and willingness of the issuer to make timely
payments as specified in the indenture (contract) accompanying
the security;
(iii) The degree of protection granted to the investors if the security
issuer is liquidated, reorganized, and/or declares bankruptcy.
The past and probable future cash flows of the security issuer;
(iv) The volume and composition of outstanding debt;
(v) The stability of the issuers cash flows over time;
(vi) The value of asset pledged as collateral for a security and
securitys priority of claim against the issuing firms assets; and
(vii) The interest coverage ratios and the liquidity of the issuing firm
(Bhalla, 2005).
Thus, credit rating agencies use their understanding of
companies business and operations and their expertise in building
frameworks for relative evaluation, which are then applied to arrive at
performance grading of various instruments of the companies, without
disclosing the private information of the issuer companies. Therefore,
issuers willing to dissolve some of the asymmetric information risk
with respect to their credit worthiness and yet not wishing to disclose
private information can use rating agencies as certifiers. In such a
case, ratings are supposed to convey new information to investors.
Ratings can also be used as regulatory licences that do or do not
convey any new information (Galil, 2003).

1.3 ESSENTIALS OF A GOOD CREDIT RATING
SYSTEM
Credit rating serves as a valuable input in the decision-making
process of different market participants in the capital market
including the regulators. A good credit rating system is one which
serves the interests of all such market participants and the regulators
in an effective way. So, in order to fulfil this requirement and the
rating system to function effectively existence of the following
ingredients is necessary.
1. Credible and Independently Derived Credit Ratings: Ratings
should be credible and the credibility arises only if the rating
agency is independent of issuers business, holds high degree of
professionalism and relevant expertise across the industry.
Further, the ratings will be credible if there exists impartiality of
opinions, strict rules of confidentiality relating to sensitive and
confidential information of the issuer, timeliness of rating reviews
and announcement of changes, ability to reach a wide range of
investors by means of press reports, print and electronic
publications and research services. In the words of Wilson(1994),
Every time a rating is assigned, the agencys name, integrity and
credibility are on line and subject to inspection by whole
community (Gurusamy, 2004).
2. The Meaning and Use of Ratings should be Clear, including the
Level of Risk Inherent in the Rating: Rating agencies should be
transparent about the meaning and limitations of their ratings.
Further the rating agencies should use warning signals whenever
possible, such as credit rating watch and rating outlook, in order
to make the ratings more important to investors. Thus, rating
users might understand that ratings can change suddenly based
on market or industry-specific events.
3. Disclosure Requirements: One of the essential requirements of a
good rating system is to make the adequate corporate disclosures
and to publish all the essential information required by the
investors.
4. Investor Education: Along with the task of rating a particular
instrument, the rating agencies should also ensure that such
information should not only reach the investors, but they should
enable investors to make meaningful interpretations also. The
investors should also be aware of the limitations of credit rating.
Regulation should require the rating firms to provide publicly
detailed explanations about the nature of their opinions and
pertinent information used in the rating process in order to
enhance the investor knowledge.
5. Transparency and Soundness of Credit Rating Analysis: There
should be transparency in ratings process, including criteria and
methodologies for assigning and updating ratings, which would
give investors critical information they need to make informed
decisions, to compare ratings, and to form their own opinions on
the soundness of an agencys analytics.
6. Existence of Active Debt Market: An active primary and
secondary debt market is crucial for rating agencies to continue to
provide their services.

1.4 IMPACT OF CREDIT RATING: POSITIVES Vs
NEGATIVES
Credit ratings have a direct and dramatic impact on the bond
market and various parties related directly or indirectly to credit
rating since credit rating is a source of reliable information for many
users as rated instruments speak themselves about the soundness of
the company and the strength of the instrument rated by the credit
rating agency.
As suppliers, corporate bond issuers rely on credit ratings to
ensure the best possible interest rate for their securities; as
consumers, bond investors depend on credit ratings to determine the
credit worthiness of companies in which they invest (Mansi and
Baker, 2001). As both pros and cons always exist, so credit rating also
has both positive and negative impact on the related parties in the
form of advantages and disadvantages as discussed below:

1.4.1 Advantages of Credit Rating
Ratings provide great advantages to issuers and investors. To
the investors, it communicates the relative ranking of the default loss
probability for a given fixed income investment in comparison to other
instruments. To the issuers, it is a marketing tool which provides
greater access to a much wider investor base as compared to unrated
securities (Vepa, 2006). As name recognition is replaced by objective
rating the lesser known companies are also able to access the money
market and capital market. The companies have the advantage of
mobilizing resources at low-coupon rate and easy market accessibility
of fund mobilization.
- Rating helps investor to compare the issues by providing them a
short and clear guide.
- Fair, honest and impartial rating motivates the public to invest their
savings in company debentures, deposits, etc.
- Credit ratings are guide posts to investors (Rao et al., 1996).
Thus, credit rating is beneficial to various parties like issuers,
investors, regulators, brokers and financial intermediates. They all
have lot to gain from credit rating. Various benefits derived from credit
rating by different parties include:
To Issuers:
The benefit of credit rating for issuers stems from the faith
placed by the market on the opinions of credit rating and widespread
use of ratings as a guide for investment decision (Arora, 2003). Credit
rating facilitates the borrower company or the issuer of securities to
mobilize savings from a wider section of interested investing public at
a lower cost for the highly rated company and helps a lesser known
company to have easy access to the capital market (Verma, 2000).
1. Rating provides access to international pool of capital as it creates
a tendency amongst the rated corporate units to maintain higher
corporate standards and to remain healthy in the business
environment. This creates better image of the business class of the
country as a whole in the international market.
2. Rating reduces the cost of borrowing for the companies as
companies with high rating can quote lesser interest rate on fixed
deposits or debentures or bonds. The investors with low risk
preferences would like to invest in such safe securities.
3. The wider access to investor base and investing instruments
increase the financial flexibility of the company.
4. Rating leads the companies to self-discipline as it encourages
them to come out with more disclosures about their accounting
system, financial reporting and management pattern. Further, in
order to maintain the standard of rating attained, the companies
try to improve their existing practices to match the competitive
standards.
5. Rating facilitates best pricing and timing of issues.
6. The rating leads the companies to assess their own performance. It
provides motivation to the companies for growth as the promoters
of the companies feel confident in their own efforts and are
encouraged to undertake expansion of their operations or new
projects.
7. Companies with rated instruments avail of the rating as a
marketing tool to create better image in dealings with their
customers, lenders and creditors.
8. Credit rating provides recognition to some unknown or new
issuers as investors invest their money after considering the rating
grade given to them rather than just by their names. So, a
relatively new issuer with good credit rating can have a strong
standing in the financial market.
To Investors
A rating is one of the inputs that is used by investors to make
an investment decision. Rating exercise adds to the structure and
system of trading market as the debt securities can be classified
according to the ratings so that the investors can weigh the ratings
vis--vis advantages of securities (Khan and Akbar, 1993). Various
benefits available to the investors from credit rating include:
1. Credit rating gives superior information about the rated product
and that too at low cost, which the investor, otherwise, would not
be able to get so easily. Thus, the investor can easily recognize the
risk involved and the expected advantage in the instrument by
looking at the symbols. This helps the investors to take calculated
risk.
2. With the help of credit rating the investors can take quick
decisions about the investment to be made in any particular
security of the company.
3. Credit rating reduces the dependence of investors on advice of
financial intermediaries, the stock brokers, merchant bankers, the
portfolio managers or financial consultants about the good
investment proposals. As the rating symbol assigned to a
particular instrument suggests the credit worthiness of the
instrument and indicates the degree of risk involved in it. Thus,
investors can make independent investment decisions.
4. Highly rated securities/instruments of the company give an
assurance to the investors of safety of the instrument, thus, this
safeguard the investors against bankruptcy as highly rated
securities are considered as safe ones.
5. Credit rating is done by the highly qualified analysts of the
agencies, who recognize all the quantitative and qualitative
variables of the company before assigning the rating. Thus, credit
rating gives the clue of credibility of the issuer company. It relieves
the investors from botheration of knowing about fundamentals of a
company, as such rating saves time and energy of investors.
6. As investors need not to see into the fundamentals of the
companies, so with the help of rating they can compare many
instruments of various companies at a time and they can make
choice depending upon their own risk profile and diversification
plan.
7. Investors can make the correct investment decisions after
considering or evaluating the rating of instruments, without just
relying on the criteria of name recognition. As the well-known or a
prominent groups companies often go sick and investors funds
deposited with them are rendered unsafe.
8. After rating the instruments, the rating agencies are involved in
the ongoing surveillance of the instrument being rated. The rating
agencies downgrade or upgrade the instruments after considering
the subsequent financial strength of the company whose
instrument is rated by it. This ongoing surveillance gives a great
benefit to the investors as they can change their investment
decision accordingly.

9. Credit rating encourages the investors to invest in securities or
instruments of companies as rating gives them clear cut idea
about the financial strength of the company without putting any
extra efforts. Thus, rating induces/encourages habit of saving
among investors.
10. The investing community is also benefited from the allied services
provided by credit rating agencies such as research in the form of
industry reports, corporate reports, seminars and open access to
the analysis of agencies.
Thus, credit rating helps the investors in numerous ways by
safeguarding their interests. According to US Credit Rating Agency
Standard and Poors, Credit ratings help investors by providing an
easily recognizable, simple tool that couples a possibly unknown
issuer with an informative and meaningful symbol of credit quality.
To Brokers and Financial Intermediaries
The brokers and other financial intermediaries also gain
benefits from credit rating as through rated instruments these parties
need to make less efforts in studying the companys credit position to
convince their clients to select a particular investment proposal. The
time, cost and energy of brokers and financial intermediaries is saved.
To Regulators
Credit rating is also helpful to regulators as Rated securities
bring improvement in capital market and reflect upon its efficient
functioning. With the help of the symbols assigned to the rated
company the regulators can differentiate between good and bad
companies without incurring any financial burden. Thus, this helps
them to take timely action against defaulted companies. The credit
rating and the related detailed analysis by the Credit Rating Agencies
help in disseminating information to all, and thus, impart
transparency in the system, which is very helpful to small investors,
who otherwise may not have access to such information and who in
turn may rely on regulators for such transparency. Thus, this task of
regulators of providing transparency to investors is done by Credit
Rating Agencies thereby making the regulators task less onerous.
Regulators rely on credit rating for various other purposes also (Arora,
2003).

1.4.2 Disadvantages of Credit Rating
Despite various benefits to different parties including investors,
issues or rated company, etc. credit rating also has many
disadvantages as the system relies heavily on expert judgments and
subjective information. So, there is difficulty in objectively comparing
and re-examining past credit assessments. Some of the drawbacks of
credit rating are stated below:
To Investors
1. Credit rating is given on the basis of past and present performance
of the company and once the rating is assigned to any instrument
it is rarely revised. Thus, this rating exercise is a static process
and not beneficial for investors who rely on rating for their future
investment decision.
2. Credit rating is an indication and no full proof reliability of
assessment as Issuer Company might conceal material
information from the investigating team of the credit rating agency.
In such cases, quality of rating suffers and renders the rating
unreliable.
3. Owing to time and cost constraints, credit rating agencies are not
able to capture all the characteristics of an issuer and issue. This
may lead to biased rating.
4. Rating is done for a particular instrument of the company and not
the company as a whole. Therefore, rating is no guarantee for the
soundness of the company. But many investors do not know this
fact and they take high rating as a certificate of soundness of the
company and other instruments of the company, and therefore,
they lose their money sometimes.
5. The issuer companies have a choice to accept or not to accept
rating; and only favourable ratings are accepted by the companies
and made public. This misleads the investors if the rating given by
one agency is not acceptable by the company, they may go to other
agencies to get their instruments rated. This is called Rating
shopping. In order to compete for clients, agencies will be tempted
to hand out more favourable ratings and to compete for lower fees
for by lowering their research and analysis cost (Jutur, 2005).
6. The issuers are paymasters, thus, independence of ratings
becomes questionable and the issuers may influence the rating
decision according to their own needs.
7. Further, credit rating agencies are not accountable for the ratings
given by them. If they do not work with high integrity and
devotion, their ratings may mislead the investors. Further, the
issuer companys image may also be on stake due to this.
8. There is a possibility of confusion due to existence of many credit
rating agencies, which rate the same instrument differently. This
difference in rating may be due to no common rigid formula for
rating with all agencies. Therefore, subjective bias in the area, viz.
management quality, asset quality, auditors quality, accounting
accuracy, etc. may arise in credit ratings (Azahgaiah, 2004).
9. In western countries, the rating agencies undertake voluntary
rating even if the issuer company does not approach them. This
unsolicited rating is primarily intended towards protection of the
interest of the common investors. However, this aspect is lacking
in India (Azahgaiah, 2004).
10. Time factor affects ratings, so sometimes misleading conclusions
may be drawn as particular company in certain industry may get
low rating due to temporary adverse condition of that particular
industry, which may adversely affect the companys interest and
goodwill.
11. Sometimes rating agencies in order to attract business lure a
corporate with a prospective high rating. Subsequently, after 2-3
months, the rating is downgraded and the issuer does not have
any choice but to accept it (Goel, 1998).
12. Validity of rating ends with the maturity of a debt instrument and
it no longer subsequently benefits the issuer company, because a
rating is valid for the life time of the debt instrument being rated.
Therefore, for a short period its validity amuses the investors but
over a long period it cannot escape uncertainty and doubts
(Verma, 2000).
13. Another major controversy surrounding corporate ratings is rating
agencies providing consultancy services to the firms whom they
rated (Jutur, 2005).




1.5 HISTORICAL PARALLELS OF CREDIT RATING
The World Scene
US has been the birth place of rating agencies as in the
background of great financial crisis of 1837 in USA the need was felt
to predict the ability of merchants and traders to pay their financial
obligations. In this context, one of the pioneer professional thinker,
Louis Tappan established the first mercantile bank credit rating
agency in New York in 1841, which rated the debt paying ability of the
merchants. This mercantile rating agency was further acquired by
Robert Dun, and its first rating guide was published in 1859. Another
similar agency was set up by John Bradstreet, a financial analyst, in
1849, who published the analytical work done by it in its rating book
in 1857. The mercantile rating agency acquired by Robert Dun and
agency set up by John Bradstreet were merged together to form Dun
& Bradstreet in 1933. Corporate bond ratings were developed prior to
World War-I in response to a commercially viable need for
independent and reliable judgment about the quality of corporate
bonds (Pogue and Soldofsky, 1969).
As such in 1900 John Moody founded Moodys Investors Service
in US and in 1909 published his Manual of Railroad Securities with
comments on 200 major railroad companies by John Moody. Further,
utility and industrial bonds were rated by the Moodys in 1914
followed by bonds issued by US cities and other municipalities in the
early 1920s. Moodys also assigned sovereign ratings to debt of
various
nations including Britain, Italy, Japan, China, etc. Further, the
Moodys started rating the debt of international issues in 1950 by
rating the Yankee bond issue of Canada and the World Bank. The
purpose of Moodys ratings is to provide the American investor with a
simple system of gradation by which the relative investment qualities
of bonds may be noted. Gradations of investment qualities are
indicated by rating symbols representing a group in which the quality
of characteristics are broadly the same (Pogue and Soldofsky, 1969).
Thus, Moodys was the first to use the alphabetical symbols like Ass,
As and so on in the credit rating system which became the base of
modern credit rating. Then in 1962, the Dun and Bradstreet which
was formed in 1933, acquired the Moodys Investor Services. Evidence
of the application of credit rating to corporate instruments for the first
time is also traceable to the time when Henry Vernum Poor (a
journalist) and his son started a firm to publish Poors Manual of
Railroad of the United States in 1860s in USA. The manual reported
financial and operating statistics covering several years for most of the
major American rail roads.
After John Moody began his ratings of railroad bond in 1909,
the Poors company also entered the bond rating business, by
publishing its first ratings in 1916. A new entrant in information and
rating business by the name of Standard Statistics Company also
started its operations in 1922 followed by Fitch Publishing Company
in 1924. The Poors Publishing Company and Standard Statistics
Company merged together in 1941 to form Standard and Poors (S&P).
S&P was further taken over by McGraw-Hill, the publishing giant in
1966. The credit rating agencies expanded from the 1970s through
the 1990s, much as they did from 1909, when John Moody
introduced
the concept, to the 1930s (Jutur, 2005).
In the 1970s a number of rating agencies started rating
activities all over the world. In 1972, Canadian Bonds Rating Service
was established followed by the incorporation of Thomson Bank
Watch in 1974, which was based in Toronto, Canada and which was
exclusively following financial institutions including banks, securities
firms and finance companies. In 1975, Japanese Bond Rating
Institute was incorporated by Japan Economic Journal. The other
rating agencies in Japan such as Japan Bond Research Institute,
Japan Credit Rating Agency, and Nippon Investors Services came to
be established soon thereafter. In 1975, McCarthy Crisanti and Maffei
was established in USA which was acquired by Duff and Phelps in
1991. Dominion Bond Rating Service was established in 1977 in
Canada, and IBCA Limited in 1978. IBCA Ltd. was an independent
and privately owned international credit rating agency based in
London (UK) and was established with the objective of offering credit
analysis of bonds in different countries. In 1980, Duff and Phelps
Credit Rating Company was formed which is a major source of credit
information internationally. It rates all major types of fixed income
securities, long and short-term debts of corporations, sovereign
nations and financial institutions. This company operates in Latin
American countries and also in Asian countries, viz. Pakistan and
India.
US is the originator of concept of credit rating but now with the
development of capital markets the world over, it is becoming a
universal phenomenon (Sarkar, 1994). Now there are credit rating
agencies operating in many other countries of the world also including
Malaysia, Bahrain, Bangladesh, China, Philippines, Mexico,
Indonesia, Israel, Pakistan, Cyprus, Korea, Thailand, Kazakhstan,
Uzbekistan and Australia.
Origin and Growth in India
In India, the rating activities started with the incorporation of
the Credit Rating Information Services of India Ltd. (CRISIL) in 1987
which commenced its operations of rating of companies in 1987-88
and was promoted by Industrial Credit and Investment Corporation of
India Ltd. (ICICI) and Unit Trust of India (UTI). Thus, India became the
first among the developing world to set up a credit rating agency.
CRISIL has its association with internationally recognized rating
agency Standard and Poors (S&P) since 1996. The second rating
agency Investment Information and Credit Rating Agency of India Ltd.
(ICRA) was incorporated in 1991 and was jointly sponsored by
Industrial Finance Corporation of India (IFCI) and other Financial
Institutions and banks. ICRA is an associate of the International
Rating Agency Moodys Investors Services. The other rating agency,
Credit Analysis and Research Ltd. (CARE), incorporated in April 1993,
is a credit rating information and advisory services company promoted
by Industrial Development Bank of India (IDBI) jointly with Canara
Bank, Unit Trust of India (UTI), private sector banks and financial
services companies. Another rating agency Onicra Credit Rating
Agency of India Ltd., which was incorporated in 1993, is recognized as
the pioneer of the concept of individual credit rating in India. Further,
Duff and Phelps Credit Rating (India) Private Ltd. (DCR) was
established in 1996, presently known as Fitch Ratings India Private
Limited.
One more rating agency, SME Rating Agency of India Limited
(SMERA) which was a joint venture of SIDBI, Dun & Bradstreet
Information Services (D&B), Credit Information Bureau of India
Limited (CIBIL), and 11 other leading banks in the country, was
established on September 5, 2005. It is the countrys first rating
agency that focuses primarily on Indian SME sector. A new rating
agency, Brickwork Ratings (BWR) which is based in Bangalore was
incorporated in 2007. Besides CRISIL (Standard & Poor), ICRA
(Moodys), CARE and Fitch, Brickwork Ratings is the fifth Credit
Rating Agency to be recognized by SEBI.

Growth of Credit Rating Agencies
Country Credit Rating Agency
USA Mercantile Credit Agency(1841)
USA Moodys Investors Service(1900)
USA Poor Publishing Company(1916)
USA Standard Statistics Company(1922)
USA Fitch Publishing Company(1924)
USA Dun & Bradstreet(1933)
USA Standard & Poor(1941)
USA McGraw-Hill(1966)
Canada Canadian Bond Rating Service(1972)
Canada Thomson Bankwatch(1974)
Japan Japanese Bond Rating Institute(1975)
USA McCarthy Crisanti & Maffei(1975)
Canada Dominican Bond Rating Service(1977)
UK IBCA Limited(1978)
USA Duff & Phelps Credit Rating Company(1980)
India CRISIL(1987)
India ICRA(1991)
India CARE(1994)
India Duff & Phelps Credit Rating India (P) Limited
( Now Fitch Rating India Private Ltd.)(1996)
India SME Rating Agency of India Limited
(SMERA)(2005)
India Brickwork Ratings India Pvt. Ltd (BWR)(2007)


1.6 GLOBAL REGULATORY OVERSIGHT
Credit rating agencies conduct business in numerous countries,
and have a great impact on the financial system across the globe.
Thus in view of the critical role played by credit rating agencies and
their increased importance in the modern financial architecture the
International Organization of Securities Commission (IOSCO), the
United States Securities and Exchange Commission (SEC), the
European Commission Committee of European Securities Regulations
(CESR), and the United States Congress and Senate have collectively
tried to remove certain shortcomings inherent in credit ratings
including barriers to entry and lack of competition, conflicts of
interest, lack of transparency and accountability. IOSCO has, thus,
formulated a Code of Conduct Fundamentals for the working of credit
rating agencies, which were recently updated in May 2008. The Code
Fundamentals are designed to apply to any credit rating agency and
any person employed by a credit rating agency in either full time or
part time capacity. The Code of Conduct focuses on transparency and
disclosure in relation to credit rating agency methodologies, conflicts
of interest, use of information, performance and duties to the issuers
and public, the role of credit rating agency in structured finance
transactions, etc (Government of India, 2009).

The US Securities and Exchange Commission (SEC) in 1975
began an informal process of recognizing rating agenciesby giving
them the designation Nationally Recognized Statistical Rating
Organizations (NRSROs)which permitted regulated entities such as
brokerage companies and mutual funds to rely on their ratings to
satisfy specific regulatory requirements. This designation involved
minimal informal oversight, since it relied on market acceptance
rather than regulatory standards.
In 2006, following a series of corporate scandals and especially
the one involving Enron, the US Congress passed the Credit Rating
Agency Reform Act. It provided the SEC with explicit legal authority to
require rating agencies electing to be treated as NRSROs to register
with it (thereby opening a clear path of entry for new competitors) and
to comply with certain requirements (Katz et al., 2009). Thus, in the
US, credit rating agencies are subject to the Credit Rating Agency
Reform Act of 2006, which sets standards which are similar to those
established under the IOSCO Code of Conduct. In 2009, the US
Securities and Exchange Commission (SEC) amended its regulations
for rating agencies to require enhanced disclosure of performance
statistics and rating methodologies, disclosure on their website of a
sample of rating actions for each class of credit ratings, enhanced
record keeping and annual reporting, and additional restrictions on
activities that could generate conflicts of interest (for example,
prohibiting rating agencies from advising issuers on ratings and
prohibiting ratings personnel from participating in any fee discussions
or negotiations). Regulators in Europe, Japan, and Australia are
actively reviewing formal oversight of rating agencies. A regulation on
credit rating agencies was approved in April 2009 by the European
Parliament and was followed by a communication on financial
supervision by the EU Commission in May 2009. All rating agencies
that would like their credit ratings to be used in the European Union
will need to apply for registration to the Committee of European
Securities Regulators (CESR) and be supervised by it and the relevant
home member state (Katz et al., 2009).
The Securities and Exchange Board of India (Credit Rating
Agencies) Regulations, 1999 empower SEBI to regulate credit rating
agencies operating in India. In fact, SEBI was one of the first few
regulators, globally, to put in place an effective and comprehensive
regulation for credit rating agencies. It is observed that all SEBI
regulated credit rating agencies in India have framed their internal
code of conduct, which have provisions, inter alia, of conflict of
interest management, avoidance and disclosures of conflict of interest
situations, etc. and such provisions prescribed are by and large in
accordance with the IOSCO Code of Conduct Fundamentals for credit
rating agencies. The internal code of conduct formulated by the credit
rating agencies is in addition to the Code of Conduct prescribed under
the SEBI (Credit Rating Agency) Regulations 1999 (Government of
India, 2009).
Further, few of the Indian credit rating agencies are members of
Association of Credit Rating Agencies in Asia (ACRAA). These include
Brickwork Ratings India Pvt. Ltd., Credit Analysis and Research Ltd.
(CARE), CRISIL Ltd., and ICRA Limited. Association of Credit Rating
Agencies in Asia (ACRAA) was formed on September 14, 2001 by 15
Asian Credit Rating Agencies from 13 countries and it is assisted by
Asian Development Bank (ADB). It was a pioneering event to bring
domestic credit rating agencies in a regional co-operative effort. As of
June 2010, membership has increased to 27 members from 14
Countries.

ACRAA was formed to promote:
- Exchange of skills and ideas amongst Asian rating agencies,
- Promotion of best practices and norms of conduct among Asian
rating agencies, and
- Development of financial markets in Asia.
ACRAA has been active in bringing together rating agencies from
across Asia for regular interchange of experiences. It has been
instrumental in arranging world-class training for persons involved in
the rating process in member agencies. A significant initiative
undertaken by the Best Practices Committee of ACRAA was to create
the ACRAA Best Practices Checklist. All Member Agencies are
expected to declare their positions on each of the items in the
checklist.
Moreover in India as SEBI administers the activities of credit
rating agencies with respect to their role in securities market only
there are different regulatory authorities connected to different
instruments which require mandatory rating for issuance of certain
instruments.
The regulators such as Reserve Bank of INDIA (RBI)
Ministry of Petroleum (MoP), IRDA and Directorate
General of Shipping have incorporated ratings into the investment
guidelines for the entities they regulate.
It may be stated ay the end that in the environment of
uncertainty, bond ratings serve as an important source of information
for comparing and evaluating the credit worthiness of debt (Moon and
Stotsky, 1993). Thus, credit rating is index assigned by rating
agencies as a measure of creditworthiness and default probability of a
company regarding its debt obligations. It is a professional opinion
given after studying all available information at a particular point of
time. Further, there is no privity of contract between an investor and a
rating agency and the investor is free to accept or reject the opinion of
the agency. An informed decision-making is the hallmark of Corporate
Governance and this is what Credit Rating Agencies are for: to inform
the investor upon the viability of the securities and the pros and cons
associated with investing in them. Credit Rating Agencies influence
investor behaviour and regulate issuers access to financial markets
as thus, they act as markets gatekeepers (Jain and Sharma, 2008).
Nevertheless, rating is essentially an investor service and a rating
agency is expected to maintain the highest possible level of analytical
competence and integrity. So, in the long run, credit rating agencies
have to build their credibility on the quality of its services. The impact
of credit rating in the modern financial system can be highlighted in
the words of Thomas Friedman, a journalist, who had once said,
There are two superpowers in the world today. Theres the United
States and theres Moodys Bond Rating Service. The United States
can destroy you by dropping bombs, and Moodys can destroy you by
downgrading your bonds. And believe me, its not clear sometimes
whos more powerful.





REVIEW OF LITERATURE
Credit rating serves as a valuable input in the decision-making
process of different participants in the capital market including
regulators, issuers and investors. Therefore, it has been attracting the
attention of thinkers in the field of finance to study various dynamics
of this fast emerging subject. Various studies have been conducted in
India as well as in different parts of the world by different bodies and
individuals and thus contributing a lot to explore new insights into
the concept of credit rating. The area of concern of the studies
conducted so far has been mainly to find out the relevance of credit
rating in the Indian context as well as at the global level and the
extent of awareness among the investors, about the concept of credit
rating.

Kliger and Sarig (2000) made an attempt to examine whether
the rating information was price relevant and useful. To study this,
the reactions of bond and stock prices to rating changes
announcements by US rating agency - Moodys, after its 1982 rating
refinements, were noted. The authors found that the rating
information did not affect the overall value of firm but the debt value
increased and equity value fell when Moodys announced better than
expected ratings and vice versa. Further the authors worked out that
the rating information was valuable because the issuers disclosed the
inside information to raters, who assign ratings after considering that
information and that too without fully disclosing the specific
underlying details to the public.


Reddy (2000) tried to investigate the changing perspectives and
issues of credit rating in India. He gave an overview of credit rating
and agencies involved in such ratings both at Indian and International
level, the benefits expected by the issuers, investors and regulators
from credit rating and the criticisms leveled on such rating agencies.
He also focused on the issues relating to sovereign rating and use of
credit rating by regulators especially in banking sector. The author
advocated that the appropriate disclosure of information and
accounting standards across the board and freedom of expression and
independence of credit rating agencies would help in improving the
rating system. Further, the credit awareness of the investors on the
operations of the rating systems should be encouraged to make the
credit ratings more viable.

Baker and Mansi (2001) examined the views of two types of
respondents, i.e., issuers of investment and non-investment grade
bonds, about the four major US Nationally Recognized Statistical
Rating Organizations (NSROs). These US rating agencies include
Standard & Poors, Moodys, Duff & Phelps and Fitch. The results of
the study reveal that the issuers of investment and non-investment
grade bonds differ significantly from each other as the number of
bond ratings maintained by the former was higher than those
maintained by the latter. But as far as their satisfaction level is
concerned, both types of issuers were generally satisfied with these
credit rating agencies but their level of satisfaction was higher for
S&P. This was because of S&Ps more frequent company visits, its
speed in issuing upgrades, its understanding of the firm and industry.

Kuhner (2001) tried to analyze whether credit rating agencies
have some benefits in misrepresenting their clients credit quality
during the systematic crisis. The author tested the given hypothesis
through various models. He revealed that in maximum situations the
agencies did not report the true credit quality of their clients. Thus,
there might be certain incentives available to the rating agencies.
Further the author also highlighted that the creditors did not act
contingent on rating assignments instead the creditors anticipate that
the agencys report has no informational value. Thus, the study
inferred that there was no relationship between agencys
announcements and the creditors withdrawal decisions.

Ferri and Liu (2002) tried to evaluate whether three major
world players of rating industry Moodys, S&P, and Fitch IBCA,
convey market high quality information on borrowers in both
developed and emerging markets by taking database covering three
years 1997, 1998 and 1999. The authors observed that in the
developing countries there was a close relationship between firm and
sovereign ratings but this was not the case with developed countries.
They highlighted that the rating criteria used for firms in developing
countries did not differ with respect to those reserved to firms in
developed countries, thus, the global rating agencies did not think
globally. Thus, the authors suggested that the firms in least developed
countries (LDCs) should be penalized because of their domicile as low
sovereign ratings would cause low private ratings, thus, bringing
about high cost of capital in lcds.


Convitz and Harrison (2003) in their paper, described that the
bond rating agencies had a dual objective of getting the financial
incentives on the one hand and the stated goal of supplying
independent and objective credit risk analysis to the investors on the
other hand. So, they had a conflict of interest between profitability
and reputation. Thus, the authors tried to evaluate whether the
actions of rating agencies were influenced by this conflict of interest or
not. For this purpose, a data set of about 2000 corporate bond rating
changes by Moodys and Standard & Poors from 1997 to 2002 was
observed. They found that rating changes were not as such influenced
by rating agencies financial incentives but rather the rating agencies
were more concerned towards their reputation related incentives. It
means that the rating agencies appeared to be relatively responsive to
their reputation concerns and thus ultimately protected the interest of
investors.

Du and Suo (2003) in their study, examined the duration effect,
momentum effect and rating policy effect on credit rating upgrades
and downgrades. Duration is defined as the length of time that the
firm has been in current rating, whereas momentum means one
rating upgrade or downgrade followed by next rating change in the
same direction. The data set of study includes 1508 firms in total
which were assigned ratings by S&P from 1988 to 2001. The authors
found that the duration effect on credit rating changes was not fixed
but it varies with time. They also found that the downgrading rating
momentum exists but there was no evidence for upgrade rating
momentum. Further, they highlighted that rating agencies had been
adopting strict and restrictive rating policies over time because
although there were more downgrades than upgrades in the studied
years, yet they did not observe much defaults related to that. So,
downgrades did not necessarily mean larger probabilities of defaults.

Azahagaiah (2004) in his study, made an attempt to highlight
the practices and problems of credit ratings in India. He studied the
perceptions of Indian investors and revealed that out of various
investment options, maximum respondents (37%) preferred company
deposits. The analysis on the basis of investment showed that 35 per
cent of respondents depend on credit rating for their investment
decision. The analysis also revealed that majority of respondents
(50%) depended on CRISIL ratings followed by those of ICRA (30.43%).
The study concluded that even though with many problems, the issue
with a credit rating had more chances of getting subscribed than that
without a credit rating.

Achalapathi and Rajani (2004) tried to evaluate the corporate
governance rating methodology being used by the two leading Indian
credit rating agencies including ICRA and CRISIL. The authors made
an attempt to apply the transparency and disclosure requirements
and rating technology to analyze the corporate governance reports of
various companies and tried to find out whether most of the
companies comply to statutory requirements or not. It was found that
financially better performing companies disclosed much as compared
to financially weak companies. Similarly, the companies having
relatively higher proportion of Foreign Institutional Investors in the
shareholding pattern disclosed more about their corporate governance
as compared to the companies which have less proportion of Foreign
Institutional Investors. Though corporate disclosures were always at
a cost being borne by the shareholders yet the disclosures were
required by the shareholders. So, most of the companies comply with
the statutory requirements as corporate disclosures increase the
corporate image of the company.

Robbe and Mahieu (2004) studied both timeliness and
predictability of rating changes by S&P. For the purpose of this study
all 583 rated companies that were included in S&P 500 index between
July 1998 and June 2003 were taken as a sample. The study analyzed
the rating changes by S&P in relation to another credit risk measure
which was developed by another company named KMV Corporation, a
new entrant in credit rating industry. The rating methodology adopted
by S&P and KMV was substantially different. S&P determined the
rating on qualitative-oriented accounting based approach. KMV
calculated the rating probabilities called Expected Default Frequencies
which was quantitative-oriented market based approach. The study
highlighted that timeliness and predictability of S&P rating changes is
low as 75 per cent of the S&P rating changes were significantly
anticipated by KMV more than a year in advance. Further, Expected
Default Frequencies of KMV possessed considerable predictive powers
to forecast future rating changes by S&P. So, they suggested that
both qualitative and quantitative approaches should be used by the
agencies to predict the rating changes properly.




Gill (2005) in her research paper, made an attempt to examine
the performance of ICRA on the basis of average default rate. The
study relates to the long-term debt instruments over a period of seven
years from 1995- 2002. The author brought out that ICRAs
performance about the companies rated by it had not been up to the
mark and default on ICRA rated long-term debt instrument are the
highest in manufacturing sector followed by financial sector. Further
the study found that many of the debt issues that defaulted during
the period were placed in ICRAs investment grade until just before
being dropped into default grade. So, the author suggested that
excessive reliance on credit ratings should be reduced and proper
steps should be taken to make the working of credit rating agencies
more accountable.

Martell (2005) analyzed the sovereign credit rating changes
issued by Standard & Poors and Moodys on 29 emerging countries
from 1986 to 2003 and the effect of the same on the stock prices of
the locally traded stocks of each country. The author found that the
local stock markets reacted only to news of sovereign credit rating
downgrades and that too which were issued by Standard & Poors.
Thus, he established that the rating changes from S&P were more
informative than those by Moodys. He also found that larger firms
were more sensitive to sovereign credit downgrades and the firms that
had access to international capital markets experienced larger
abnormal returns than the firms that did not have access to
international financial markets.


Kanagaraj and Murugesan (2006) in their paper, tried to
evaluate the relationship between credit rating and financial variables.
The sample of the study includes the group of manufacturing firms
whose debentures were rated by CRISIL and the study covers a period
of six years from 1996-1997 to 2001-2002. The author had grouped
the important variables, which form the basis for rating classification,
into nine financial dimensions including profitability, liquidity,
activity, debt service coverage, liabilities structure, size, firms age,
leverage and sales turnover. The authors revealed that there is a very
good relation between the financial performance of a firm and credit
rating. The authors further worked out that the variables such as debt
coverag, profitability and leverage hold a dominant position in credit
rating classification while size of the firm, working capital
management and liabilities structure are given a consideration in
rating.

Vepa (2006), in her study, made an attempt to trace trends in
the corporate debenture issues of the private sector in India and the
rating trends of the same with special reference to the pioneer rating
agency of India CRISIL. The time period of the study was from 1991-
92 to 2004-05. The author observed that the number of public and
rights issues had decreased during the period under study, whereas
the percentage of private placement out of total issues had increased
consistently. Many of the debt instruments including debentures were
downgraded during the period but the presence of multiple credit
rating agencies gave scope to issuers to approach more than one
credit rating agency with a hope to secure better ratings. The author
highlighted that when credit rating became mandatory in 1992-93 in
India, private placements of debentures gained importance as a
preferred route of financing as credit rating was not mandatory for
private placements but in spite of that, the debentures or issues
which were rated were more safe and reliable than the unrated ones
by the investors.

Cantor et al. (2007) analyzed the behaviour of various plan
sponsors and investment managers regarding the use of rating
guidelines in the conduct of their investment activities. For the
purpose of study, 200 plan sponsors and investment managers of US
and Europe were taken as sample. They also investigated a number of
important issues regarding the linkage between market dynamics and
use of credit rating. The authors revealed that the rating based
guidelines were widespread but their forms and motivations vary
considerably but the usage of ratings appeared remarkably similar in
US and Europe. Further, they found that the adoption of rating based
guidelines by investment managers was dominated by client
requirements rather than the regulatory needs. They also highlighted
that the market participants expressed a preference on more accuracy
of ratings over more stability of ratings.

Czarnitzki and Kraft (2007), in their study, tested whether the
credit ratings give more specific information about creditworthiness of
the firms as compared to the publicly available information (which is
available to the potential investors without any substantial cost). They
selected a sample of about 8000 firms of German manufacturing
sector for the purpose of study and the time period of study was
1999-00. They compared the ratings given by leading German credit
rating agency Credit Reform with the publicly available information.
The study revealed that the young firms were more likely to default
than the established ones. Further, the lower the productivity the
more would be the probability of default. They further inferred that
credit rating has some additional informational value for lenders but
the rating agencies overemphasized the factor firm size in
construction of rating index.

Jain and Sharma (2008), in their paper, attempted to examine
the working of credit rating agencies in the light of role played by
them in the capital market as information disseminators. The authors
identified conflicts of interest affecting the rating decisions and the
manner in which the regulations have attempted to address them.
Further, they also studied the regulatory framework for credit rating
agencies in India. The authors revealed that credit rating agencies
play a central role in the capital markets through their informed and
independent analysis. The various conflicts of interest highlighted in
the study were relating to the fee charged, ancillary services of credit
rating agencies, ownership interest of credit rating agencies in client
securities and the problem of notching. The study highlighted that
despite the significant role played by credit rating agencies in capital
markets, they are not properly regulated as not much responsibility is
put on them in respect of their rating actions. Further, in the Indian
context too, the authors revealed certain loopholes in the regulatory
system of credit rating agencies. These included deficient disclosure
regime, lack of private enforcement regime, management conflict of
interest and lack of rules for structured finance ratings, which need

to be corrected in a proper and timely manner.

Reddy and Gowda (2008), in their paper, explained the
importance and problems of credit rating in India. They also
highlighted the basis of credit rating and credit rating practices
prevalent in India. For this purpose, the opinions of sample of
investors from Hyderabad were taken. The results of the study
inferred that majority of the respondents were aware of the existence
of various credit rating agencies including CRISIL, CARE, ICRA, etc.
About 40 per cent (80 out of 200) of the respondents depend on credit
rating for their investment in debt instrument but more than 50 per
cent from them (94 out of 180) rely on CRISIL for their investment
than the other credit rating agencies. The study worked out that
though there is confusion among various investors due to existence of
more than one credit rating agency but majority of them are satisfied
with the guidance of credit rating agencies.

Bhattacharyya (2009), in her paper, evaluated the issuer
rating system in India with special reference to ICRAs issuer rating
model, since ICRA introduced the issuer rating services in India in
2005. The author identified various quantitative variables having
major impact on the issuer rating along with their relative importance
with the help of discriminant analysis. The time period of the study is
from the date when the issuer rating started in 2005 to March 2008
and the sample consists of 17 companies which have been rated by
ICRA during this period. The study highlighted that out of the ten
variables being used by ICRA for issuer rating the PBIT & Debt plus
net worth ratio, current ratio and net sales growth rate play an
important role but the qualitative factors can also affect the ratings at
any time.

Bheemanagauda and Madegowda (2010) made an attempt to
evaluate the performance of credit rating agencies in India including
CRISIL, ICRA, CARE and FITCH. Secondary data relating to long-term
debt instruments from time period 2000-08 has been used for the
purpose of the study. The analysis of the study brings out that during
the given period there is a substantial increase in the rating business
in India. During the study period, the maximum percentage of
instruments rated is assigned the investment grade rating. As far as
rating revisions are concerned, the study depicts that the downgrades
were more than double the upgrades both in terms of number of
instruments and the volume of debt. This depicts that the ratings
were issuer biased. So, the authors suggested that stringent methods
should be adopted to avoid frequent downgrades. The study further
highlights that among the agencies which maintain the stability of
ratings, Fitch India Ratings holds the top most position followed by
CRISIL, ICRA and CARE in line.

Dichev and Piotroski (2011) examined the long run stock
returns following bond rating changes by using a sample that
comprised all Moodys bond rating changes during the period 1970-
97. They found no reliable abnormal returns following upgrades but
negative abnormal returns were found following the downgrades. They
revealed that the poor returns of downgraded firms were more
pronounced for small firms. They also tried to find out whether the
abnormal returns following downgrades were compensation for risk or
due to some other explanation. The evidences from the study
suggested that the poor returns resulted from the under reaction to
the announcement of downgrades, rather than from lower systematic
risk.

Arora (2011) made an attempt to evaluate the credit rating
system in India. The main objectives concentrated in the study were to
study the factors and their relevant weightage in bond rating and to
develop a model for testing bond rating by various agencies. The
results of the study indicated that both qualitative and quantitative
factors were important for bond rating but the findings revealed that
credit assessment done by credit rating agencies was relatively weak.
The post-rating performance of companies did not justify initial
ratings assigned to them. Further, the external inconsistency and
variability in rating of bonds was observed due to changing corporate
business environment and poor forecasting abilities of the analysts.

Kraussl (2012) in his working paper, assessed the role of credit
rating agencies in the international financial market particularly in
the emerging market economies in the second-half of 1990s. Credit
rating agencies played an important role in financial decision-making
by providing information about credit risks associated with different
financial investments and they provided standardized evaluation of
the likely risks and returns associated with alternative investments.
The role of sovereign credit ratings had also been examined by the
author in financial markets of the emerging economies because
sovereign credit ratings might convey certain new information about
any countrys credit worthiness and thus might encourage financial
market downturns. Therefore, the study inferred that the credit rating
agencies affect the size and volatility of emerging market lending.
These results were stronger in the case of government bond
downgrades. Further, the study also revealed that the speculative
grade rated emerging market economies were more vulnerable to
interest rate changes in the financial markets.

Thus, it can be said at the end that many studies relating to
credit rating have been conducted in India as well as abroad but a
glimpse of existing literature reflects that despite of the increasing
importance of credit rating agencies as the information providers for
credit related opinions, the comprehensive research pertaining to
credit rating in Indian context is still limited. Most of the studies
conducted so far in India focused mainly upon the theoretical and
conceptual framework of credit rating in India.












RESEARCH METHODOLOGY
The present chapter explains the need, objectives, scope,
time period, sample and the techniques used for data analysis
in the study. The limitations of the study have also been discussed.

1. NEED FOR THE STUDY
Credit Rating is used by the investors as indication of the
likelihood of receiving back the money invested by them, in
accordance with the terms on which they invested. Credit ratings are
opinions based on all information known to rating agency, including
publicly available information and/or non-public documents and
information provided to the agency by an issuer and other parties.
Credit rating is useful to safeguard the interest of investors by guiding
them towards the right path.
The increasing number of scams and controversies have shaken
the confidence of investors in corporate instruments. Thus, credit
rating is particularly useful to investors when they are faced with an
array of debt investment options that is much larger than what their
own credit assessment resources can reliably support. Therefore,
considering the importance of credit rating, different aspects of credit
rating need to be studied deeply so that it can be of more help to the
investors. Despite the increasing importance of credit rating agencies
as information providers, for credit related opinions of debt
instruments, the research pertaining to credit rating in the Indian
context has been limited. So, the present study is an attempt to
ascertain the activities undertaken by rating agencies on various
parameters and to know the investors perceptions regarding the
rating agencies.

2. OBJECTIVES OF THE STUDY
Considering the importance of credit rating, the specific
objectives of the study are as follows:
1) To study the regulatory environment affecting the credit rating
activities in India.
2) To examine the operational performance of various credit rating
agencies.
3) To assess the consistency in rating methodology and to examine
rating variability by rating agencies.
4) To study the impact of credit rating on the performance of various
companies.
5)To study the investors opinion regarding the credit rating practices
in india.

3. SCOPE OF THE STUDY
The study focuses on the four SEBI recognized credit rating
agencies in India, including CRISIL, ICRA, CARE and FITCH.
Brickwork Ratings agency (BWR) recognized by SEBI has not been
taken into consideration as it came into existence only in the year
2007. Both primary as well as secondary data has been used for the
study.

4 . TIME PERIOD OF THE STUDY
The study covers the period from January 2013 to March, 2013.



5 . SAMPLE AND SOURCES OF SECONDARY DATA
The sample of this study includes 25 per cent of the total
number of trading and manufacturing companies whose debentures
and bonds were rated by each rating agency during the time period
April, 2001 to March, 2006. In this way, a total number of 144
companies were selected, covering 60 from CRISIL, 36 from ICRA, 28
from CARE and 20 from FITCH. Companies selected for each rating
agency are further divided into four equal groups with AAA, AA, A and
BBB rating grades. These rating categories have been chosen keeping
in view the fact that majority of rated companies fall under these
rating classes and these form the basis of various studies conducted
in this field.
The data regarding different rating grades as well as
instruments and issuers rated by the agencies under study, has been
collected from the reports of the rating agencies including various
issues of CRISIL Rating Scan, ICRA Rating Profile and CARE Rating
View, FITCHs India Ratings Monthly and websites of these rating
agencies. Further, the data pertaining to various financial ratios for
the given period has been collected from PROWESS database of CMIE.

6 . SAMPLE AND SOURCES OF PRIMARY DATA
The investors viewpoint regarding the credit rating practices
has been studied through a primary survey. The population from
which the sample has been selected consists of the individual
investors residing in ludhiana. Since the population of the sample
was spread over a very large area and it was difficult to approach all
of them because of time and cost constraints, hence, for the purpose
of this study, a sample of 100 individual investors was selected. For
this purpose, sampling was carried out in two stages
The convenience and judgement sampling method was adopted
for collecting information from the investors.
The primary data was collected through a structured
questionnaire. A questionnaire is an instrument that is widely used to
collect various types of data and consists of list of questions designed
to collect the relevant information. First of all, the questionnaire
helped to collect the information regarding demographic features of
the respondents like Age, Educational Qualification, Occupation,
Experience of investors in investing activities and total annual
investment of the respondents. Then, information regarding the
opinion and perceptions of individual investors regarding credit rating
was collected.
Some of the responses related to certain attributes given in the
questionnaire were assigned weights before going for statistical
analysis. These include:
(i) Comparison of ranks assigned to different investment bases was
done after giving weights as Rank 1=5, Rank 2=4, Rank 3=3, Rank
4=2, and Rank 5=1.
(ii) Extent of agreement on different statements regarding credit rating
was shown by assigning weights as Strongly Agree = 5, Agree = 4,
Neutral = 3, Disagree = 2, and Strongly Disagree = 1.
(iii) Level of importance given to different rating attributes was shown
by assigning weights as Most Important = 5, Important = 4, Neutral
= 3, Unimportant = 2, and Most Unimportant = 1.



7. VARIABLES FOR ANALYSIS
Rating methodology as well as post-rating performance of the
companies have been analyzed corresponding to eight financial ratios
related to long-term solvency and short-term liquidity as well as
profitability of the companies. The short-term liquidity ratios
considered are Current ratio and Quick ratio whereas long-term
solvency ratios include Debt-equity ratio and Interest Coverage ratio.
Further the profitability ratios selected include Return on Capital
Employed, Return on Net Worth, Profit after Tax/Total Income
(PAT/TI), and Profit before Depreciation, Interest and Tax/Total
Income (PBDITA/TI). These financial ratios have been selected as
these are commonly used by all the credit rating agencies and some of
the previous studies also support these ratios.
Further, the cross tabulation of the data collected through
questionnaire has been done on the basis of five variables, viz. Age,
Educational Qualification, Occupation, Experience of investors in
investing activities and total annual investment of the respondents.

8 . TECHNIQUES OF DATA ANALYSIS
Various statistical tools have been applied to analyze the
secondary data. Mean, Standard Deviation and Coefficient of Variation
have been applied for analyzing the instruments and issuers being
rated by the rating agencies under study.
F-values using Analysis of Variance (ANOVA) have been
calculated for ascertaining the consistency in rating methodology of
each agency separately. This consistency has been found in case of
companies falling in similar rating grades/ groups (within group) and
companies falling in different rating grades/ groups (between groups),
for eight financial ratios selected for four rating grades, viz. AAA, AA, A
and BBB.
ANOVA has also been applied to compare of rating methodology
of all the agencies together by taking companies belonging to same
rating class (within group) as sample for eight financial ratios selected.
Further, Tukeys HSD Post Hoc Test was also applied to make
multiple comparisons in cases where the F-values appeared to be
significant.
The Percentage Change has been calculated for the purpose of
analyzing variability in rating by the four rating agencies over the
period.
Linear Regression Analysis has been applied to study the post-
rating performance of the companies, for each performance indicator
(current ratio, quick ratio, debt-equity ratio, interest coverage ratio,
return on capital employed, return on net worth, PAT/TI and
PBDITA/TI) with one independent variable, i.e., time - the
representative of credit rating.
The primary data collected through the questionnaire was
analyzed with the help of various tools including Simple percentages,
Analysis of Variance (ANOVA), Critical Difference (CD), Cross-
tabulation and Chi-square Test.
All statistical calculations have been made by the use of
Microsoft Excel and Statistical Package for Social Sciences (SPSS)
version 16.




1. Mean of Individual Series

Mean values have been used to find the average of various items.

The following formula has been used to calculate the arithmetic mean:


X =
X


N



Where, X = Arithmetic mean

X= Sum of all the values of the variable X, and
N = Number of observations.



2. Standard Deviation

It is a measure of how widely values are dispersed from the average
value (the mean). The standard deviation values have been calculated
by using the following formula:


o =
x
2



S.D. () =
N


x = (X - X)

Where, S.D. () = Standard Deviation

X = Actual Mean of Series


(X - X) = Deviations of the Items from the Mean,


and

N = Number of observations.


3. Coefficient of Variation

It is a relative measure of dispersion based on standard deviation.
The series having greater CV are said to be more variable than the
other and the series having less CV are said to be less variable than
the other.


CV =
o
100
X

Where, CV = Coefficient of Variation


X= Value of Mean.


4.Simple Percentage Analysis

Simple percentage analysis is most important and widely used
statistical tool in analysis and interpretation of data. The simple
percentages are calculated through the following formula:

Single Unit in a whole of N Units

100
N


5. Percentage Change

Simple percentage change has been used to find the change in
ratings between two periods. The following formula has been used:

Change in number of N Units

100
Total number of N Units


6. Analysis of Variance(ANOVA)

Analysis of variance (ANOVA) has been carried out to compare
more than two means at a time. The process of the analysis is given
hereunder:

Source of Variation d.f. T.S.S. M.S.S. F-ratio


Categories n-1=a S1 S1/a=x x|y

Error b-a=c S2 S2/c=y

Total N-1=b




Where, n = No. of categories to be compared N
= n x Y

Y = No. of data points

T.S.S. = Total Sum of Squares

M.S.S. = Mean Sum of Squares (TSS/d.f.),
and d.f. = Degree of Freedom.










7. Tukeys HSD Post-Hoc Test

This test has been applied to make multiple comparisons in cases
where the F-ratios appeared to be significant. This test is basically
applied where the N is unequal.


8. Critical Difference (CD)

In case F-ratio came to be significant, Critical Difference (CD) has
been calculated with the following formula:

CD =
2 * M .S.S.e
* t at error d.f.
Y





Critical Difference (CD) was calculated to compare all the possible
pairs of mean values. If the arithmetic difference in any two mean
values is greater than or equal to CD, then it was taken significant,
otherwise non-significant. This test is applied where the N is equal.


9. Linear Regression Analysis

Linear Regression Analysis has been applied to study the
relationship of each independent variable with each dependent
variable selected separately. The following regression equation has
been used for this purpose:

Y = a + b x

Where,

Y = Dependent variable, i.e. performance indicator of company
(Current ratio, Quick ratio, Debt-equity ratio, Interest
coverage ratio, Return on capital employed, Return on Net

Worth, PAT/TI and
PBDITA/TI) a = Constant

b = Slope, it determines how much the Y variable will change
when X is increased by one point, and

x = Independent variable, i.e. time, the representative of credit
rating.





10. Cross Tabulation

Cross Tabulation can be done by combining any of the two
questions and tabulating the data together. It was carried to
understand relationship between demographic variables of the
respondents and their perceptions regarding credit rating.


11. Chi-square Test

Pearsons Chi-square test, popularly known as Chi-square

test (
2
) is used to determine whether a relationship exists between
two variables or not. Chi-square test has been used to study the
association of various demographic features with the various aspects
regarding credit rating highlighted by the respondents in the
questionnaire. It has been worked out as follows:

2
=
(O - E)
2



E



Where,

2
= Chi-square value

O = Observed frequencies, and

E = Expected frequencies.

The calculated values of
2
are compared with relevant table
value to conclude some inference.


9. SYMBOLS USED FOR DIFFERENT LEVELS OF

SIGNIFICANCE:

***: Significant at 1% level (0.01)

**: Significant at 5% level (0.05)
*: Significant at 10% level (0.10






10. LIMITATIONS OF THE STUDY
In research, we can seek perfection but shortcomings cannot
altogether be ruled out, therefore,the present study is not an
exception. No doubts, sincere efforts have been made to make
precise study a representative in its related area, but still some
of limitation are:
1. The primary data in the study has been collected through a pre-
designed questionnaire which carries all the limitations inherent
with the primary data as perceptions of the respondents in selected
sample may be influenced by the knowledge, experience and the
attitude of individuals.
2. As the size of population is very large, therefore, the sample has
been drawn on convenience and judgement basis. So, the
shortcomings inherent in this method of sampling may creep into
the sample used in the study.
3. As the study is restricted to only districts of ludhiana, its
findings may not be generalized for other districts of the state as
well as for whole of India.
4. Different quantitative and qualitative factors are considered by
various rating agencies while assigning a rating grade, whereas in
the present study only quantitative factors including eight financial
ratios have been used to assess the consistency in rating
methodology. Therefore, the results of the study should be
interpreted with caution.





CREDIT RATING PRACTICES: INVESTORS

PERCEPTIONS

This chapter examines the awareness of investors regarding the
functioning of credit rating agencies in India. Further, an attempt has
been made to study the sources relied on by the investors while
making the investment, their satisfaction level regarding credit rating,
their comparison of rated and unrated instrument, and their
perceptions regarding different attributes of rating, fees charged by
the rating agencies and accountability of rating agencies.

The chapter is the outcome of primary survey conducted to
collect the necessary information from a sample of 100 investors with
the help of a structured questionnaire. The survey covers investors
from districts of Ludhiana in Punjab.

1. DEMOGRAPHIC PROFILE OF THE RESPONDENTS

As every investor has his own investment decision, it may vary
from the decision of other investors. Therefore, it is necessary to know
about their personal profile. So, the demographic sketch of the
individual investors surveyed is based on various attributes like Age,
Educational Qualification, Occupation, Experience of investors in
investing activities and total annual investment of the respondents.
An effort has been made to carry out the analysis according to these
characteristics of the sample. A brief profile of the respondents is as
follows:

1.1 Age Structure

The choice of investors regarding investment differs at different
levels of age. So, an endeavour has been made to see the impact of age
on the choice of investment. The individual investors have been
classified into the following four categories:

(i) Up to 30 years (A1).

(ii) Between 30 to 45 years (A2).




(iii) Between 45 to 60 years (A3).

(iv) Above 60 years (A4).

The data concerning age pattern of the respondents is given in
Table 1.

Table 1
Age-wise Distribution of Respondents
%age of
Age Number of Respondents Respondents

Up to 30 Years(A1) 38 38.00

30-45 Years(A2) 47 46.66

45-60 Years(A3) 10 10.67

Above 60 Years(A4) 5 4.67

Total 100 100.00



Table 1 reveals that most of the respondent investors, i.e., 46.66
per cent fall in the age category A2, followed those belonging to A1, A3
and A4 categories with the respective percentages of 38, 10.67 and
4.66.

1.2 Educational Qualifications

The educational qualifications have an important role to play in
decision-making of the investors. The educational profile of the
respondents has been classified into the following categories:

(i) Undergraduates.

(ii) Graduates having a degree in any discipline like
Commerce, Arts, Science etc.

(iii) Post-graduates in any of the disciplines.

(iv) Professional qualifications include degrees like CA, ICWA,
MFC, MCA, MBA etc.


The data showing the educational qualifications of the respondent
investors has been presented in Table 2






Table 2
Education-wise Distribution of Respondents
Category Number of Respondents %age of Respondents

Undergraduate 7 7.33

Graduate 32 32.00

Post-graduate 33 32.67

Professional 28 28.00

Total 100 100.00



Table 2 reveals that maximum number of respondents, i.e.,

32.67 per cent are post-graduates followed by 32 per cent graduates,
28 per cent professionals, and the remaining 7.33 per cent
undergraduates.

1.3 Occupation

Occupation is considered as an important determinant affecting

the investment decision of the investors. So, occupation-wise, the
investors have been classified into five categories, viz. Service,

Business, Profession, Agriculture and Others as shown in Table 3.

Table 3
Occupation-wise Distribution of Respondents

Category Number of Respondents %age of Respondents

Service 39 38.66

Agriculture 2 1.67

Business 26 26.67

Professionals 29 29.00

Others 4 4.00

Total 100 100.00



Table 3 demonstrates that among the surveyed respondents
38.66 per cent are servicemen followed by 29 per cent professionals
and 26.67 per cent businessmen. The others include students, self-
employed, retired persons, etc. who constitute 4 per cent of the total
respondents. However, a very small proportion of the respondents,
i.e., 1.67 per cent appear in the agriculture category.






1.4 Investment Experience

Further, the investment experience of the investors also affects
their investment decision. On the basis of their experience, the
respondent investors have been divided into four categories, viz. Less
than 1 year (E1), 1 to 3 years (E2), 3 to 5 years (E3), and Above 5 years
(E4). These categories are presented in the Table 4.

Table 4
Investment Experience-wise distribution of Respondent Investors
Number of
Category Respondents %age of Respondents
Less than 1 Year(E1) 23 22.67
1 to 3 Years(E2) 41 41.33
3 to 5 Years(E3) 23 23.00
Above 5 Years(E4) 13 13.00
Total 100 100.00

The table exhibits that maximum number of respondents, i.e.,

41.33 per cent having an experience ranging from 1 to 3 years
followed by 23 per cent of respondents who fall under E3 category.

Further, 22.67 per cent of respondents are related to category E1, and
a very low percentage of respondents, i.e., 13 per cent belong to
category E4.

1.5 Total Annual Investment

The total annual investment also affects the investors mindset

regarding the various rating activities, so data regarding total annual
investments has also been collected. The total annual investments
have been divided into four categories namely, Less than Rs. 1,00,000
(I1), Rs. 1,00,000 to 3,00,000 (I2), Between Rs. 3,00,000 to 5,00,000

(I3), and More than Rs. 5,00,000 (I4).

Table 5
Investment-wise Distribution of Respondents
Annual Number of
Investment (Rs.) Respondents %age of Respondents
Less than 100000(I1) 46 46.34
100000 to 300000(I2) 36 36.00
300000 to 500000(I3) 12 12.33
More than 500000(I4) 6 5.33
Total 100 100.00





Table 5 clearly depicts that majority of the respondents, i.e.,
46.34 per cent belong to I1 category, whereas 36 per cent, 12.33 per
cent and 5.33 per cent represents I2, I3 and I4 categories respectively.

2. INVESTMENT PREFERENCES OF RESPONDENTS

In order to know about the investment preferences of the
respondents, they were asked two questions regarding the basis of
their investment and the type of investment in which they invest in.

2.1 Basis of Investment

The investors can base their decision upon many factors while
making an investment. They can make their investment decision on
the basis of their common sense, past experience and knowledge in
the field. Further, they can seek advice of their friends, relatives or
brokers. Their investment decision might be influenced by the credit
rating assigned to the instrument by the credit rating agencies.

Further, the advertisements in newspapers and the tips provided by
the financial experts may also be helpful to the investors in taking
their investment decisions. To examine the investors preference about
various basis of investment they were asked to rank the given factors.
The weighted scores and overall ranks of different investment basis
were worked out by assigning weights to different ranks as under:

Rank 1= 5, Rank 2= 4, Rank 3= 3, Rank 4= 2, and Rank 5= 1

Here, overall ranks are given after calculating F-ratio followed by
Critical Difference (CD). The overall ranking is assigned on the basis of
value of CD. Similar ranks are assigned to those bases, whose
difference in the weighted score is less than the value of CD. Those
bases which are given similar overall rank are almost equally
preferred by the respondents irrespective of different weighted score.
Results thus obtained are shown in the Table 6.










Table 6
Basis of Investment
Basis of Rank 1 Rank 2 Rank 3 Rank 4 Rank 5 Weighted Overall
Investment Score Rank

Advice of
Others 37(37.00) 15(15.00) 15(15.00) 18(17.67) 15(15.33) 3.41 1

Credit Rating 18(17.67) 29(29.00) 24(24.33) 13(13.33) 16(15.67) 3.19 2

Financial
Expert 25(24.66) 20(20.00) 17(16.67) 18(17.67) 21(21.00) 3.10 2

Advertisement 13(12.67) 26(26.00) 24(24.00) 20(20.00) 17(17.33) 2.97 2

Common
Sense 8(8.00) 10(10.00) 20(20.00) 31(31.33) 31(30.67) 2.03 3

F-ratio = 5.78*** CD = 0.20

*** Significant at 1 per cent level
Note: Figures in parentheses denote percentages.

The ranks assigned by the respondents to different investment
basis are shown in Table 6. According to the weighted average scores,
advice of others followed by credit rating, tips by the financial experts,
advertisements in newspapers, and common sense come in line of
preference from 1 to 5 as a basis of investment by the investors. But
there comes out to be three broad categories of rankings according to CD
as shown in the table. The advice of friends, relatives and others
appeared to be the most preferred bases of investment. Credit rating, tips
by financial experts and advertisement in newspapers are almost equally
preferred by the investors and placed on second position. Common sense
is given the last preference as an investment basis.

2.2 Type of Investment

To know about the type of investment usually respondents
invest in, they were asked to tick their preference about the type of
investment between Risk free investment, Moderate risky investment
and Highly risky investment. Tables 7a, 7b, 7c present the investment
preferences of investors surveyed on the basis of various demographic
features discussed earlier.



2.2.1 Impact of Age on Type of Investment

Table 7a
Age-wise Choice of Investment
Age

Type of

Up to 30 30-45 45-60 Above 60

Investment Years(A1) Years(A2) Years (A3) Years(A4) Total


Risk Free

Investment 13(35.1) 15(32.1) 5(43.7) 1(28.6) 34(34.3)


Moderate Risky

Investment 20(52.6) 25(53.6) 5(50.0) 3(57.1) 53(53.0)


Highly Risky

Investment 5(12.3) 7(14.3) 1(6.3) 0(14.3) 13(12.7)


Total 38(100) 47(100) 11(100) 4(100) 100(100)



Chi-square value= 2.660, d.f.=6, Not significant at 5 per cent level of
significance. Note: 1. Figures in parentheses denote percentages.

2. The use of Chi-square statistics in goodness-of fit tests is an approximation of the
multinominal probability distribution and carries with it some restrictions with
respect to sample size if a good approximation is to be achieved. Traditionally,
statisticians have recommended that expected frequencies should be equal to or
greater than five in order to achieve an acceptable approximation. Recent research,
however, indicates that this is not at all necessary if the number of degrees of
freedom is two or more.

As about the type of investment they invest in, Table 7a shows
that most of respondents, i.e., 53 per cent invested where risk was
moderate followed by 34.33 per cent of respondents who preferred to
invest in risk free investment. Only 12.67 per cent of respondent
investors like to invest where the risk was high.

Age can have influence on the pattern of investment of
investors. Table 7a depicts the impact of age on the type of investment
in which the investors invest their money. From the table it is revealed
that maximum number of investors have invested in moderate risky
investment, irrespective of age group, the highest percentage (57.1%)
among these is of investors who belong to A4 category (above 60 years
of age) followed by 53.6 per cent, 52.6 per cent and 50 per cent of
investors who belong to A2, A1 and A3



categories respectively. 34.3 per cent of investors invested in risk free
investment and highest percentage among such respondents fall in
age A2 (42.8%). Further it is also revealed from the table that
maximum percentage of investors, i.e., 14.3 per cent each, belonging
to age group A2 and A4 invest in highly risky investment. The Chi-
square value obtained at 5 per cent level of significance indicates that
no significant association exists between age group and the type of
investment in which the investor invest in.


2.2.2 Impact of Qualification on Type of Investment

Table 7b
Qualification-wise Choice of Investment
Type of Educational Qualification

Investment

Total

Undergraduate Graduate Postgraduate Professional


Risk Free

Investment 3(40.9) 12(36.5) 12(38.8) 7(25.0) 34(34.3)


Moderate

Risky

Investment 3(45.5) 15(45.8) 15(46.9) 20(70.2) 53(53.0)


Highly Risky

Investment 1(13.6) 6(17.7) 5(14.3) 1(4.8) 13(12.7)


Total 7(100) 33(100) 32(100) 28(100) 100(100)



Chi-square value= 15.943, d.f.=6, Significant at 5 per cent level of
significance. Note: Figures in parentheses denote percentages.

Table 7b highlights that a large proportion respondents
belonging to all educational groups preferred to invest in such
investment where the risk was moderate and maximum percentage of
such respondents have attained a professional degree (70.2%).
However among those respondents who invest in risk free investment
the majority (40.9%) is of undergraduates and among those who
invest in highly risky investment the majority (17.7%) is of graduate
respondents. The Chi-square value calculated at 5 per cent level of
significance shows that there is significant association between the






educational qualification of the investors and the type of investment
they invest in.

2.2.3 Impact of Occupation on Type of Investment

Table 7c
Occupation-wise Choice of Investment
Type of Occupation

Investment

Total

Service Agriculture Business Profession Others


Risk Free

Investment 9(23.3) 1(40.0) 11(41.3) 12(41.4) 2(41.7) 35(34.3)


Moderate Risky

Investment 22(56.0) 1(40.0) 13(47.4) 16(54.0) 1(58.3) 53(53.0)


Highly Risky

Investment 8(20.7) 0(20.0) 3(11.3) 1(4.6) -- 12(12.7)


Total 39(100) 2(100) 27(100) 29(100) 3(100) 100(100)



Chi-square value= 19.863, d.f.=8, Significant at 5 per cent level of significance.
Note: Figures in parentheses denote percentages.

Table 7c depicts the occupation-wise classification of investors
investing in risk free, moderate risky and highly risky investments.

The table highlights that maximum number of investors belonging to
each occupational category have invested in moderate risky
investment and the highest proportion of such respondents fall in

Others category (58.3%) followed by 56 per cent of servicemen, 54 per
cent of professionals. Among those respondents who invested where
the risk was high, maximum percentage is of servicemen i.e. (20.7 %)
whereas a great percentage of Businessmen, Professionals and
Others, i.e., 41 per cent each invested in risk free investments. The
Chi-square value calculated at 5 per cent level of significance shows
that there is significant association between the occupation and type
of investment selected by the investors.

2.2.4 Impact of Experience on Type of Investment

If we examine experience-wise distribution of investor's survey,
we found from Table 7d that 65.3 per cent of respondents belonging to
E2 category opt for moderate risky investment whereas second highest
percentage is of respondents belonging to E4 experience



category. Among those investors who invest in risk free investment,
48.5 per cent belong to E1 category and next in order come 40.6 per
cent of respondents belonging to E3 category. The percentage of
investors who invest in highly risky investment is highest for E4
category. It is revealed from the table that with the increase in
experience level, the choice of highly risky investment also go on
increasing. The Chi-square value obtained at 5 per cent level of
significance indicates that there is significant association between
investment experience of investors and the type of investment in
which they invest their money.

Table 7d
Experience-wise Choice of Investment
Experience in Investment

Type of

Less than 1 Between 1-3 Between 3-5 Above 5

Investment Year(E1) Years(E2) Years(E3) Years(E4) Total


Risk Free

Investment 11(48.5) 11(26.6) 9(40.6) 3(23.1) 34(34.3)


Moderate Risky

Investment 10(45.6) 27(65.3) 9(37.7) 7(53.8) 53(53.0)


Highly Risky

Investment 1(5.9) 4(8.1) 5(21.7) 3(23.1) 13(12.7)


Total 22(100) 42(100) 23(100) 13(100) 100(100)



Chi-square value= 28.050, d.f.=6, Significant at 5 per cent level of significance.
Note: Figures in parentheses denote percentages.


2.2.5 Impact of Total Annual Investment on Type of Investment

Total Annual Investment-wise analysis provided in Table 7e
shows that 81.2 per cent of respondents belonging to I4 category while 59
per cent, 45.9 per cent and 43.5 percent of respondents belonging to I1, I3
and I2 categories respectively like to invest where the risk was moderate.
An equal percentage of investors belonging to I2 category invest in risk
free and moderate risky investment. Among those respondents who
invest in highly risky investment maximum percentage, i.e., 18.9 per cent
is of respondents belonging to I3 category whereas minimum percentage
is of those belonging I1 category. TheChi-square value obtained at 5
per cent level of significance indicates




that significant association exist between the total annual investment
and the type of investment in which the investors invest.

Table 7e
Total Annual Investment-wise Choice of Investment
Total Annual Investment

Between Between
Type of Less than Rs.100000- Rs.300000- Above
Investment Rs.100000(I1) 300000(I2) 500000(I3) Rs.500000(I4) Total

Risk Free
Investment 14(30.2) 16(43.5) 4(35.2) 0(6.3) 34(34.3)

Moderate
Risky
Investment 27(59.0) 16(43.5) 6(45.9) 4(81.2) 53(53.0)

Highly Risky
Investment 5(10.8) 5(13.0) 2(18.9) 1(12.5) 13(12.7)

Total 46(100.0) 37(100) 12(100) 5(100) 100(100)


Chi-square value= 14.089, d.f.=6, Significant at 5 per cent level of significance.
Note: Figures in parentheses denote percentages.

3. CHOICE OF CREDIT RATING AGENCY

The respondent investors were asked about their choice of the
rating agency and they were given four options including CRISIL,

ICRA, CARE and FITCH. Many respondents rely on more than one
rating agency for their investment decision. So the distribution of
respondents according to the rating agencies they rely upon is shown
in Table 8.8. The data reveals that maximum number of respondents,
i.e., 58.67 per cent rely upon CRISIL for their investment decision,
53.33 per cent of them rely upon ICRA, 50.67 per cent on CARE and
20 per cent on FITCH. Thus, CRISIL is relied on by maximum
proportion of respondents, and FITCH by the minimum, the one
reason for this can be that CRISIL is one of the oldest credit rating
agencies in India.








Table 8

Choice of Credit Rating Agency
(Multiple Responses)
Agency Number of Respondents %age of Respondents

CRISIL 59 58.67

ICRA 53 53.33

CARE 51 50.67

FITCH 20 20.00



4. AWARENESS ABOUT CREDIT RATING AGENCIES

In order to ascertain the knowledge and awareness among

individual investors regarding credit rating, three direct questions
were asked to each respondent including the purpose of credit rating,
instruments being rated by the rating agencies and their awareness
about the symbols assigned by the credit rating agencies.

4.1 Awareness about Purpose of Credit Rating

To know the awareness regarding purpose of credit rating
among respondents, each respondent was given four choices
regarding the purpose of credit rating. These are To measure the
credit risk related to the instrument, to assist the investors, to
improve the quality of instruments operating in the debt market and
all of the above. The respondents who ticked the fourth choice were
judged to have full awareness about the purpose of credit rating
whereas the respondents who chose either first, second or third
options are not fully aware. The information collected from the
respondents regarding their awareness about the purpose of credit
rating has been presented in the following tables:

4.1.1 Impact of Age on Awareness about Purpose of Credit Rating

The analysis in Table 9a reveals that most of respondents, i.e.,
89 per cent think that credit rating measures the credit risk, assists
investors and improve the quality of instrument, irrespective of the
age group and among such respondents, all the respondents who are
above 60 years of age ( A4 category) have such opinion.

Table 9a
Awareness about Purpose of Credit Rating (Age-wise)
Age

Up to 30 30-45 45-60 Above 60
Purpose Years(A1) Years(A2) Years(A3) Years(A4) Total

To measure credit
risk 2(4.4) 2(5.0) -- -- 4(4.0)

To assist investors 1(3.5) 1(1.4) -- -- 2(2.0)

To improve quality
of instruments 1(1.8) 3(6.4) 1(12.5) -- 5(5.0)

All of the above 34(90.3) 41(87.2) 9(87.5) 5(100) 89(89.0)

Total 38(100) 47(100) 10(100) 5(100) 100(100)


Chi-square value=12.228 , d.f.=9, Not Significant at 5 per cent level of significance.
Note: Figures in parentheses denote percentages.

On the other hand 90.3 per cent of respondents belonging to A1
category and about 87 per cent of respondents belonging to A2 and A3
category have full awareness about the purpose of credit rating
agencies. A very low percentage of respondents give the all other
choices but these respondents are not wrong. Yet it seemed that they
don't have full awareness about the purpose of credit rating. The Chi-
square value calculated at 5 per cent level of significance indicates
that no significant association exists between age group and the
awareness of investors regarding the purpose of credit rating.













4.1.2 Impact of Qualification on Awareness about Purpose of

Credit Rating
Table 9b depicts the qualification-wise awareness level of

respondents regarding the purpose of credit rating.


Table 9b
Awareness about Purpose of Credit Rating (Qualification-wise)
Educational Qualification

Under- Post-
Purpose graduate Graduate graduate Professional Total

To measure credit risk 1(13.6) 2(5.2) 1(4.1) -- 4(4.0)

To assist investors -- 1(4.2) -- 1(2.4) 2(2.0)

To improve quality of
instruments 1(9.1) 2(6.3) 1(3.1) 1(4.8) 5(5.0)

All of the above 6(77.3) 27(84.3) 30(92.8) 26(92.8) 89(89.0)

Total 8(100) 32(100) 32(100) 28(100) 100(100)


Chi-square value= 16.191, d.f.=9, Not significant at 5 per cent level of
significance. Note: Figures in parentheses denote percentages.

Around 93 per cent each of post-graduates and professionals
are fully aware about purpose of credit rating, while 84.3 per cent of
graduates and 77.3 per cent of undergraduates have such awareness.

13.6 per cent of undergraduates viewed that credit rating only
measure the credit risk related to the instrument, whereas 9.1 per
cent of them opined that it improves the quality of instruments. 6.3
per cent of graduates think that credit rating only improve the quality
of the instrument while 4.8 per cent of professionals and 3.1 per cent
of postgraduates think so. The Chi-square value obtained at 5 per
cent level of significance indicates that no significant association
exists between educational qualification and awareness about purpose
of credit rating.













4.1.3 Impact of Occupation on Awareness about Purpose of
Credit Rating

Table 9c highlights the occupation-wise responses of
respondents regarding the purpose of credit rating.

Table 9c
Awareness about Purpose of Credit Rating (Occupation-wise)
Occupation

Purpose

Total

Service Agriculture Business Profession Others


To measure credit risk 1(2.6) 1(40.0) 1(5.0) 1(3.4) -- 4(4.0)


To assist investors 0(0.9) -- 1(3.8) 0(1.1) 1(8.3) 2(2.0)


To improve quality of

instruments 1(2.6) 1(40.0) 3(10.0) 0(2.3) -- 5(5.0)


All of the above 36(93.9) 0(20.0) 22(81.2) 27(93.2) 4(91.7) 89(89.0)


Total 38(100) 2(100) 27(100) 28(100) 5(100) 100(100)



Chi-square value= 45.505, d.f.=12, Significant at 5 per cent level of significance.
Note: Figures in parentheses denote percentages.

The table highlights that majority of the respondents belonging
to all occupational categories have full awareness regarding the
purpose of credit rating except those who are engaged in agriculture
as only 20 per cent of them were fully aware about the same. On the
other hand, 93.9 per cent of servicemen, 93.2 per cent of
professionals, 91.7 per cent of respondents belonging to others
category and 81.3 per cent of businessmen know the exact purpose of
credit rating. In case of respondents belonging to agricultural category

40 per cent of respondents think the credit rating only measures the
credit risk, while similar percentage of such respondents believe that
credit rating only improves the quality of the instruments. The Chi-
square value obtained at 5 per cent level of significance indicates that
significant association exists between the occupation level and the
awareness about the purpose of credit rating.










4.1.4 Impact of Experience on Awareness about Purpose of Credit
Rating

It can be seen from Table 9d that maximum percentage of
respondents belonging to E3 category, i.e., 94.3 per cent were fully
aware about purpose of credit rating followed by 90.4 per cent, 84.6
per cent and 83.3 per cent of respondents belonging to E2, E4 and E1
category respectively. It seems that awareness about purpose of credit
rating increases with the increase in experience except in case of
respondents belonging to E4 category.

Table 9d
Awareness about Purpose of Credit Rating (Investment Experience-wise)
Experience in Investment

Less than Between 1- Between 3-5 Above 5
Purpose 1 Year(E1) 3 Years(E2) Years(E3) Years(E4) Total

To measure credit
risk 2(7.4) 1(3.2) 0(1.4) 1(5.1) 4(4.0)

To assist investors 0(1.5) 1(1.6) 0(1.4) 1(5.1) 2(2.0)

To improve quality
of instruments 2(7.4) 2(4.8) 0(2.9) 1(5.1) 5(5.0)

All of the above 19(83.7) 37(90.4) 22(94.3) 11(84.7) 89(89.0)

Total 23(100) 41(100) 22(100) 14(100) 100(100)


Chi-square value=7.438, d.f.=6, Not significant at 5 per cent level of significance.
Note: Figures in parentheses denote percentages.


The Chi-square value obtained at 5 per cent level of significance
indicates that no significant association exist between the investment
experience of investors and their awareness about purpose of credit
rating.


















4.1.5 Impact of Total Annual Investment on Awareness about
Purpose of Credit Rating


The total annual investment-wise responses of the respondents
given in Table 9e explain that irrespective of the size of total annual
investment, majority of the respondents in all the categories have full
awareness about the purpose of credit rating. 90.7 per cent of
respondents belonging to I1 category, followed by 89.2 per cent of I3
category and nearly 87 per cent each of respondents belonging to I2
and I4 category have full knowledge about the purpose of credit rating.

Table 9e
Awareness about Purpose of Credit Rating (Total Annual Investment-wise)
Total Annual Investment

Between Between
Less than Rs.100000- Rs.300000- Above
Purpose Rs.100000(I1) 300000(I2) 500000(I3) Rs.500000(I4) Total

To measure credit
risk 2(4.3) 1(3.7) 0(2.7) 1(6.3) 4(4.0)

To assist investors 1(1.4) 1(2.8) -- 0(6.3) 2(2.0)

To improve quality
of instruments 2(3.6) 2(6.5) 1(8.1) -- 5(5.0)

All of the above 42(90.7) 31(87.0) 11(82.9) 5(87.4) 89(89.0)

Total 47(100.0) 35(100) 12(100) 6(100) 100(100)


Chi-square value= 5.777, d.f.=9, Not significant at 5 per cent level of significance.
Note: Figures in parentheses denote percentages.

6.3 per cent each of respondents belonging to I4 category
think that the only purpose of credit rating is to measure the credit
risk related to instrument and only purpose of rating is to assist the
investors. Thus, a very few respondents seem to be ignorant regarding
the purpose of credit rating. The Chi-square value obtained at 5 per
cent level of significance indicates that no significant association exist
between total annual investment of investors and their awareness
about purpose of credit rating.






4.2 Awareness about Instruments Rated by Credit Rating
Agencies

The credit rating agencies rate various types of instruments
including debentures, IPOs, mutual funds, fixed deposits of
companies etc. To know the level of awareness about the functioning
of credit rating agencies among respondents, they were asked about
the instruments being rated by the credit rating agencies. Five options
were given to the respondents regarding the instruments being rated
by credit rating agencies. These includes Debentures, IPOs, Mutual
Funds, Fixed Deposits and All the Above.

All the responses were correct but still the respondents who
have given the option all of the above as his response seems to have a
good amount of awareness about credit rating. The response data
showing the demography-wise awareness of instruments being rated
by credit rating agencies under study is shown in following tables.

4.2.1 Impact of Age on Awareness about Instruments Rated by
Credit Rating Agencies

Table 10a

Awareness about Instruments Rated (Age-wise)
Age

Upto 30 30-45 45-60 Above 60
Instruments Years(A1) Years(A2) Years(A3) Years(A4) Total

Debentures 1(3.5) 2(4.3) -- -- 3(3.3)

IPOs 0(0.8) 0(0.7) 1(6.3) -- 1(1.3)

Mutual
Funds 1(1.8) 0(0.7) -- -- 1(1.0)

Fixed
Deposits 1(1.8) 0(0.7) -- -- 1(1.0)

All of the
above 35(92.1) 44(93.6) 10(93.7) 5(100) 94(93.4)

Total 38(100) 46(100) 11(100) 5(100) 100(100)


Chi-square value= 11.026, d.f.=12, Not significant at 5 per cent level of significance.
Note: Figures in parentheses denote percentages with total of each category.

It is evident from Table 10a that maximum percentage of

respondents, i.e., 93.3 per cent viewed that all the instruments




including the debentures, IPOs, mutual funds, fixed deposits are rated
by the credit rating agencies. On the other hand, 3.3 per cent and 1.3
per cent of respondents think that debentures and IPOs respectively
are rated by the credit rating agencies. Only 1 per cent each of
respondents are of the view that mutual funds and fixed deposits
alone are rated by the credit rating agencies.

Age-wise results have been depicted in the Table 8.10a. It can
be easily witnessed that all the respondents belonging to A4 category
seem to have a full awareness about instruments being rated by credit
rating agencies whereas around 94 per cent of respondents each
belonging to A2 and A3 category and 92 per cent of them belonging to
A1 category have full awareness about the instruments rated. Among
the remaining respondents a very low percentage have given their
response as Debentures, IPOs, mutual funds and fixed deposits. The
Chi-square value obtained at 5 per cent level of significance indicates
that no significant association exists between age group and their
awareness level regarding instruments being rated by the credit rating
agencies.

4.2.2 Impact of Qualification on Awareness about Instruments
Rated by Credit Rating Agencies

Table 10b exhibits that maximum percentage of respondents
among all educational groups have full knowledge about the
instruments being rated by credit rating agencies but the highest
percentage, i.e., about 99 per cent is of postgraduate and professional
degree holders. Next in order appear graduates (87.5%) and
undergraduates (72.7%) who hold the same opinion. Further a very
low percentage of respondents including 13.6 per cent of
undergraduates, 6.3 per cent of graduates and 1 per cent of
postgraduates have given their answer as debentures. 4.5 per cent of
undergraduates each have given their choices as IPOs, mutual funds
and fixed deposits whereas 2.1 per cent each of graduates have given
similar responses, Thus, it can be inferred from the table that




knowledge about instruments being rated by credit rating agencies
increase with the higher educational qualification. The Chi-square
value obtained at 5 per cent level of significance indicates that there is
significant association between education qualification and their
awareness about instruments being rated by the credit rating
agencies.

Table 10b
Awareness about Instruments Rated (Qualification-wise)
Educational Qualification

Instruments

Total

Undergraduate Graduate Postgraduate Professional


Debentures 1(13.7) 2(6.3) 0(1.0) -- 3(3.3)


IPOs 0(4.5) 1(2.1) -- 0(1.2) 1(1.3)


Mutual

Funds 0(4.5) 1(2.1) -- -- 1(1.0)


Fixed

deposits 0(4.5) 1(2.1) -- -- 1(1.0)


All of the

above 5(72.8) 28(87.4) 32(99.0) 29(98.8) 94(93.4)


Total 6(100%) 33(100%) 32(100%) 28(100%) 100(100%)



Chi-square value= 30.636, d.f.=12, Significant at 5 per cent level of significance.
Note: Figures in parentheses denote percentages.

4.2.3 Impact of Occupation on Awareness about Instruments
Rated by Credit Rating Agencies

Table 10c presents the occupation-wise position and it can be
seen that except the agriculture category majority of respondent
among all other occupational groups have full knowledge about
instruments being rated by credit rating agencies. This includes 100
per cent of respondents belonging to others category, around 96 per
cent each of businessmen and professionals and around 91 per cent
of serviceman. 40 per cent and 20 per cent of agriculturists have given

IPOs and fixed deposits respectively as their response. A very minimal
percentage of respondents belonging to service, business and
profession have marked their responses as debentures, IPOs, mutual
funds and fixed deposits. The Chi-square value obtained at 5 per cent




level of significance indicates that significant association exists
between occupation and their awareness about instruments being
rated by the credit rating agencies.

Table 10c
Awareness about Instruments Rated (Occupation-wise)
Occupation

Instruments

Total

Service Agriculture Business Profession Others


Debentures 2(6.0) -- 0(1.3) 1(2.3) -- 3(3.3)


IPOs 0(0.9) 1(40.0) 0(1.3) -- -- 1(1.3)


Mutual

Funds 0(0.9) -- 1(1.3) 0(1.1) -- 1(1.0)


Fixed

deposits 1(1.7) 0(20.0) -- -- -- 1(1.0)


All of the

above 35(90.5) 1(40.0) 26(96.1) 28(96.6) 4(100) 94(93.4)


Total 38(100%) 2(100%) 27(100%) 29(100%) 4(100%) 100(100%)



Chi-square value=84.570 , d.f.=16, Significant at 5 per cent level of significance.
Note: Figures in parentheses denote percentages.

4.2.4 Impact of Experience on Awareness of Instruments Rated

by Credit Rating Agencies

Table 10d

Awareness about Instruments Rated (Investment experience-wise)
Experience in investment

Less than 1 Between 1-3 Between 3-5 Above 5
Instruments Year(E1) Years(E2) Years(E3) Years(E4) Total

Debentures 0(1.5) 2(5.6) 0(1.4) 1(2.6) 3(3.3)

IPOs 1(2.9) 0(0.8) 1(1.4) -- 2(1.3)

Mutual
Funds 0(1.5) 1(1.6) -- -- 1(1.0)

Fixed
deposits 0(1.5) 1(1.6) -- -- 1(1.0)

All of the
above 21(92.6) 37(90.4) 22(97.2) 13(97.4) 93(93.4)

Total 22(100) 41(100) 23(100) 14(100) 100(100)


Chi-square value= 9.296, d.f.=12, Not significant at 5 per cent level of significance.
Note: Figures in parentheses denote percentages.





We find in Table 10d that 97.4 per cent of respondents of E4
category have vast amount of knowledge about the instruments being
rated by credit rating agencies, they are being followed by 97 per cent
of respondents belonging to E3 category, 92.6 per cent of respondents
belonging to E1 category and 90.4 per cent of respondent of E2
category. A very least percentage of respondents belonging to E1
category, i.e., 1.5 per cent each have given debentures, mutual funds
and fixed deposits as their answer, whereas 2.9 per cent of them have
given IPOs as their response. Further 5.6 per cent and 0.8 per cent of
respondents belonging to E2 category responded to debentures and
IPOs respectively, whereas, 1.6 per cent each of such respondents give
mutual funds and fixed deposits as their response. Moreover, 1.4 per
cent each of respondents of E3 category have given debentures and
IPOs as their answers. The Chi-square value obtained at 5 per cent
level of significance indicates that no significant association exists
between investment experience of investors and their level of
awareness about instruments being rated by the credit rating
agencies.

4.2.5 Impact of Total Annual Investment on Awareness about
Instruments Rated by Credit Rating Agencies

If we look at Table 10e, it can be witnessed that all
respondents in investment category I3 have full knowledge of
instruments rated by credit rating agencies, followed by 94.4 per cent,
93.7 per cent, and 90.6 per cent of respondents belonging to
investment category I2, I4, and I1 respectively. Only 5 per cent of
respondents belonging to I1 category and 2.8 per cent of respondents
belonging to I2 category think that only debentures are rated by credit
rating agencies. 6.3 per cent of respondents of I4 category think that
only IPOs are rated by credit rating agencies. 1.4 per cent of
respondents belonging to I1 category and 1 per cent of I2 category give
mutual funds as their answer. A very least percentage of investors
belonging to I1 category think that only fixed deposits are rated by




credit rating agencies while none of the respondents belonging to any
other investment category think so. The Chi-square value obtained at
5 per cent level of significance indicates that no significant association
exist between total annual investment of investors and their
knowledge about instruments being rated by the credit rating
agencies.

Table 10e
Awareness about Instruments Rated (Total Annual Investment-wise)
Total Annual Investment

Between Between
Less than Rs. 100000- Rs. 300000- Above
Instruments Rs. 100000(I1) 300000(I2) 500000(I3) Rs. 500000(I4) Total

Debentures 2(5.0) 1(2.8) -- -- 3(3.3)

IPOs 0(0.7) 1(1.9) -- 1(6.3) 2(1.3)

Mutual Funds 1(1.4) 0(0.9) -- -- 1(1.0)

Fixed
deposits 1(2.3) -- -- -- 1(1.0)

All of the
above 42(90.6) 34(94.4) 12(100) 5(93.7) 93(93.4)

Total 46(100.0) 36(100) 12(100) 6(100) 100(100)


Chi-square value= 11.657, d.f.=12, Not significant at 5 per cent level of significance.
Note: Figures in parentheses denote percentages.

4.3 Awareness about Symbols Used by Credit Rating Agencies

Various symbols are used by the credit rating agencies for

rating the instruments. A credit rating compresses an enormous
amount of diverse information into a single rating symbol. Each
symbol depict a particular meaning as such rating agencies use
different symbols for different instruments having highest safety,
high/adequate safety, inadequate safety and risk of default etc. Thus,
a rating symbol itself speaks of the nature of the instrument. So, the
respondents were asked to write down the rating symbols they
remember along with their meaning and accordingly their responses
were divided into three groups- Right, Wrong and Dont Know. Thus
their responses regarding the same have been discussed in Tables 11a
to 11e.



4.3.1 Impact of Age on Awareness about Symbols Used By Credit
Rating Agencies

Table 11a
Age-wise Awareness about Symbol Meaning
Awareness Age

about Symbol

Upto 30 30-45 45-60 Above 60

Meaning Years(A1) Years(A2) Years(A3) Years(A4) Total


Right 35(93.0) 43(91.4) 10(93.8) 4(92.9) 92(92.3)


Wrong 2(4.4) 2(5.0) 1(6.2) -- 5(4.7)


Don't Know 1(2.6) 2(3.6) -- 0(7.1) 3(3.0)


Total 38(100) 47(100) 11(100) 4(100) 100(100)



Chi-square value=2.868, d.f.=6, Not significant at 5 per cent level of significance.
Note: Figures in parentheses denote percentages.

Thus, the analysis in Table 11a reveals that 92.3 per cent of the
respondents are well acquainted with the meaning of rating symbols
whereas 4.7 per cent of the respondents wrongly interpret the
symbols. Further, among the respondents who were ignorant about
the meaning of symbols constitute 3 per cent of the sample only as
shown in the table. So the majority of respondents are aware of the
meaning of the rating symbols.

The given table presents the information as regards the fact
whether difference exists among different age groups in respect to
their awareness about meaning of rating symbols. A look at the table
reveals that maximum percentage of investors in each age group have
correct knowledge about the meaning of rating symbols while the
percentage of investors who don't have the knowledge of symbol
meaning and who wrongly interpret the symbols is quite low. 93.8 per
cent of investors belonging to age group A3 know the meaning of
rating symbols followed by around 93 per cent each of respondents
belonging to A1 and A4 age groups. 6.2 per cent of investors belonging
to A4 age group and 4.4 per cent belonging to A1 age group wrongly
interpret the rating symbols. Moreover, the percentage of investors
who altogether don't know about the meaning of rating symbols is
highest for age group A4, i.e., 7.1 per cent followed by 3.6 per cent and



2.6 per cent of respondents belonging to A2, A1 age groups
respectively. The Chi-square value obtained at 5 per cent level of
significance indicates that significant difference exists between age
groups of investors and their knowledge about the rating symbol.

4.3.2 Impact of Qualification on Awareness about Symbols Used
by Credit Rating Agencies

Table 11b
Educational Qualification-wise Awareness about Symbol Meaning
Awareness Educational Qualification

about


Symbol
Undergraduate

Graduate Postgraduate Professional Total

meaning


Right 5(63.6) 29(90.6) 31(93.9) 28(100) 93(92.3)


Wrong 0(9.1) 2(6.3) 2(6.1) -- 4(4.7)


Don't

Know 2(27.3) 1(3.1) -- -- 3(3.0)


Total 7(100%) 32(100%) 33(100%) 28(100%) 100(100%)



Chi-square value=57.027, d.f.=6, Significant at 5 per cent level of
significance. Note: Figures in parentheses denote percentages.

Table 11b reveals that the large percentage of respondents
belonging to all the educational categories correctly know the meaning
of rating symbols. All the professionals are acquaint with the meaning
of rating symbols followed by 93.9 per cent of post graduates, 90.6 per
cent of graduates and 63.6 per cent of undergraduates. Thus, none of
the professionals wrongly interpret the symbol while 9.1 per cent of
undergraduates do so. 27.3 per cent of the undergraduates don't
know about the rating symbols. Thus, it is evident from the table that
the higher the education level higher is the awareness about rating
symbols. The Chi-square value obtained at 5 per cent level of
significance reveals that there is significant relationship between
educational qualification and awareness about meaning of rating
symbols.











4.3.3 Impact of Occupation on Awareness about Symbols Used by
Credit Rating Agencies

Table 11c
Occupation-wise Awareness about Symbol Meaning
Awareness Occupation

about


Symbol
Service Agriculture Business Profession Others Total

Meaning


Right 36(94.0) 0(20.0) 25(95.0) 28(95.4) 3(66.6) 92(92.3)


Wrong 1(3.4) 1(20.0) 1(3.7) 1(4.6) 1(16.7) 5(4.7)


Don't

Know 1(2.6) 1(60.0) 0(1.3) -- 1(16.7) 3(3.0)


Total 38(100) 2(100) 26(100) 29(100) 5(100) 100(100)



Chi-square value=75.723, d.f.=8, Significant at 5 per cent level of
significance. Note: Figures in parentheses denote percentages.

Table 11c shows the knowledge about rating symbol in relation
to the occupation level of investors. It is revealed from the table that
near about 95 per cent of servicemen, Businessmen and

Professionals correctly know the meaning of rating symbols, whereas
maximum number of agriculturists doesnt know about the meaning
of rating symbols. 16.7 per cent respondents belonging to others
category either don't know the meaning of rating symbol and similar
number of them interpret the symbol wrongly. The Chi-square value
obtained at 5 per cent level of significance indicates that significant
association exists between occupation of investors and their
awareness about the rating symbol.

4.3.4 Impact of Experience on Awareness about Symbols Used by
Credit Rating Agencies

On the basis of their experience in investment activities,
investors awareness about rating symbols has been discussed in

Table 11d. The table shows that the maximum percentage of investor
belonging to all experience groups correctly interpret the meaning of
rating symbols including 97.1 per cent of E3 category, 91.9 per cent of
E2 category 89.7 per cent each belonging to E1 and E4 category. A very
low percentage of respondents among all experience



groups don't know the meaning of rating symbols and the highest
ratio among such respondents is of those belonging to E1 category
(4.4%). None of the respondents belonging to E3 category wrongly
interpret the symbols while a very minor percentage of respondents
belonging to other experience groups do so. The Chi-square value
obtained at 5 per cent level of significance indicates that no significant
association exist between investment experience of investors and their
awareness level about the rating symbol.

Table 11d
Experience-wise Awareness of Symbol Meaning
Awareness
Experience in investment


about Less than 1 Between 1-3 Between 3-5 Above 5

Symbol
Year(E1) Years(E2) Years(E3) Years(E4) Total

Meaning


Right 20(89.7) 38(91.9) 22(97.1) 12(89.7) 92(92.3)


Wrong 1(5.9) 3(5.6) -- 1(7.7) 5(4.7)


Don't Know 1(4.4) 1(2.5) 1(2.9) 0(2.6) 3(3.0)


Total 22(100) 42(100) 23(100) 13(100) 100(100)



Chi-square value= 5.324, d.f.=6, Not significant at 5 per cent level of significance.
Note: Figures in parentheses denote percentages.

4.3.5 Impact of Total Annual Investment on Awareness about
Symbols Used By Credit Rating Agencies

In Table 11e total annual investment-wise results have been
presented and it is clear that among the respondents who know the
right meaning of rating symbol, the majority (94.6%) belongs to I3
category. All the respondents belonging to I4 category are acquaint
with the rating symbols but 93.7 per cent of them know the meaning
of rating symbols correctly. Whereas on the other hand 6.3 per cent of
them wrongly interpret the rating symbols. The percentage of
respondents who don't know the meaning of rating symbols at all is
highest for I2 category, i.e., 3.7 per cent. The Chi-square value
obtained at 5 per cent level of significance indicates that there is no
significant association between total annual investment of investors
and their awareness about the rating symbol.




Table 11e
Total Annual Investment-wise Awareness of Symbol Meaning
Total Annual Investment

Between Between
Symbol Less than Rs. 100000- Rs. 300000- Above
Meaning Rs. 100000(I1) 300000(I2) 500000(I3) Rs. 500000(I4) Total

Right 43(92.8) 33(90.7) 12(94.6) 5(93.7) 93(92.3)

Wrong 2(4.3) 2(5.6) 0(2.7) 0(6.3) 4(4.7)

Don't
Know 1(2.9) 1(3.7) 1(2.7) -- 3(3.0)

Total 46(100.0) 36(100) 13(100) 5(100) 100(100)


Chi-square value= 1.344, d.f.=6, Not significant at 5 per cent level of significance.
Note: Figures in parentheses denote percentages.

5. SATISFACTION LEVEL REGARDING CREDIT RATING

To know about the overall satisfaction level of the investors
regarding credit rating, they were asked about their satisfaction
regarding the guidance/recommendations of credit rating agencies
and about their judgement towards rated and unrated instruments.

5.1 Level of Satisfaction Regarding Guidance of Credit Rating
Agencies

To know the level of satisfaction regarding the overall
guidance/recommendations of rating agencies, investors were asked
to tell about their level of satisfaction on a five point scale including,

Highly satisfied, Satisfied, Neither satisfied nor dissatisfied,
Dissatisfied, Highly dissatisfied. Thus age-wise, qualification-wise,
occupation-wise, total annual investment-wise and experience-wise
responses of the respondents are shown in Table 12a to 12e.

Table 12a reveals that 65 per cent of the total respondents are
satisfied with the guidance of credit rating agencies, but only 14.3 per
cent are highly satisfied with it. 18.7 per cent of the respondents
remain neutral, i.e., neither they are satisfied nor dissatisfied with the
guidance of rating agencies. Only 2 per cent of the respondents are






dissatisfied with the guidance of rating agencies but none of them are
highly dissatisfied.

5.1.1 Impact of Age on Level of Satisfaction

Table 12a
Age-wise Overall Satisfaction Level
Age Level

Upto 30 30-45 45-60 Above 60
Level of Satisfaction Years(A1) Years(A2) Years(A3) Years(A4) Total

Highly Satisfied 5(13.2) 7(15.7) 1(12.5) 1(14.3) 14(14.3)

Satisfied 24(62.2) 30(65.7) 8(71.9) 3(64.3) 65(65.0)

Neither Satisfied Nor
Dissatisfied 9(22.8) 7(15.7) 2(15.6) 1(21.4) 19(18.7)

Dissatisfied 1(1.8) 1(2.9) -- -- 2(2.0)

Total 39(100) 45(100) 11(100) 5(100) 100(100)


Chi-square value= 4.131, d.f.=9, Not significant at 5 per cent level of significance.
Note: Figures in parentheses denote percentages.

It is clear from the table that the highest percentage of
investors, i.e., 71.9 per cent belonging to age group A3 (45-60 years)
are satisfied by the overall guidance of credit rating agencies, followed
by the age groups A2, A4 and A1 with 65.7 per cent, 64.3 per cent and
62.3 per cent of respondents respectively. The highest percentage of
investors who are neither satisfied nor dissatisfied by the guidance of
credit rating agencies belong to A1 age group. 15.7 per cent of
investors belonging to age group A2 are highly satisfied by the
guidance while an equal number of them remained neutral. A very low
percentage of investors who belong to A1 and A2 category are
dissatisfied by the guidance of credit rating agencies whereas none of
the investors who belong to A3 and A4 age groups are dissatisfied by
the same. The Chi-square value obtained at 5 per cent level of
significance depicts that there is no significant association between
age and overall satisfaction level of the investors.

5.1.2 Impact of Qualification on Level of Satisfaction

Table 12b depicts the satisfaction level of respondents regarding
overall guidance of credit rating agencies in relation to their




level of education. It is evident from the table that near about 70 per
cent of the graduate and professional respondents are satisfied by the
overall guidance of credit rating agencies. Whereas, among those
respondents who are highly satisfied by the guidance of credit rating
agencies highest proportion, i.e., 18.4 per cent is of postgraduates. 25
per cent of the professionals are neither satisfied nor dissatisfied by
the overall guidance of credit rating agencies while none of them are
dissatisfied with the overall guidance. A very low percentage from all
other educational categories is dissatisfied by the guidance of credit
rating agencies. The Chi-square value obtained at 5 per cent level of
significance depicts that there is significant association between
educational qualification and overall satisfaction level of the investors.

Table 12b

Education-wise Overall Satisfaction Level
Level of Educational Qualification

Satisfaction Undergraduate Graduate Postgraduate Professional Total

Highly Satisfied 2(13.8) 4(13.5) 6(18.4) 2(6) 14(14.3)

Satisfied 4(45.5) 22(69.8) 20(61.2) 19(69) 65(65.0)

Neither Satisfied
Nor Dissatisfied 1(18.2) 4(13.5) 6(18.4) 8(25) 19(18.7)

Dissatisfied 0(4.5) 1(3.2) 1(2.0) -- 2(2.0)

Total 7(100) 31(100) 33(100) 29(100) 100(100)


Chi-square value=18.187, d.f.=9, Significant at 5 per cent level of significance.
Note: Figures in parentheses denote percentages.

5.1.3 Impact of Occupation on Level of Satisfaction

We find in Table 12c that 68.1 per cent of respondents
belonging to service category followed by 67.5 per cent, 66.7 per cent,
60 per cent and 58.6 per cent of those belonging to business, others,
agriculture and professional categories respectively are satisfied by
the overall guidance of credit rating agencies. Whereas, among those
respondents who are highly satisfied by the guidance of credit rating
agencies, highest percentage is of agriculturists followed by the
professionals. Among those respondents who remain neutral about
the guidance of credit rating agencies highest proportion, i.e., 21.8 per



cent is of professionals. None of the agriculturists and respondents
belonging to others category are dissatisfied by the guidance of credit
rating agencies while a very low percentage of servicemen,
businessmen and professionals think so.

Table 12c
Occupation-wise Overall Satisfaction Level
Level of Occupation

Satisfaction

Total

Service Agriculture Business Profession Others


Highly Satisfied 5(12.1) 0(20) 3(12.5) 5(18.4) 1(16.7) 14(14.3)


Satisfied 26(68.1) 1(60) 18(67.5) 17(58.6) 3(66.6) 65(65.0)


Neither Satisfied

Nor Dissatisfied 7(17.2) 0(20.0) 5(17.5) 6(21.8) 1(16.7) 19(18.7)


Dissatisfied 1(2.6) -- 1(2.5) 0(1.2) -- 2(2.0)


Total 39(100) 1(100) 27(100) 28(100) 5(100) 100(100)



Chi-square value= 4.215, d.f.=12, Not significant at 5 per cent level of significance.
Note: Figures in parentheses denote percentages.

The Chi-square value obtained at 5 per cent level of
significance depicts that there is no significant association between
occupation of the respondents and overall satisfaction level of the
investors.

5.1.4 Impact of Experience on Level of Satisfaction

Table 12d highlights that nearly 70 per cent of respondents
belonging to E2 and E3 category are satisfied by the guidance of credit
rating agencies. Among those respondents who are highly satisfied by
the guidance the maximum percentage is of investors belonging to E1
category (19.2%) followed by those belonging to E4 category (17.9%).

27.9 per cent, 20.5 per cent, 18.8 per cent and 12.9 per cent of the
respondents belonging to E1, E4, E3 and E2 categories respectively are
neither satisfied nor dissatisfied by the guidance. None of the
respondents belonging to E1 category are dissatisfied by the guidance
of credit rating agencies. Whereas, a very low percentage of investors
belonging to E2, E3 and E4 category are dissatisfied by the same. The

Chi-square value obtained at 5 per cent level of significance depicts






that there is no significant association between investment experience
of respondents and overall satisfaction level regarding credit rating.

Table 12d
Investment Experience-wise Overall Satisfaction Level
Experience in investment

Level of

Less than Between 1-3 Between 3-5 Above 5

Satisfaction 1 Year(E1) Years(E2) Years(E3) Years(E4) Total


Highly Satisfied 4(19.2) 6(14.5) 2(7.2) 2(17.9) 14(14.3)


Satisfied 12(52.9) 29(71.0) 16(69.6) 8(59.0) 65(65.0)


Neither Satisfied

Nor Dissatisfied 6(27.9) 5(12.9) 5(18.8) 3(20.5) 19(18.7)


Dissatisfied -- 1(1.6) 1(4.4) 0(2.6) 2(2.0)


Total 22(100) 41(100) 24(100) 13(100) 100(100)



Chi-square value= 15.331, d.f.=9, Not significant at 5 per cent level of significance.
Note: Figures in parentheses denote percentages.

5.1.5 Impact of Total Annual Investment on Level of

Satisfaction

After analyzing Table 12e, it is revealed that maximum
percentage of respondents belonging to I3 category, i.e., 83.8 per cent, are
satisfied by the overall guidance of credit rating agencies followed by
category I1, I4 and I2 with 63.3, 62.5 and 61.1 percentage respectively.
Among the respondents who are highly satisfied by the guidance of credit
rating agencies, 17.3 per cent belongs to I1 category. Among the
respondents who are neither satisfied nor dissatisfied by the guidance of
credit rating agencies the majority is of belonging to I4 category, i.e.,

25 per cent. None of the respondents belonging to I4 category are
dissatisfied by the guidance of credit rating agencies, while a very low
percentage of other categories have such opinion. The Chi-square
value obtained at 5 per cent level of significance depicts that there is
no significant association between annual investment of the investors
and overall satisfaction level of the investors.









Table 12e
Total Annual Investment-wise Overall Satisfaction Level
Total Annual Investment

Between Between
Level of Less than Rs. 100000- Rs. 300000- Above Rs.
Satisfaction Rs.100000(I1) 300000(I2) 500000(I3) 500000(I4) Total

Highly Satisfied 8(17.3) 5(13.9) 1(5.4) 0(12.5) 14(14.3)

Satisfied 29(63.3) 22(61.1) 10(83.8) 4(62.5) 65(65.0)

Neither Satisfied
Nor Dissatisfied 8(18.0) 8(22.2) 1(8.1) 2(25) 19(18.7)

Dissatisfied 1(1.4) 1(2.8) 0(2.7) -- 2(2.0)

Total 46(100.0) 36(100) 12(100) 6(100) 100(100)


Chi-square value= 9.557, d.f.=9, Not significant at 5 per cent level of significance.
Note: Figures in parentheses denote percentages.

5.2 Comparison of Rated and Unrated Instrument

In order to know the level of satisfaction of respondents about

credit rating, they were asked to compare the rated instrument with
the unrated one. They were asked to give their opinion on Far better,

Better, Same and Poor scale. The Tables 13a, to 13e provides the
demography-wise responses of the respondents.

5.2.1 Impact of Age on Comparison of Rated and Unrated
Instrument

Table 13a

Comparison of Instruments (Age-wise)
Age

Upto 30 30-45 45-60 Above 60
Comparison Years(A1) Years(A2) Years(A3) Years(A4) Total

Far Better 6(14.9) 8(17.9) 1(12.5) 1(14.3) 16(16.0)

Better 23(60.5) 30(65.0) 8(71.9) 3(64.3) 64(64.0)

Same 9(22.8) 7(14.3) 1(15.6) 1(21.4) 18(18.0)

Poor 1 (1.8) 1(2.8) -- -- 2(2.0)

Total 39(100) 46(100) 10(100) 5(100) 100(100)


Chi-square value= 5.401, d.f.=9, Not significant at 5 per cent level of significance.
Note: Figures in parentheses denote percentages.

Table 13a highlights the age-wise comparative standing of

the rated and unrated instrument in the minds of investors.




Maximum number of investors in each age group thinks the rated
instrument to be better than the unrated instrument. 71.9 per cent of
investors who belong to A3 age group think that the rated `instrument
is better than the unrated one followed by 65 per cent of investors
belonging to A2 age group. The percentage of investors who think that
the rated instrument is far better than the unrated one, the highest
proportion, i.e., 17.9 per cent is of those belonging to A2 age group.
While among those investors who think that rated instrument is same
as unrated one, the highest percentage is of those belonging to A1
category (22.8%). A very low percentage of investors who belong to A1
and A2 age group think that the rated instrument is poor while none
of the investors who belong to A3 and A4 age group think so. The Chi-
square value obtained at 5 per cent level of significance indicates that
there is no significant association between of age group of investors
and comparison of rated and unrated instrument.

5.2.2 Impact of Qualification on Comparison of Rated and
Unrated Instrument

Table 13b

Comparison of Instruments (Qualification-wise)
Educational Qualification

Under- Post-
Comparison graduate Graduate graduate Professional Total

Far Better 2(31.8) 5(15.6) 7(21.4) 2(6.0) 16(16.0)

Better 3(45.5) 22(68.8) 19(59.3) 20(69.0) 64(64.0)

Same 1(18.2) 4(12.5) 6(17.3) 7(25.0) 18(18.0)

Poor 0(4.5) 1(3.1) 1(2.0) -- 2(2.0)

Total 6(100) 32(100) 33(100) 29(100) 100(100)


Chi-square value= 19.689, d.f.=9, Significant at 5 per cent level of significance.
Note: Figures in parentheses denote percentages.

Educational Qualification wise results have been depicted in
Table 13b. It is clear from the table that most of the professional
respondents (69%) think that the rated instrument is better than the
unrated one, whereas, 68.8 per cent percentage of respondents who
have attained a graduate degree also think so. Among those



respondents who think that the rated instrument is far better than
the unrated one the highest percentage, i.e., 31.8 per cent is of
undergraduates followed by 21.4 per cent of postgraduates, 15.6 per
cent of graduates and 6 per cent of professionals. None of the
professional respondents think that the rated instrument is poor than
the unrated one while 4.5 per cent of graduates think so. The Chi-
square value obtained at 5 per cent level of significance indicates that
there is significant association between educational qualification of
investors and their judgement towards rated and unrated instrument.

5.2.3 Impact of Occupation on Comparison of Rated and Unrated
Instrument

Table 13c
Comparison of Instruments (Occupation-wise)
Occupation

Comparison

Total

Service Agriculture Business Profession Others


Far Better 6(15.5) 0(20.0) 3(12.5) 6(19.5) 1(16.7) 16(16.0)


Better 26(66.4) 0(60.0) 18(67.5) 17(57.5) 3(66.6) 64(64.0)


Same 6(15.5) 0(20.0) 5(17.5) 6(21.8) 1(16.7) 18(18.0)


Poor 1(2.6) -- 1(2.5) 0(1.2) -- 2(2.0)


Total 39(100) 0(100) 27(100) 29(100) 5(100) 100(100)



Chi-square value= 4.323, d.f.=12, Not significant at 5 per cent level of significance.
Note: Figures in parentheses denote percentages.

It can be seen from the Table 13c that 67.5 per cent of
respondents in Business category think that the rated instrument is
better than the unrated one followed by nearly 66 per cent each of
respondents belonging to others and of service category. Among the
respondents who think that rated instrument is far better than the
unrated one, the highest percentage is of agriculturists (20%) followed
by professionals (19.5%), others (16.7%), servicemen (15.5%) and
businessmen (12.5%) in line. The investors who think that the rated
instrument is same as the unrated one include 21.8 per cent of
Professionals, 20 per cent of Agriculturists, 17.5 per cent of
Businessmen, 16.7 per cent of those belonging to others category and

15.5 per cent of servicemen. Further, almost equal percentage of



servicemen and businessmen think that the rated instrument is poor
than the unrated one while none of the agriculturists and those
belonging to others category think so. The Chi-square value
calculated at 5 per cent level of significance indicates that there is no
significant association between occupation of investors and their
judgement towards rated and unrated instrument.

5.2.4 Impact of Experience on Comparison of Rated and Unrated
Instrument

Table 13d
Comparison of Instruments (Experience-wise)
Experience in investment

Less than 1 Between 1-3 Between 3-5 Above 5
Comparison Year(E1) Years(E2) Years(E3) Years(E4) Total

Far Better 5(20.6) 7(16.1) 2(8.7) 2(20.5) 16(16.0)

Better 12(51.5) 29(69.4) 16(69.6) 7(59.0) 64(64.0)

Same 6(27.9) 5(12.9) 4(17.4) 3(17.9) 18(18.0)

Poor -- 1(1.6) 1(4.3) 0(2.6) 2(2.0)

Total 23(100) 42(100) 23(100) 12(100) 100(100)


Chi-square value= 15.359, d.f.=9, Not significant at 5 per cent level of significance.
Note: Figures in parentheses denote percentages.

It can clearly be seen from the Table 13d that nearly 70 per
cent of respondents belonging to E2 and E3 category think that rated
instrument is better than the unrated one and this percentage is 59
and 51.5 for experience group E4 and E1 respectively. About 21 per
cent of investor belonging to category E1 and E4 think that rated
instrument is far better than the unrated one. A higher percentage of
investors belonging to E1 category, i.e., 27.9 per cent think that the
rated instrument is same as the unrated one, in relation to other
categories. A very least percentage of investors think that the rated
instrument is poor than the unrated one irrespective of the experience
group except category E1, where nobody think so. The Chi-square
value obtained at 5 per cent level of significance indicates that there is
no significant association between investment experience of investors
and their judgement towards rated and unrated instrument.




5.2.5 Impact of Total Annual Investment on Comparison of Rated
and Unrated Instrument

Table 13e
Comparison of Instruments (Total Annual Investment-wise)
Total Annual Investment

Between Between
Less than Rs. 100000- Rs. 300000- Above
Comparison Rs. 100000(I1) 300000(I2) 500000(I3) Rs. 500000(I4) Total

Far Better 10(20.9) 5(13.9) 1(5.4) 0(12.5) 16(16.0)

Better 28(61.2) 22(61.1) 10(83.8) 4(62.5) 64(64.0)

Same 7(16.5) 8(22.2) 1(8.1) 2(25.0) 18(18.0)

Poor 0(1.4) 1(2.8) 1(2.7) -- 2(2.0)

Total 45(100.0) 36(100) 13(100) 6(100) 100(100)


Chi-square value=12.296, d.f.=9, Not significant at 5 per cent level of significance.
Note: Figures in parentheses denote percentages.

As is visible from Table 13e, maximum percentage of
respondents belonging to I3 category, i.e., 83.8 per cent think that the
rated instrument is better than the unrated instrument. On the other
hand, nearly 61 per cent of respondents of all other categories think
so. Among the respondents who think that rated instrument is far
better than the unrated one, the highest percentage is of those
belonging to I1 category (20.9%) and the lowest of those belonging to I3
category (5.4%). Maximum percentage of investors who think that
rated instrument is same as unrated one belonged to I4 category
(25%). A very low percentage of investors in all categories think that
rated instrument is poor than the unrated one except category I4
where none of respondents think so. The Chi-square value calculated
at 5 per cent level of significance indicates that there is no significant
association between total annual investment of investors and their
judgement towards rated and unrated instrument.

6. PERCEPTIONS REGARDING CREDIT RATING

In order to know the perceptions of respondents regarding credit
rating, different questions were asked to them regarding (i) Extent of
agreement among them regarding various statements related to credit




rating, (ii) Level of importance given to various rating attributes (iii)
Opinion regarding rating fees charged (iv) Opinion regarding
standardised symbols used by credit rating agencies, and (v) Opinion
regarding accountability of rating agencies. The opinions of
respondents regarding above said issues are discussed below.

6.1 Extent of Agreement among Investors

Credit Rating gives superior information about the rated
product and that too at low cost, which the investor otherwise would
not be able to get so easily. Thus, the investor can easily recognize the
risk involved and the expected advantage in the instrument by looking
at the symbols. This helps the investors to take calculated risk. Thus,
credit rating helps the investors in numerous ways by safeguarding
their interest, so in order to know about the investors level of
agreement regarding the same, various statements regarding credit
rating were given to the respondents to know their opinion on these
statements. These statements include

1. Credit rating is the expression of safety of investment.

2. It saves time and energy of investors.

3. It is very important for decision making.

4. Symbols assigned give clue of creditability.

5. Agencies rate the instrument according to actual worth.

6. Existence of many agencies creates confusion.

7. There are chances of malpractices.

8. Agencies should revise ratings periodically.

9. All ratings should be made public.

Respondents were asked to rate the above given statements on
strongly agree, agree, neutral, disagree and strongly disagree scale.
The average extent of agreement was calculated by assigning weights
to different statements as under:

Strongly Agree = 5, Agree = 4, Neutral = 3, Disagree = 2 and

Strongly Disagree = 1.







The significance of difference of agreement over various
statements has been assessed by Analysis of Variance (ANOVA).

Further Critical Difference (CD) has been worked out to give overall
ranks to the statements. The statements whose difference in mean
score is less than the value of CD are ranked in similar categories. The
table also shows the percentage agreement and disagreement level of
each statement. The results so obtained are shown in Table 14.

Table 14
Extent of Agreement among Investors

Statement Mean SD %age %age Dis- Agreement
No. Agreement agreement class

1 3.98 0.91 79.67 20.33 2

2 3.8 1.02 76.07 23.93 3

3 3.8 1.07 76.07 23.93 3

4 3.21 1.06 64.13 35.87 4

5 3.1 1.08 62 38 4

6 3.13 1.15 62.6 37.4 4

7 2.38 1.02 47.53 52.47 5

8 4.22 0.97 84.4 15.6 1

9 4.05 1.08 80.93 19.07 2

Total Score 31.67 3.46 70.38 29.62

F.ratio = 8.54*** CD = 0.15

*** Significant at 1 per cent level

The table depicts that each of the given statements has different
mean score, placing the statement that agencies should revise ratings
periodically at the top level. According to the mean score, the
statement that there are chances of malpractices among rating
agencies is placed at the last level of agreement. All other statements
come in between as shown in table 14. But according to the value of

CD there comes out to be only five broad categories of agreement class
as depicted in the table, as the statements whose difference in mean
score is less than the value of CD, i.e., 0.15 are ranked in similar
categories. So the highest number of the respondents believe that
rating agencies should revise their ratings periodically as this



statement is ranked on top position. Further at the next level of
agreement the statements that all the ratings should be made public
by the credit rating agencies and credit rating is the expression of
safety of investment appear, as both these statements are placed at
second position as difference in their mean values is less than the
value of CD. Credit rating saves time and energy of investors and it is
very important for decision making comes next at the third level of
agreement. Whereas three statements including symbols assigned
gives clue of creditability, existence of many agencies creates
confusion and the agencies rate the instrument according to actual
worth hold the fourth position. The statement that there are chances
of malpractices in credit rating agencies comes under the least
agreement class as the minimum number of respondents believes so.
The extent of agreement on different statements regarding credit
rating was found to be significantly different as indicated by the
significant F-ratio.

6.2 Level of Importance to Rating Attributes

With the help of credit rating, investors need not to see into the
fundamentals of the companies, as they can compare many
instruments of various companies at a time and can make their
investment decision accordingly. As investors rely on credit rating for
their investment decision, they might be acquaint with the various
rating attributes. Ratings can be accurate and effective only if the
personnel involved in the rating process are properly qualified and are
having a good experience in the rating activities. The analysts should
hold high degree of professionalism and relevant expertise across the
industry in order to make the ratings more credible. The rating
agencies should downgrade or upgrade the instruments after
considering the subsequent financial strength of the company whose
instrument is rated by it and this should be done in a timely manner.

Moreover, the methodology used by the rating agencies to rate various
instruments and the rating process should be transparent. After




rating the instruments, the rating agencies are involved in the ongoing
surveillance of the instrument being rated. This ongoing surveillance
gives a great benefit to the investors as they can change their
investment decision accordingly. The investing community is also
benefited from the allied services provided by credit rating agencies
such as research in form of industry reports, corporate reports,
seminars and open access to the analysis of agencies. Further there is
one more attribute of rating agencies which might be important for the
investors, i.e., coverage of new issues by the rating agencies. Thus, an
attempt was made to assess the extent of importance given to all these
rating attributes, by the respondents. The respondents were asked to
rank all these attributes from 1 to 5 scales. Rank 1 to be given to that
attribute which is considered most important by them and rank 5 to
most unimportant one. The mean level of importance given by the
respondents to different rating attributes was assessed after assigning
following weights:

Most Important = 5, Important = 4, Neutral = 3, Unimportant = 2 and
Most Unimportant = 1

The significance of difference of importance given to various
rating attributes has been assessed by Analysis of Variance (ANOVA).

Further, Critical Difference (CD) has been worked out to give overall
level of importance given to various rating attributes. The statements
whose difference in mean score is less than the value of CD comes
under similar importance level. The results so obtained are shown in
Table 15. The percentage level of importance and dis-importance for
each attribute is also shown in the table.

The Table 15 highlights that each of the rating attribute
has different mean score which rank all the attributes accordingly.

The table shows that the most important rating attribute for investors
is rating accuracy because it is ranked at first place both according to
the mean score as well as the value of CD Quality of analysts is the
second most important attribute for the investors. Timeliness of




upgrades and downgrades and transparency of methodology both
comes under the third level of importance. These both attributes come
under one class as the difference in their mean score is less than the
value of CD. Under the next level, equal importance is given by the
investors to surveillance and coverage of new issue by the rating
agencies. The usefulness of research by the rating agencies is given
the least importance by the respondents.

Table 15
Level of Importance to Rating Attributes
Attribute Mean SD %age %age Dis- Importance
Importance importance class

Quality of Analyst 4.1 1.01 81.93 18.07 2

Rating Accuracy 4.28 0.98 85.6 14.4 1

Timeliness of 3.83 1.08 76.67 23.33 3
upgrade/
downgrade

Transparency of 3.78 1.17 75.53 24.47 3
methodology

Surveillance 2.74 1.17 54.87 45.13 4

Usefulness of 2.51 1.26 50.13 49.87 5
research

Coverage of new 2.65 1.34 53.07 46.93 4
issues

Total Score 23.89 2.89 68.26 31.74

F-ratio = 6.89*** C.D. = 0.17

*** Significant at 1 percent level


6.3 Opinion Regarding Rating Fees Charged

In order to know the opinion of investors regarding the

justification of rating fees charged by the rating agencies, a question
was asked Do you think that the rating fees charged from the issuer
is justified? and they were asked to give their responses in Yes or No.

The respondents who replied in Yes were further asked a question

Do you think that the rating fee paid by the issuer is able to influence





the rating decisions? Whereas the respondents who replied in No for
the first question, were further asked a different question According
to you who should pay the rating fees?. Tables 16a, to 16e provide the
demography-wise opinion of respondents regarding the fee charged by
credit rating agencies. Tables 17 and 18 present the responses of the
respondents on the above given second and third questions.

6.3.1 Impact of Age on Opinion Regarding Rating Fees Charged

Table 16a
Age-wise Opinion on Rating Fees Charged
Age

Upto 30 30-45 45-60 Above 60
Opinion Years(A1) Years(A2) Years(A3) Years(A4) Total

Yes 24(62.3) 31(65.7) 7(71.9) 2(42.9) 64(64.0)

No 14(37.7) 16(34.3) 3(28.1) 3(57.1) 36(36.0)

Total 38(100) 47(100) 10(100) 5(100) 100(100)


Chi-square value=3.902, d.f.=3, Not significant at 5 per cent level of significance
Note: Figures in parentheses denote percentages.

Table 16a reveals that proportionately more respondents, i.e.,
64 per cent believed that fees charged by the rating agencies is
justified, followed by 36 per cent of respondents who did not think so.
Age-wise analysis reveals that 71.9 per cent of respondents belonging
to age group A3 think that rating fees charged by the rating agencies is
justified followed by 65.7 per cent and 62.3 per cent of respondents
belonging to A2 and A1 age group respectively who think so. But
maximum number of respondents, i.e., 57.1 per cent who belong to A4
age group think that fees charged in not justified. The Chi-square
value obtained at 5 per cent level depicts that significant difference
exist between level of age and opinion of investors about the rating
fees charged by credit rating agencies.












6.3.2 Impact of Qualification on Opinion Regarding Rating Fees
Charged

Table 16b
Qualification-wise Opinion on Rating Fees Charged
Educational Qualification

Opinion

Total

Undergraduate Graduate Postgraduate Professional


Yes 4(50.0) 24(76.0) 19(59.2) 17(59.5) 64(64.0)


No 4(50.0) 8(24.0) 13(40.8) 11(40.5) 36(36.0)


Total 8(100) 32(100) 32(100) 28(100) 100(100)



Chi-square value= 9.630, d.f.=3, Significant at 5 per cent level of significance.
Note: Figures in parentheses denote percentages.

Table 16b reveals that 76 per cent of respondents who are
graduates believe that fee charged by credit rating agencies is justified
while about 59 per cent of each of postgraduate and professionals think
so. 50 per cent of undergraduates think that fee charged by credit rating
agencies is justified while an equal number don't think so.

The Chi-square value obtainedat 5 per cent level of significance
depicts that there is significant association between the educational
qualification of the investors and opinion of investors about the rating
fees charged by credit rating agencies.

6.3.3 Impact of Occupation on Opinion Regarding Rating Fees
Charged

Table 16c
Occupation-wise Opinion on Rating Fees Charged
Occupation

Opinion

Total

Service Agriculture Business Profession Others


Yes 26(66.4) 1(60.0) 19(70.0) 16(56.3) 2(58.3) 64(64.0)


No 13(33.6) 0(40.0) 8(30.0) 13(43.7) 2(41.7) 36(36.0)


Total 39(100) 1(100) 27(100) 29(100) 4(100) 100(100)



Chi-square value= 3.963, d.f.=4, Not significant at 5 per cent level of significance
Note: Figures in parentheses denote percentages.

The results showing the impact of occupation on the response of
respondents regarding rating fees charged have been highlighted in
Table 16c. A large proportion of the respondent investors, i.e., 70 per
cent and 66.4 per cent from the business and service categories




respectively believed that the fees charged by credit rating agencies
are justified. However, as many as 43.7 per cent, 41.7 per cent and 40
per cent respondents belonging to the profession, others and
agriculture categories respectively opined that fees charged by the
credit rating agencies are not justified. The Chi-square value obtained
at 5 per cent level of significance depicts that there is no significant
association between occupation of the investors and their opinion
about the rating fees charged by credit rating agencies.

6.3.4 Impact of Experience on Opinion Regarding Rating Fees
Charged

Table 8.16d
Experience- wise Opinion on Rating Fees Charged
Experience in Investment

Less than 1 Between 1-3 Between 3-5 Above 5
Opinion Year(E1) Years(E2) Years(E3) Years(E4) Total

Yes 11(50.0) 28(68.5) 16(69.6) 8(64.1) 64(64.0)

No 11(50.0) 14(31.5) 7(30.4) 5(35.9) 36(36.0)

Total 22(100) 41(100) 23(100) 13(100) 100 (100)



Chi-square value=7.826 , d.f.=3, Significant at 5 per cent level of significance
Note: Figures in parentheses denote percentages.

The response data showing the experience-wise opinion of the
respondent investors on rating fees charged by the rating agencies
under study has been presented in Table 16d. It is evident from the
table that the respondents in almost equal proportion, belonging to
the E2 and E3 categories believed that the fees charged by the rating
agencies are justified. However, as far as investors belonging to E1
category are concerned, investors in equal number are justified and
not justified by the rating fees charged by the credit rating agencies.
The Chi-square value obtained at 5 per cent level of significance
depicts that there is significant association between the investment
experience of investors and their opinion about the rating fees charged
by credit rating agencies.




6.3.5 Impact of Total Annual Investment on Opinion Regarding
Rating Fees Charged

Table 16e
Total Annual Investment-wise Opinion on Rating Fees Charged
Total Annual Investment

Between Between
Less than Rs. 100000- Rs. 300000- Above
Opinion Rs. 100000(I1) 300000(I2) 500000(I3) Rs. 500000(I4) Total

Yes 29(63.3) 23(63.0) 9(75.7) 3(50.0) 64(64.0)

No 17(36.7) 13(37.0) 3(24.3) 3(50.0) 36(36.0)

Total 46(100.0) 36(100) 12(100) 56100) 100(100)


Chi-square value=3.629 , d.f.=3, Not significant at 5 per cent level of significance.
Note: Figures in parentheses denote percentages.

A glance at Table 16e provides that irrespective of their annual
investments, majority of the respondents think that the fees charged
by the credit rating agencies are justified except those in I4 category
where only half of the respondents carry the same opinion. A least
percentage of respondents (24.3%) belonging to I3 category consider
that rating fees charged by credit rating agencies are not justified. The
Chi-square value obtained at 5 per cent level of significance depicts
that there is no significant association between the total annual
investment of the investors and opinion of investors about the rating
fees charged by credit rating agencies.

6.3.6 Opinion regarding Rating Fees Influencing Rating Decisions

It can be observed from Table 17 that among the
respondents who think that rating fees charged by the credit rating
agencies are justified, about 70 per cent of them opine that fee paid by
the issuer influences the rating decision of the agency.

Table 17
Opinion on Rating Fees Influencing Ratings
Opinion Number %age
Yes 45 70.31
No 19 29.69
Total 64 100.00






6.3.7 Opinion regarding Payment of Rating Fees

Table 18
Opinion on Payment of Rating Fees
Agency to Pay Number %age

SEBI 24 65.74

Stock Exchange 12 34.26

Total 36 100.00


Table 18 reveals that 65.74 per cent of the respondent investors
believe that as the rating fees charged are not justified, SEBI should
pay the rating fees, whereas the remaining 34.26 per cent
respondents view that rating fees should be paid by the stock
exchanges.

6.4 Opinion Regarding Standardised Symbol Used by Credit
Rating Agencies

The symbol used by the various rating agencies are almost
similar except a little difference which differentiates a symbol of one
rating agency from the other. An attempt has been made to know the
investors opinion whether the rating agencies used the same
standardised symbols or not and the responses obtained in this
regard have been presented in Table 19.

Table 19

Opinion on Standardised Symbols Used
Opinion Number %age

Yes 29 28.67

No 71 71.33

Total 100 100.00


It is evident from the table that only 28.67 per cent of the
respondents believe that the rating agencies use the same
standardised rating symbols, while another 71.33 per cent
respondents think it otherwise.

6.5 Opinion Regarding Accountability of Rating Agencies

Accountability of credit rating agencies will improve the working
of credit rating agencies and thus the faith of investors. So, response
has also been collected from the respondents on the statement




whether rating agencies should be accountable for the ratings given
by them.

Table 8.20
Opinion on Accountability of Rating Agencies
Opinion Number %age

Yes 86 86.00

No 14 14.00

Total 100 100.00


The analysis given in Table 20 shows that maximum number of
respondents (86%) are of the view that rating agencies should be made
accountable for the ratings given by them.


The analysis reveals that the advice of friends, relatives and
others appeared to be the most preferred bases of investment of the
respondent investors. Credit rating, tips by financial experts and
advertisements in newspapers are almost equally preferred by all the
respondents and are placed on the second position. Further, it is
revealed that CRISIL is relied upon by most of the respondents, i.e.,
58.67 per cent, for their investment decision followed by ICRA
(53.33%), CARE (50.67%) and FITCH (20%). Moreover, the highest
number of respondents believed that ratings should be revised
periodically. The findings further show that rating accuracy is the
most important rating attribute for the investors followed by quality of
analyst, timeliness of upgrade/downgrade, transparency of
methodology, surveillance, coverage of new issues and usefulness of
research.









SUGGESTIONS AND FINDINGS

Credit rating is the symbolic indicator of the current opinion of
rating agencies regarding the relative capability of issuer of the
instrument, to service its financial obligations as per contract. It is a
qualified assessment and formal evaluation of companys credit history
and capability of repaying obligations. Rating is an independent and
professional assessment of default risk in financial obligation. This
assessment is based on an objective analysis of the information and
clarifications provided by various sources including the issuer. Credit
rating establishes a link between risk and return. It provides a yardstick
against which one can measure the risk inherent in an instrument. The
investor uses the rating to assess the risk level and compares the offered
rate of return with his risk return trade off and takes his investment
decision accordingly. Thus, credit rating is essentially the tas of
determining the strength of the likelihood of the timely payments by an
issuer on a financial obligation. The credit rating agencies evaluate the
intrinsic worth of a company and assign ranks to the companies
accordingly. In India, the rating activities started with the incorporation of
the Credit Rating Information Services of India Ltd. (CRISIL) in 1987. The
second rating agency, Investment Information and Credit Rating Agency of
India Ltd. (ICRA), was incorporated in 1991. The other rating agencies
including Credit Analysis and Research Ltd. (CARE) as well as Onicra
Credit Rating Agency of India Ltd., were incorporated in 1993. Further,
Duff and Phelps Credit Rating (India) Private Ltd. (DCR) WaS established in

1996, which is presently known as Fitch Ratings India Private Ltd. Another
rating agency, SME Rating Agency of India Limited (SMERA), was
established in 2005. A new rating agency, Brickwork Ratings (BWR) based in
Bangalore, was incorporated in 2007. However, only five rating agencies
including CRISIL, ICRA, CARE, FITCH and Brickwork Ratings have been
recognized by SEBI.
Nowadays, credit rating is desirable and mandatory for certain instruments
worldwide to caution the investors in advance about the strength and
weaknesses of a fund raising company. The increasing number of scams and
controversies have shaken the confidence of investors in corporate
instruments. So, the importance of credit rating was increased in the wake
of the growing number of cases of defaults and frauds in payment of interest
and repayment of principal sum borrowed. Thus, credit rating is useful to
safeguard the interest of investors by guiding them towards the right path.
In the changed scenario where corporates are increasingly dependent on
public, the removal of restrictions on interest rates and stipulation of a
mandatory credit rating of a number of instruments since 1991 by the
government / SEBI, credit rating has emerged as a critical element in the
functioning of Indian debt or financial markets. The credit rating agencies
today have ample opportunities to play a unique role in strengthening the
capital market and building the investors confidence in the financial
system. In despite of the increasing importance of credit rating agencies as
the information providers for credit related opinions of debt instruments, the
comprehensive research pertaining to credit rating in the Indian context is
limited. So, considering the importance of credit rating, the present research
work has been undertaken to study the regulatory environment affecting the
credit rating activities in India, to examine the operational performance of
four SEBI recognized credit rating agencies, viz. CRISIL, ICRA, CARE and
FITCH, to assess the consistency in rating methodology and to examine
rating variability in grades assigned by these agencies, to study the post-
rating performance of various companies rated by these agencies and to
study the investors opinion regarding the credit practices in india.





1. FINDINGS

The major findings of the study are:

1.1 Credit Rating Practices Investors Perceptions
The results of analysis relating to investors perceptions regarding
credit ratings have been given as under:

1.It has been found that a large number of respondents (about 47%)
were in the age category of 30-45 years. Majority of the respondents
have either attained a graduate degree or higher qualification
undergraduates constitute only 7 per cent of the respondents. The
maximum percentage of respondents (38%) were servicemen followed by
the professionals (29%) and businessmen (26%). Only 2 per cent of the
respondents were engaged in agriculture. Further, as many as 41 per
cent respondents were engaged in investment activities for a period
ranging from 1 to 3 years.
2.The impact of various demographic features of the respondents on
the type of the investment they invest was studied through cross
tabulation and chi-square test. The analysis revealed that majority of
the respondents (53%) had invested where the risk was moderate and a
very small percentage of them (13%) went for the investments where the
risk was higher. The highest proportion of investors, who invested in
moderately risky investment, were above 60 years of age. Further, 70.2
per cent of the respondents having a professional degree invested where
the risk was moderate. Similarly, a high proportion of respondents
belonging to service, profession and others occupational categories
invested in such type of investments. The respondents having 1-3 years
experience in investment activities invested mostly where the risk was
moderate whereas 81.3 per cent of the respondents who invested more
than Rs. 5, 00,000 annually preferred to invest where the risk was
moderate only. The analysis brings out that there was a significant
association between choice of type of investment of respondents and
their qualification, occupation, experience in investment activities as
well as total annual investment but there was no significant association
between age of the respondents and their choice regarding type of
investment.
3.The respondents were asked to rank various bases of their
investment decision. The analysis reveals that the advice of friends,
relatives and others appeared to be the most preferred bases of
investment. Credit rating, tips by financial experts and advertisements
in newspapers are almost equally preferred by all the respondents and
are placed on the second position. Common sense is given the least
preference as a basis of investment.
4.Further, the study reveals that CRISIL is relied upon by 58.67 per
cent of the respondents for their investment decision followed by ICRA
(53.33%), CARE (50.67%) and FITCH (20%).
5.The results of the study show that 89 per cent of the respondents
have full awareness about the purpose of credit rating. All the
respondents who were above 60 years of age have full awareness about
the purpose of credit rating, whereas about 90 per cent of the
respondents belonging to all other age groups have full awareness about
its purpose. Around 93 per cent of post-graduates as well as
professionals and 84 per cent of graduates have full awareness about
the purpose of credit rating but only 77 per cent of undergraduates have
this awareness. Occupation-wise analysis shows that majority of the
respondents belonging to all occupational categories have full awareness
regarding the purpose of credit rating except those who were engaged in
agriculture as only 20 per cent of them were fully aware about the
purpose of credit rating. The study reveals that there was significant
association between occupation and awareness about purpose of credit
rating. Further, the chi-square value depicts that there was no
significant association between age, qualification, investment experience
as well as total annual investment and the level of awareness regarding
purpose of credit rating.
6.The study also reveals that nearly 93 per cent of the respondents
were fully aware about the instruments being rated by credit rating
agencies but there was no significant association between the age of the
respondents, their investment experience as well as the amount of total
annual investment and their level of awareness regarding instruments
being rated by credit rating agencies.
7.The awareness level regarding instruments rated by credit rating
agencies was higher in post-graduates and professional degree holders
as compared to undergraduates and graduates. Similarly, the
respondents from agriculture field had less awareness regarding
instruments being rated by credit rating agencies, as compared to those
who were engaged in other occupations.
8.The study highlights that about 92 per cent of the respondents
correctly knew about the rating symbols used by credit rating agencies,
3 per cent of them were ignorant about these symbols, while the rest
interpreted the rating symbols wrongly. The insignificant chi-square
values reveal that there was no significant association between the
knowledge about rating symbols and age, investment experience as well
as total annual investments of the respondents but their education level
and the difference in their occupations significantly affect their
knowledge about the rating symbols being used by credit rating
agencies.

9.As far as the satisfaction level of the respondents regarding credit
rating is concerned, 65 per cent of the respondents were satisfied by the
guidance of credit rating agencies and 14.3 per cent were highly
satisfied, only 2 per cent of them were dissatisfied by guidance but none
of them were highly dissatisfied. As many as 18.7 per cent of the
respondents were neither satisfied nor dissatisfied with the guidance
provided by credit rating agencies. The results highlight that there was
no significant association between the levels of satisfaction of
respondents regarding credit rating and their demographic features
selected, except for their education level. Majority of the respondents,
i.e., 64 per cent believed that the rated instrument was better than the
unrated one and 16 per cent of them considered it to be far better. Only
2 per cent of the respondents perceived the rated instrument to be poor
than the unrated one, whereas 18 per cent of them believed that there
was hardly any difference between the two. The study reveals that the
qualification of the respondents and their judgement level towards rated
and unrated instruments are significantly associated with each other.
10.The respondents were asked about their level of agreement
regarding various statements relating to credit rating. The highest
number of respondents believed that ratings should be revised
periodically. Two statements, viz. all the ratings should be made public;
and credit rating is the expression safety of instrument appeared next in
the order of their agreement. The statements called rating saves time
and energy of investors; and it is very important for decision-making
appeared at the third level of agreement. The statements that symbols
assigned give clue of creditability; existence of many agencies creates
confusion; and the agencies rate the instrument according to actual
worth hold the fourth position. The statement that there are chances of
malpractices in credit rating agencies was agreed upon by the least
number of respondents. The significant F-value indicates that there was
significant difference in the extent of agreement on different statements.
11.The results of the study reveal that all credit rating attributes are
not considered equally important by the investors, some are very
important while others are less important. The findings show that rating
accuracy is the most important attribute for the investors followed by
quality of analyst, timeliness of upgrade/downgrade, transparency of
methodology, surveillance, coverage of new issues and usefulness of
research.
12.As regards their opinion regarding the justification of rating fees
charged from the issuers, a large number of respondents, i.e., 64 per
cent believed that the fees charged from the issuers are justified.
However, 70 per cent of such respondents opined that the fees charged
by the rating agencies have an influence on their rating decision. On the
other hand, 66 per cent respondents believed that as the rating fees
charged from the issuers are not justified, SEBI should pay such fees,
whereas the remaining 34 per cent of them opined that the fees should
be paid by the stock exchanges themselves.
13.The study also brings out that 66 per cent of the respondents
believed that the rating agencies should be made accountable for the
ratings given by them.

2. SUGGESTIONS
1.Credit rating agencies provide only an indication about the relative
capability of the issuer of various instruments but they do not give any
foolproof reliability of their assessment. They are not accountable for the
ratings assigned by them. Hence, there is need to make them
accountable for the same.

2. The rating agencies make public only those ratings which are
accepted by the issuer companies. They should also publish even those
ratings which are not accepted by the given companies.
3. The credit rating agencies also follow qualitative aspects for rating
which may not be more reliable and accurate. Therefore, they should lay
more emphasis on quantitative factors.
4. Besides the given factors considered by the credit rating agencies,
they should also take into consideration other issues regarding
investment like, liquidity risk, pre-payment risk, interest rate risk,
taxation aspects, risk of securities market loss, exchange loss risk, etc.
5. Credit rating agencies could also be required to make robust
disclosures regarding the analytical bases of their ratings opinions, the
type of information used to arrive at ratings, and their internal
standards for promoting consistency and for monitoring and updating
ratings. Moreover there should be transparency about the interaction
between issuers and analysts during the rating process. With greater
transparency of credit rating agency methodologies, investors would be
in a better position to assess the opinions.
6. Credit rating agencies should create more awareness among the
investors regarding credit rating activities because as far as investors
are concerned, they still give more importance to advice from friends,
relatives etc. while making investments.
7. In various countries, the rating agencies undertake voluntary
rating even if the issuer company does not approach them. This
unsolicited rating is primarily intended towards protection of the
interest of the common investors. However, this aspect is lacking in
India and the credit rating agencies need to go for voluntary rating.
8. The meaning and benefit of ratings should be made clear to the
investors by the rating agencies, including the level of risk inherent in
the ratings. The rating agencies should clearly explain what elements
they do not address, for example, suitability of investments for any
particular investor. This would give investors critical information they
need to make informed decisions, to compare ratings, and to form their
own opinion on the soundness of an agencys analytics.
9. Credit ratings are typically ordinal in nature, i.e., the higher
grades are considered to be safe than the respective lower ones but how
much more safe it is cant be calculated. So ratings should be made
cardinal.
10. The regulatory bodies should ensure that credit rating agencies
have policies and procedures requiring their employees to treat non-
public information confidentially. As by having access to non-public
information, rating agencies are in a position to provide more informed
analysis, thus, potentially enhancing the quality of the ratings they
provide.













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WEBSITES
- www.altavista.com
- www.carerating.com
- www.crisil.com
- www.emeraldinsight.com
- www.en.wikipedia.org
- www.fitchindia.com
- www.google.com
- www.icrarating.com
- www.irdaindia.org
- www.publicpolicy.umb.edu
- www.rediff.com


















QUESTIONNAIRE
Investors Perceptions regarding Credit Rating Practices in India

(To be filled by investors)

(The information provided by you will be used for the research purpose only)

Q. 1. Investors Profile

(a) Name and Address



(b) Age

(i) Upto 30 (ii) Between 30-45

(iii) Between 45-60 (iv) Above 60

(c) Educational Qualification

(i) Undergraduate (ii) Graduate

(iii) Post Graduate (iv) Professional

(d) Occupation (Tick the right one)

(i) Service (ii) Agriculture
(iii) Business (iv) Profession
(v) Others
(e) Total Annual Investments (Tick the right one)

(i) Less than Rs. 1,00,000
(ii) Between Rs. 1,00,000 to Rs. 3,00,000
(iii) Between Rs. 3,00,000 to Rs. 5,00,000
(iv) Above Rs. 5,00,000
Qs.2. How frequently do you invest money?

(i) Once in a year
(ii) Once in every six months
(iii) Once in a quarter
(iv) Once in a month
(v) Many times a month
Qs.3. For how much time have you been in investing activities?

(i) Less than one year
(ii) Between one to three years
(iii) Between three to five years
(iv) Above five years
Qs.4. In which type of portfolio do you invest?

(i) Short term (Investment less than one year)

(ii) Long term

Qs.5. In which type of investment do you invest?

(i) Risk free investment
(ii) Moderate risky investment
(iii) Highly risky investment
Qs.6. Rank the following from 1 to 5 on the basis of which you make your investment. (Rank 1 to be
given to the basis which is the most preferred one).

(i) Common sense ( )
(ii) Credit Rating ( )
(iii) Advice of friends/relatives/Brokers ( )
(iv) Message in newspaper (advertisement) ( )
(v) Tips by Financial Experts ( )
Qs. 7. What according to you is the purpose of credit rating?

(i) To measure the credit risk related to the instrument
(ii) To assist the investors
(iii) To improve quality of instruments operating in the debt market
(iv) All of the above
Qs.8. On which Credit Rating Agency do you rely upon for your investment decision?

(i) CRISIL
(ii) ICRA
(iii) CARE
(iv) FITCH
Qs. 9. Which of the following instruments, according to you, are rated by credit rating agencies?
(i) Debentures
(ii) IPOs

(iii) Mutual Funds
(iv) Fixed Deposits
(v) All
Qs.10. Are you familiar with the symbols assigned by Credit Rating Agencies?

(i) Yes

(ii) No

Qs.11. Please write down some of the rating symbols you remember along with their meanings.






Qs.12. How do you compare the rated instrument with the unrated one?

(i) Far Better
(ii) Better
(iii) Same
(iv) Poor
Qs.13. Do all rating agencies use the same standardized symbols?

(i) Yes

(ii) No

Qs.14. What is your opinion about overall guidance/ recommendations of credit rating agencies?
(i) Highly Satisfied
(ii) Satisfied

(iii) Neither Satisfied nor Dissatisfied
(iv) Dissatisfied
(v) Highly Dissatisfied
Qs. 15. Do you think that the rating fees charged from the issuer is justified?
(i) Yes
(ii) No

[If yes then attempt qs (a) and if no then attempt qs (b) below]

(a) Do you think that the fee paid by the issuer is able to influence the rating decisions?
(i) Yes
(ii) No

(b) According to you, who should pay the rating fee?
(i) SEBI
(ii) Stock Exchanges

(iii) Any other (Please specify)

Qs. 16. Give your opinion about the following statements regarding credit rating.

Strongly Agree Neutral Disagree Strongly

Agree Disagree

(i) Credit rating is the expression

of safety of investment

(ii) It saves time and energy of

investors

(iii) It is very important for

decision making

(iv) Symbols assigned gives clue

of creditability

(v) Agencies rate the instrument

according to actual worth

(vi) Existence of many agencies

creates confusion

(vii) There are chances of

malpractices

(viii) Agencies should revise

ratings periodically
(ix) All ratings should be made

Public





















Qs.17. What rating attributes are most important to investors? (Rank each attribute on a 5 point
scale. Rank 1 to be given to Most Important attribute and 5 to Most Unimportant)

1 2 3 4 5
(i) Overall quality of the analysts
(ii) Rating accuracy
(iii) Timeliness of upgrades/downgrades
(iv) Transparency of methodology
(v) Surveillance
(vi) Usefulness of research
(vii)Coverage of new issues
Qs. 18. Do you think that credit rating agencies should be accountable for ratings given by them?
(i) Yes
(ii) No









THANK YOU