Executive Summary

INTRODUCTION Credit rating agencies play an important role in assessing risk and its location and distribution in the financial system. By facilitating investment decisions they can help investors in achieving a balance in the risk return profile and at the same time assist firms in accessing capital at low cost. CRAs can thus potentially help to allocate capital efficiently across all sectors of the economy by pricing risk appropriately. However, in view of the fact that CRAs that rate capital market instruments are regulated by SEBI and that entities regulated by other regulators (IRDA, PFRDA and RBI) predominantly use the ratings, it was felt necessary to institute a comprehensive review of the registration, regulatory and supervisory regime for CRAs. The major motivation for the exercise was to look at inter regulatory coordination so that all interested stake holders have an institutional mechanism for providing inputs-feed back to ensure realisation of the objective behind the regulation of CRAs. Adding a further dimension to this enquiry, the subprime crisis has attracted considerable adverse attention worldwide on the role of CRAs enhancing the need for this review. CRAs attempt to make sense of the vast amount of information available regarding an issuer or borrower, its market and its economic circumstances in order to give investors and lenders a better understanding of the risks they face when lending to a particular borrower or when purchasing an issuers fixed-income securities. A credit rating, typically, is a CRAs opinion of how likely an issuer is to repay, in a timely fashion, a particular debt or financial obligation, or its debts generally.

Given that rating is only an opinion, albeit a very influential one, and regulation of gatekeeper business models is a border line ethical regulatory issue, the committee has examined wide ranging steps to improve the functioning and accountability of CRAs including the suggestion that in the medium run regulators may move away from the mandatory rating practice at least in the capital markets.

CHAPTER NO.1 RATING AND RATING AGENCIES

1.1 INTRODUCTION
The removal of strict regulatory framework in recent years has led to a spurt in the number of companies borrowing directly from the capital markets. There have been several instances in the recent past where the fly-by-night operators have cheated unwary investors. In such a situation, it has become increasingly difficult for an ordinary investor to distinguish between 'safe and good investment opportunities' and 'unsafe and bad investments'. Investors find that a borrower's size or name is no longer a sufficient guarantee of timely payment of interest and principal.

Investors perceive the need of an independent and credible agency, which judges impartially and in a professional manner, the credit quality of different companies and assist investors in making their investment decisions. Credit Rating Agencies, by providing a simple system of gradation of corporate debt instruments, assist lenders to form an opinion on -the relative capacities of the borrowers to meet their obligations. These Credit Rating Agencies, thus, assist and form an integral part of a broader programme of financial disintermediation and broadening and deepening of the Debt market. Credit rating is used' extensively for evaluating debt instruments. These include long-term instruments, like bonds and debentures as well as short-term obligations, like Commercial Paper. In addition, fixed deposits, certificates of deposits, inter-corporate deposits, structured obligations including non-convertible portion of partly Convertible Debentures (PCDs) and preferences shares are also rated.

The Securities and Exchange Board of India (SEBI), the regulator of Indian Capital Market, has now decided to enforce mandatory rating of all debt instruments irrespective of their maturity.

1.2 MEANING OF CREDIT RATING

Credit Rating Agencies rate the aforesaid debt instruments of companies. They do not rate the companies, but their individual debt securities. Rating is an opinion regarding the timely repayment of principal and interest thereon; It is expressed by assigning symbols, which have definite meaning. A rating reflects default risk only, not the price risk associated with changes in the level or shape of the yield curve. It is important to emphasise that credit ratings are not recommendations to invest. They do not take into account many aspects, which influence an investment decision. They do not, for example, evaluate the reasonableness of the issue price, possibilities of earning capital gains or take into account the liquidity in the secondary market. Ratings also do not take into account the risk of prepayment by the issuer, or interest rate risk or exchange rate risks. Although these are often related to the credit risk, the rating essential is an opinion on the relative quality of the credit risk. It has to be noted that there is no privacy of contract between an investor and a rating agency and the investor is not protected by the opinion of the rating agency. Ratings are not a guarantee against loss. They are simply opinions, based on analysis of the risk of default. They are helpful in making decisions based on particular preference of risk and return. A company, desirous of rating its debt instrument, needs to approach a credit rating agency and pay a fee for this service. There is no compulsion on the corporate sector to obtain' or publicize the credit rating except for certain instruments. A -company can use the rating as another from its prospectus and publicity, if it is not good. The Credit Rating Agencies regularly analyse the financial position of corporations and assign and revise the ratings for their securities. The different rating agencies seldom give different ratings for the same security. If two rating agencies do give the same security different ratings, it is called split rating; the few differences that occur are rarely more than one rating grade level apart. Accepted ratings are published in media, every week. In tune with the industrial practice in India, rating agencies do not publish ratings which are not accepted by issuers.

DEFINITION
A credit rating represents the rating agency's opinion on the likelihood of a rated debt obligation being repaid in full and on time. A simple alphanumeric symbol is normally used to convey a credit rating.

1.3

SYSTEMATIC IMPORTANCE

OF RATING

AND RATING

AGENCIES
The history of systematic credit rating, however, is a century old beginning with rating of US railroad bonds by John Moody in 1909. During this one century of growth and adaptation, CRAs progressed from rating simple debt products to rating complex derivatives to national economies and altered their business models to cover a range of activities/products. There are three major credit rating agencies operating internationally- Fitch, Standard and Poors, Moodys Investor Services: between them they share the bulk of the $5 billion rating business globally relegating other 60 plus local/regional players into just competitive fringes. In India, credit ratings started with the setting up of The Credit Rating Information Services of India (now CRISIL Limited) in 1987. CRISIL was promoted by premier financial institutions like ICICI, HDFC, UTI, SBI, LIC and Asian Development Bank. Now CRISIL is an S&P company with a majority shareholding. Apart from CRISIL four more rating agencies have been registered by SEBI in India. These are ICRA, promoted by IFCI and now controlled by Moodys, CARE promoted by IDBI, Fitch India a 100% subsidiary of Fitch, and a new born Brickworks. In India, CRAs that rate capital market instruments are governed by Securities and Exchange Board of India (Credit Rating Agencies) Regulations, 1999. The regulation provides detailed requirements that a rating agency needs to fulfil to be registered with SEBI. Name of the CRA CRISIL ICRA CARE FITCH INDIA BRICKWORKS Year of commencement of Operations 1988 1991 1993 1996 2008

In India, revenues of the three big rating agencies, CRISIL, ICRA and CARE have shown an upward trend given the increase in the usage of ratings over time.

1.4 BENEFITS OF CREDIT RATING

Rating serves as a useful tool for different constituents of the capital market. For different classes of persons, different benefits accrue from the use of rated instruments. 1) Investors: Rating safeguards against bankruptcy through recognition of risk. It gives an idea of the risk involved in the investment. It gives a clue to the credibility of the issuer company. Rating symbols give information on the quality of instrument in a simpler way that can be understood by lay investor and help him in taking decision on investment without the help from broker. Both individuals and institutions can draw up their credit risk policies and assess the adequacy or otherwise of the risk premium offered by the market on the basis of credit ratings.

2) Issuers of Debt Instruments: A company whose instruments are highly rated has the opportunity to have a wider access to capital, at lower cost of borrowing. Rating also facilitates the best pricing and timing of issues and provides financing flexibility. Companies with rated instruments can use the rating as a marketing tool to create a better image in dealing with its customers, lenders and creditors. Ratings encourage the companies to come out with more disclosures about their accounting systems, financial reporting and management pattern. It also makes it possible for some category of investors who require mandated rating from reputed rating agencies to make investments.

3) Financial Intermediaries: Financial intermediaries like banks, merchant bankers, and investment advisers find rating as a very useful input in the decisions relating to lending and investments. For instance, kith high credit rating, the brokers can convince their clients to select a particular investment proposal Ignore easily thereby saving on time, cost and manpower ill convincing their clients.

4) Business Counter-parties: The credit rating helps business counter-parties in establishing business relationships particularly for opening letters of credit, awarding contracts, entering into collaboration agreements, etc.

5) Regulators: With the help of credit ratings, determine eligibility criteria and entry barriers for new securities, monitor financial soundness of organizations and promote efficiency in debt securities market. This increases transparency of the financial system leading to a healthy development of the market.

1.5 LIMITATIONS OF CREDIT RATINGS First, credit ratings are changed when the agencies feel that sufficient changes have occurred. The rating agencies are physically unable to constantly monitor all the firms in the market. The opinions of rating agencies may turn wrong in the context of subsequent events that may have an adverse impact on asset quality of the issuer.

Second, the use of credit ratings imposes discrete categories on default risk, while, in reality default risk is a continuous phenomenon. Moody's recognised this way back in 1982 by adding numbers to the letter system, thereby increasing its number of rating categories from 9 to 19. Nevertheless, this limitation still pertains. The letter grades assigned by rating agencies serve only as a general, somewhat coarse form of discrimination.

Third, owing to time and cost constraints, credit ratings are unable to capture all characteristics for an issuer and issue. A borrowing company can reduce the cost of borrowing, if it obtains a higher rating for its contemplated issue. The stakes and pressures, consequently, to get a good quality rating are high. If the company comes to know that its issue is going to get a low quality rating, it may approach another agency and then use the best rating among them since it is not under obligation to disclose all ratings.

According to the practice in the rating industry in India, a corporate entity has the option of not agreeing to the first rating given to its debt issue and can choose not to get rated by that agency at all. In such a situation, the rating agency cannot divulge its assessment to anybody, and the corporate entity is free to go to any other agency. But once the corporate entity agrees with the first rating, it has no option of getting out of the -rating discipline imposed by the rating agency. This may tempt rating agencies to woo clients with the help of an initial favourable rating, but the freedom may eventually be misused by the rating agency because corporate client doesn't have the option to differ with the agency, once it initially agrees to get rated by it. To ensure that corporate clients are not dependent on one rating agency, the system of compulsory dual ratings of all instruments could be considered.

Sometimes, the rating agency may reduce the rigor of their criteria on their own to enlarge the business and improve profits especially if they are a listed company.

Investors should, therefore, not follow blindly the ratings of different agencies in regard to the safety of fixed income instruments. The investors should explore other alternative evaluation sources so that they become aware of the true risks involved. The rating agencies have to be alert to ensure that their rating decisions are not driven by volume and profitability with a view to ensure favourable impact on the price of its share. It may be asserted that the rating agencies should be judged by overall performance and not by one or two defaults.

Once the corporate agrees with the first rating, the rating agency is obliged to assess the debt issue till its maturity and publish the rating as part of its surveillance system. It has been observed that rating agencies have miserably failed in predicting the brewing crisis and have continued to give investment grade rating to companies, which have eventually defaulted. It has been argued that CRB scam would not have taken place if we had a better credit rating agency that would have cautioned in time on the status of the company.

After the crisis, rating agencies became overcautious and resorted to drastic downgrades of ratings in respect of specific companies. For instance, CRISIL, ICRA, and CARE downgraded respectively 140, 35 and 50 companies in 1997. Of the rating changes effected by CRISIL, ICRA, and CARE-36%, 40% and 64% respectively were by three or more notches.

Downgrades of Ratings (in percentage) in 1997

CRISIL By one notch By two notches By three notches By four notches By more than four notches Total downgrades 140 35.0 29.3 12.9 7.9 15.0

ICRA 28.6 31.4 8.6 8.6 22.9

CARE 22.0 14.0 20.0 4.0 40.0

35

50

The high proportion of companies whose investment grade rating was overnight changed to non-investment grade is not conducive for enhancing the faith of investors in ratings.

In India, as in the developed countries, rating changes often lag the variations in stock prices. Of the 157 rating downgrades made by the three rating agencies in 1997, in 130 companies, the change in ratings lagged the decline in share prices. Despite evidence that stock price movements do eventually lead to a change in ratings, there is reason to believe that further changes are urgently needed when the ratings of companies and their stock prices are compared.

This need is more prominent in the case of the investment grade ratings granted to NBFCs by CRISIL and ICRA than to the companies which are trading below par, yet command investment grade rating.

CHAPTER NO.2 CREDIT RATING AGENCIES IN INDIA

CREDIT RATING AGENCIES IN INDIA

In India, at present, there are four credit Rating Agencies: i) Credit Rating and Information Services of India Limited (CRISIL). ii) Investment Information and Credit Rating Agency of India Limited (ICRA). iii) Credit Analysis and Research Limited (CARE). iv) Duff and Phelps Credit Rating of India (Pvt.) Ltd. CRISIL: This was set-up by ICICI and UTI in 1988, and rates debt instruments. Nearly half of its ratings on the instruments are being used. CRISIL's market share is around 75%. It has launched innovative products for credit risks assessment viz., counter party ratings and bank loan ratings. CRISIL rates debentures, fixed deposits, commercial papers, preference shares and structured obligations. Of the total value of instruments rated, debentures' accounted for 31.1%, fixed deposits for 42.3% and commercial paper 6.6%. CRISIL publishes CRISIL rating in SCAN that is a quarterly publication in Hindi and Gujarati, besides English.

CRISIL evaluation is carried out by professionally qualified persons and includes data collection, analysis and meeting with key personnel in the company to discuss strategies, plans and other issues that may effect ,evaluation of the company. The rating process ensures confidentiality. Once the company decides to use rating, CRISIL is obligated to monitor the rating over the life of the debt instrument.

ICRA: ICRA was promoted by IFCI in 1991. During the year 1996-97, ICRA rated 261 debt instruments of manufacturing companies, finance companies and financial institutions equivalent to Rs. 12,850 crores as compared to 293 instruments covering debt volume of Rs. 75,742 crores in 1995-96. This showed a decline of 83.0% over the year in the volume of rated debt instruments. Of the total amount rated cumulatively until March-end 1997, the share in terms of number of instruments was 28.5% for debentures (including long term instruments), 49.4% for Fixed Deposit programme (including medium- term instruments), and 22.1% for Commercial Paper Programme (including short term instruments). The corresponding figures of amount involved for these three broad rated categories were 23.8%.

CARE: CARE is a credit rating and information services company promoted by IDBI jointly with investment institutions, banks and finance companies. The company commenced its operations in October 1993. CARE is recognised by Securities and Exchange Board of India (SEBI), Government of India (GOI), Reserve Bank of India (RBI), etc. CARE Ratings is well equipped to rate all types of debt instruments like Commercial Paper, Fixed Deposit, Bonds, Debentures, Hybrid Instruments, Structured Obligations,

Preference Shares, Loans, Asset Backed Securities (ABS), Residential Mortgage, etc. CARE Ratings services has been recognized by statutory authorities and other agencies in India which include Securities and Exchange Board of India (SEBI), Reserve Bank of India (RBI), Director General, Shipping and Ministry of Petroleum and Natural Gas (MOPNG), Government of India (GOI), National Housing Bank (NHB), National Bank for Agriculture and Rural development (NABARD), National Small Scale Industries Commission (NSIC). Duff and Phelps Credit Rating of India (Pvt.) Ltd.: The Duff and Phelps is a leading international credit rating agency. The J.M.Financial and Alliance Group in joint venture with Duffs and Phelps has now set up in India. Its main objective is to give credit rating to debt instruments. On special request it may undertake rating of companies and countries as well. The popular symbol employed by DCR is D1, D2, D3 etc. depending upon the credit status. For example, RBI has stipulated a minimum credit rating of D-2 DCR India for the purpose of issuing commercial papers by institutions.

2.1 FUNCTIONS OF CREDIT RATING AGENCIES

(1) Assists Investors: It assists investors, both individual as well as institutional, in making well informed investment decisions. (2) Ensures adequate disclosures: Credit rating agencies ensures that adequate information is disclosed to it and after assessing all the risks involved it decides on a credit symbol. (3) Easy understanding: The credit rating symbols are easily understandable to the investors based on which they can take well informed investment decision. Triple A indicates highest safety and D indicates default which is easily understandable. (4) Low Cost Funds: High credit rating indicates low risk which means companies with high credit rating can raise the required funds at lower rates of returns. (5) Constant Monitoring: Once the rating has been assigned the credit rating agencies constantly monitor the degree of risk exposure of the firm and accordingly based on it, it can upgrade or even downgrade the assigned credit rating symbols. (6) Credit quality information: Credit rating agencies inform the investors regarding the credit quality of the company which the investors are not aware of and thus facilitates in promotion of the Public issues of the companies. CRISIL receives the completed application form along with the rating fee CRISILs representatives visit the company CRISILs analysts have a short discussion with the management of the company CRISIL prepares a rating report, assigns a rating and sends the copy of the report to company and NSIC.

2.2 BENEFITS TO RATED COMPANIES

(i) Sources of Additional Certification Credit rating agency provides additional information to issue the issuers of debts/ financial instruments. A highly rated firm can enter the market with great confidence. Indian experience shows that use of rating, benefit a great deal by getting larger amount of money from a wider audience at a lower cost. (ii) Increase the Investor Population A sound credit rating system gives an alternative method to name recognition as a determining factor in making the investment and help increase the population of those in debts obligation of the company. (iii) Forewarns Risk Credit rating acts as a guide to company which get a lower rating. It forewarns the management of the perception of the risk in the market and prompts to take steps on their operating and marketing risk and thereby changes the perception in the market. (iv) Encourages Financial Discipline Rating also encourages disciplines among the corporate borrower to improve their financial structure and performance to obtain better rating for their debt obligation. (v) Merchant banker Job made easy Merchant banker and brokers will be relieved of the responsibility of guiding investor as to the risk of particular investment. Merchant baker are brokers, in the absence of objective information, go on the basis of name, recognition in guiding their clients. With the advent of credit rating, what they required to do is to bring to the attention of their clients the rating of debts obligation. (vi) Foreign Collaboration made easy The Foreign Collaboration always ask for credit rating while negotiating with an Indian company. Credit rating enables to identity instantly the relative credit standing of the company. The importance of credit rating being increasingly recognised in the Euro- markets.

(vii) Benefits the industry as a whole Relatively small and unknown companies use ratings to install confidence in investors. Higher rate companies get larger amount of money at a lower cost. Thus the industry as a whole can benefits from rating by direct mobilisation of saving from individuals rather than from intermediary lending institute. (viii) Low cost of borrowing A company with highly rated instrument has the opportunity to reduce the cost of borrowing by quoting lesser interest rate on fixed deposits or debenture as investor with low risk preference would invest on safe securities through yielding low rate of return. (ix) Rating as a marketing tool Companies with rated instruments, use rating as a marketing tool to create better image in dealing with their customer, lenders and creditors.

2.3 CHALLENGES TO NEW CRAs

The value investors place on the opinions and ratings of a CRA depends, to a significant extent, on the reputation that CRA has built among investors. This reputation frequently is based on a history of providing accurate, timely and useful ratings. Consequently, new CRAs can face several disadvantages to more established CRAs. These include: Lack of a rating history: Without a history of timely and accurate ratings, a CRA may have difficulty establishing itself. Investors will be reluctant to accord the ratings of a new entrant the same regard given more established CRAs because new entrants lack historical default rates by which investors can compare its performance against other CRAs. As a result, issuers may be reluctant to engage a new entrant for a rating. Without investor or issuer interest, it may take considerable time for a CRAs rating business to become self-sustaining. Consequently, a new entrant may have to devote considerable time and expense developing a reputation among investors before it can become a viable competitor to more established CRAs. Lack of resources and issuer access: In many (though not all) cases, a new entrant may have fewer resources (staff, analytical tools and other resources) than more established CRAs. Without these resources, a new entrant may be at a disadvantage vis--vis more established CRAs, who may be able to hire more staff (and more experienced staff) to analyze large issuers involved in numerous complicated transactions. Likewise, as issuers initially may express no interest in contracting with a new entrant for a rating, new entrants may be forced to build their reputation on the basis of unsolicited ratings, without the benefit of issuer cooperation and input. This last point, however, may be mitigated to some extent if ongoing issuer disclosure obligations provide sufficient information to the public that a new entrant can, through careful analysis, draw accurate and timely conclusions regarding the issuers financial health and economic prospects. Special conflicts of interest: Given the high start-up costs new entrants face, new CRAs may be vulnerable to financial pressures larger CRAs may be insulated against by their size. To a new entrant, a single fee-paying issuer may comprise a large portion of the CRAs overall revenue, creating a potential conflict of interest that may influence its rating decisions should the new entrant fear a loss of this business. Likewise, the large amount of capital and time necessary to establish a new entrant may necessitate an affiliation with a larger firm. As described earlier, such affiliations present their own conflicts of interest issues if the financial interests of the parent firm influence the rating decisions of the CRA affiliate.

2.4 PRACTICAL PROBLEMS

1. The absence of widespread branch net work of the rating agency may limit its skill in rating. 2. Inexperienced unskilled or over loaded staff may not do justice to their job and resulting rating may not be perfect. 3. Since rating exercise involves a number of factors, a rigid mathematical formula cannot be applied to finalise the rating and some elements of subjectivity creeps in thereby giving scope for bias. 4. Time factor greatly affect rating and gives misleading conclusion. A company which experience adverse condition temporarily will be given a low rating judged on the basis of temporary phenomenon. 5. Since the rating agencies receives a sizable fee from the companies for awarding ratings, a tendency of inflate the rating may develop. 6. The rating is not permanent but subject to changes and moreover the agencies can not give any guarantee for the investors. 7. Investments which have the same rating may not have identical investment quality because the number of rating categories is limited and hence not reflect small but meaningful difference in the degree of risk. 8. Borrowing entities give misleading advertisement about the rating symbols of their instruments. For examples, X Co LTD which has got AAX for its debenture may mobilise. Fixed deposits instated of revealing the low rating for fixed deposits. Such kind of window dressing should be curtailed.

2.5 FUTURE OF CREDIT RATING IN INDIA

At present, commercial paper, k bonds and debenture with maturities exceeding 18 moths and fixed deposits of large companies registered with RBI are required to compulsorily rated. There are moves to make rating compulsory for other types of borrowings such as the fixed deposits programme of manufacturing companies. In addition the rating agencies are expected to be called upon to enlarge volume s of securitisation of debt and structuring of customised instruments to meet the need of issuers or different class of investors. There are numbers of areas where rating agencies will have to cover new ground in coming years. The rating of municipal bonds, state government borrowing, commercial bank and public sector undertaking etc. will be covered in the near future. So, the outlook for the credit rating industry is positive. The experience of Indian rating agencies so far is that about 30 % of their rating are not accepted or used. Instances are there when companies with poor rating assigned by one company have gone to another for better rating. These raises doubt about the efficiency of the credit rating agencies in serving the investors. Various constraints are faced by the credit rating agencies. The major constraint is the low level of disclosure by Indian companies. Rating agencies have completed of inadequate access to information, poor quality of audit ad long time lags in the availability of data. The companies often do not co operate whenever they feel that disclosure of a particular piece of information might not be in their interest. All these act as systematic constraints on the rating service. The Indian credit rating agencies have made strategic alliance with reputed international agencies. They adopt, to large extent, the rating methodologies adopted by their western counterparts. The suitability of rating methods and models formulated in well developed markets in the west is highly doubtful in Indian conditions. The rating agencies in India have to evolve their own methodology within the context of macro economics environment.

CHAPTER NO.3 CRISIL

3.1 INTRODUCTION TO CRISIL

An increased range of borrowers, increasingly complex financial transactions and large quantum of debt borrowed in India warranted the need of provider of objective, accurate and timely information of credit quality. To fulfil this objective, CRISIL was incorporated in 1987 as public limited company. Today CRISIL is Indias largest and most respected rating agency. CRISILs majority share holder is standard $ Poors the worlds foremost provider of independent credit rating, indices, risk evaluation, investment research and data. Leading Corporation worldwide is rated by S&P. S&Ps credit risk tracer (CRT) has analyzed about 1million SMEs in Europe.

Established in 1987, CRISIL has been promoted by leading Indian financial institutions like The Industrial Credit and Investment Corporation of India Limited (ICICI), Unit Trust of India (UTI) and Housing Development Finance Corporation Limited. The major shareholders include Standard & Poor's, ICICI, UTI, Life Insurance Corporation, General Insurance Corporation and a host of nationalized and foreign banks. CRISIL became a public limited company in November 1993 and is presently a quoted company on the Bombay Stock Exchange and the National Stock Exchange. . CRISIL pioneered the concept of credit rating in India and developed the framework and methodology for rating debt in the context of the India financial, monetary and regulatory system. CRISIL today has attained a pre-eminent position in the rating industry. It is the largest rating agency in the South East Asia region and is amongst the four largest ratings agencies in the world. In February 1996, CRISIL entered into a strategic alliance with Standard and Poors .The relationship got strengthened with S&P with CRISILs working credibility, competence and management. The relationship got further strengthened with S&P taking up a majority stake in CRISIL.

CRISIL started with the rating of corporate dept and other the years extended its scope of activities. Its range of services one includes rating services, advisory services and investment research related services.

3.2 HISTORY

January 29: CRISIL, India's first credit rating agency, is incorporated,

promoted by the erstwhile ICICI Ltd, along with UTI and other financial 1987 institutions.

Mr. N Vaghul and Mr. Pradip Shah are CRISIL's first Chairman and

Managing Director, respectively.

January 1: CRISIL commences operations within a year of its

incorporation. The business environment is far from promising for the one1988 year old - the lending rates are fixed, and India has no such thing as a corporate bond market as yet. And, what's more, credit rating is an idea that's far ahead of its times.

The CRISILCARD Service - providing comprehensive information

1990

and analytical opinion on India's corporate entities - is launched.

Despite the odds, and the initial lack of market acceptance of credit

1991

ratings, CRISIL's operations are now well established. It begins to acquire brand identity, with a reputation for analytical rigour and independence.

CRISIL offers technical assistance and training to help set up Rating

1992

Agency Malaysia Berhad, and MAALOT, the Israeli securities rating company.

CRISIL's IPO is a whopping success - its 20, 00,000 shares, sold at a

1993

premium of Rs.40 per share, are oversubscribed by 2.47 times.

Mr. R Ravimohan takes over as CRISIL's Managing Director. CRISIL diversifies business portfolio with a strategic entry into

1994

advisory services, and wins its first major mandate in the infrastructure policy advisory domain.

In partnership with the National Stock Exchange of India Ltd

1995

(NSEIL), CRISIL develops and launches the CRISIL500 Equity Index, helping investors clue in on stock price movements.

CRISIL forges a strategic business alliance with Standard & Poor's

1996

(S&P) Ratings Group. The tie-up is part of CRISIL's strategy to develop its skills and processes.

S&P acquires a 9.68 per cent stake in CRISIL. The alliance with the

world's leading rating agency adds a new dimension to CRISIL's 1997 methodologies. It provides CRISIL with exposure to the international rating markets and to S&P's rating processes.

CRISIL sets up India Index Services Ltd (IISL), a joint venture with

1998

NSEIL, to provide a variety of indices and index-related services and products to India's capital markets.

CRISIL's proprietary Risk Assessment Model (RAM) becomes the

banking industry standard: given the heightened regulatory focus on the 1999 banks' risk management practices, RAM serves as a customised credit rating model for the banks.

CRISIL acquires the business, and brand, INFAC, of Information

Products and Research Services (India) Pvt Ltd. INFAC is a leading provider of research to India's financial sector. The acquisition strengthens CRISIL's research business, and makes it India's leading provider of integrated 2000 research.

CRISIL launches the CRISIL Composite Performance Ranking

(CRISIL~CPR) to provide performance evaluation standards and investment decision support to mutual fund houses, distributors, and investors.

CRISIL sets up subsidiary, Global Data Services of India Ltd, to

standardise published financial data for analysis.

CRISIL launches Mutual Fund Awards in association with CNBC-

2001

TV18 - a benchmark award for India's best performing mutual funds.

CRISIL launches the CRISIL Young Thought Leader (CYTL) Award

- to attract outstanding talent and provide a platform to India's future business leaders to showcase their views.

CRISIL sets up:

The Centre for Economic Research - to apply economic principles to

2002

live business situations

CRISIL MarketWire - to provide real-time financial news services to

help clients make pricing- and investment-related decisions

CRISIL sets up its investment and risk management services group to

offer integrated risk management solutions and advice to banks and corporate.

CRISIL follows it up with its first overseas acquisition -

2003

EconoMatters Ltd (later the Gas Strategies Group), a London-based company providing natural gas related consulting, information and training, and conference-organising services.

CRISIL expands its global reach further with an equity investment in

the world's first regional rating agency, the Caribbean Information and Credit 2004 Rating Services Limited (CariCRIS), which CRISIL also helps set up.

The CRISIL Awards for Excellence in Municipal Initiatives are

instituted, to recognise outstanding programmes in urban development.

The strategic alliance with S&P since 1996 culminates in S&P's

acquiring majority control of CRISIL.

CRISIL makes its second overseas acquisition, of Irevna, thus adding

equity research to its wide canvas of work. Irevna is a leading global equity research and analytics company. 2005

CRISIL launches Small and Medium Enterprise (SME) Ratings to

serve the specialised needs of the SME sector.

CRISIL partners CNBC-TV18 for Emerging India Awards - the first

platform to recognize and reward the achievements of India's Small & Medium Enterprises.

CRISIL launches IPO grading services to provide investors with

independent, reliable, and consistent assessments of the fundamental 2006 strengths of new public issues.

Irevna is ranked globally as the top Investment Research Outsourcing

Firm by The Black Book of Outsourcing.

Ms. Roopa Kudva takes over as Managing Director and CEO of

CRISIL, following Mr. Ravimohan's appointment as Managing Director and Region Head of S&P, South Asia.

CRISIL assigns India's first Bank Loan Rating under the Reserve

Bank of India's Basel-II related regulations.

The Provident Fund Regulatory and Development Authority awards

2007

CRISIL with a prestigious mandate to assist in the selection of Fund Managers under the New Pension Scheme.

The Black Book of Outsourcing ranks Irevna the No. 1 Financial

Services Industry Analytics Outsourcing Firm.

CRISIL launches Real Estate Awards with CNBC AWAAZ. The

award honours India's exemplary developers and builders.

CRISIL launches Complexity Levels, an initiative to strengthen

2008

India's capital markets by providing greater transparency to investors.

CRISIL's revenues cross Rs.5 billion in 2008.

CRISIL's SME Ratings group assigns its 5000th SME rating. CRISIL captures about half of India's bank loan rating market. Irevna is ranked globally by The Black Book of Outsourcing as the

2009

No. 1 Investment Research and Analytics Outsourcing Firm.

CRISIL Research launches Independent Equity Research (IER).

CRISIL moves into a new, corporate head office - the new CRISIL

House, at Powai, Mumbai, is a state-of-the-art, green building.

CRISIL SME Ratings crosses its 15,000th SME rating. CRISIL launches Real Estate Star Ratings. CRISIL acquires Pipal Research, further strengthening its leadership

2010

in the KPO industry.

3.3 CRISIL RATINGS ON VARIOUS INVESTMENT AVENUES

According to CRISIL, Credit Rating is an unbiased and independent opinion as to issuers capacity to meet its financial obligations. Its doesn't constitute recommendations to buy/sell or hold a particular security. CRISIL, the first credit rating agency was started on January 1, 1988. It was started jointly by ICICI bank and UTI bank with an equity capital of Rs. 4 crores. The main objective of CRISIL is to rate debt obligation of Indian Companies. CRISIL commences rating as per the request of the companies. CRISIL provides the rating as per the investment i.e. (a) Debenture (b) Fixed deposit (c) Short term investment (d) Structured obligations (e) Real estate developers projects (f) Foreign Structure Obligations

(g) Bond funds (h) Real estate developers (i) Governance and value creation (j) Health-care institutions (k) Credit assessments (l) Collective investment schemes

Following is the brief of ratings for above said investments. (a) CRISIL Debenture Rating Symbols: (i) High Investment Grades:

AAA (Triple A): Highest Safety - on timely payment of interest and principal AA (double A): High Safety (This symbol shows the minor variation from triple A) (ii) Investment Grades:

A: Adequate safety. This rating shows the adverse impact arising out of changed circumstances. BBB: Moderate Safety This rating shows the variations caused by changing circumstances weakening the capacity. (iii) Speculative Grades:

BB: Inadequate Safety This rating shows the comparative uncertainties faced by the issuer. B: High Risk This shows adverse business or economic conditions affecting the issuer. C: Substantial Risk This rating shows unfavourable circumstances to develop as it can be default. D: Default This rating shows that such debenture is extremely speculative and returns from them can be realized only on reorganization or liquidation.

(b) CRISIL Fixed Deposit Ratings Symbols: FAAA (F triple A): Highest Safety FAA (F double A): High Safety FA: Adequate Safety This rating shows the changes in circumstances can affect the issues more than those in higher rated categories. FB: Inadequate Safety This shows the inadequacy capacity to make the timely interest and principal payments. FC: High Risk Such rating shows the adverse business or economic conditions would lead to lack of ability or willingness to pay interest or principal. FD: Default this shows that the issuer is either in default or is expected to be default upon maturity.

(c) CRISILs Rating for Short term Instrument: P - 1: Very Strong. This rating shows the degree of safety regarding timely payment on the instrument is very strong. P 2: Strong P 3: Adequate P 4: Minimal. This rating shows adversity affected by short term adversity or less favourable conditions. P 5: Default: This rating indicates that the instrument is expected to be in default on maturity or is in default.

(d) CRISILs Rating for Structured Obligations: Structured Obligations are using the same rating as debentures. However, structured obligations rating are defined differently. (1) High Investment Grades: AAA (SO): Highest Safety. This rating shows the highest degree of certainty regarding timely payment of financial obligations on the instrument. AA (SO): High Safety (2) Investment Grades:

A (SO): Adequate Safety. This rating shows changes in circumstances can adversely affect such instrument more than those in higher rated categories. BBB (SO: Moderate Safety (3) Speculative Grades: BB (SO): Inadequate Safety. This ratings shows the less susceptible to default than instruments. B (SO): High Risk. This rating shows high risk as well as greater susceptible to default. An adverse business or economic C (SO): Substantial Risk. This rating indicates the certainty of the payment of instrument. D (SO): Default (e) CRISILs Rating Symbols for Real Estate Developers Project: Highest Ability:

PA 1: This rating shows the highest ability of developer to specify and build to agreed quality levels and transfer clear title within stipulated time schedules. High Ability: PA 2 Adequate Ability: PA 3 Inadequate Ability: PA 4. This rating shows the inability of completion of project.

(f)

CRISILs Rating of Foreign Structured Obligations:

CRISIL ratings of Foreign Structured Obligations (FSO) are based on the entity based outside of the country. The rating shows the certainty regarding timely payment of financial obligation on the instrument. Financial Structured Obligations rating shows the same scale (AAA to D) as CRISIL rates for long term instrument. (g) CRISILs Rating for Bond Funds: CRISIL rates the bonds and shows the protection capacity in terms of profit or loss o credits. The following are the ratings: AAAf: Very Strong Aaf : Strong Af : Adequate BBBf : Moderate BBf : Inadequate Cf : Defaults CRISIL rates real estate projects on

(h) CRISILs Rating for Real Estate Developers:

the basis of their past achievement records. This records indicates the future expectation. The following are the ratings: DA1: Excellent: This shows the past record of the real estate project is excellent DA2: Very Good DA3: Good DA4: Unsatisfactory DA5: Poor

(i)

CRISIL Rating for Corporate Governance and Value Creation:

This rating was introduced because of few companies failure in USA due to governance failure. As a result for investor protection this ratings scale is introduced .This ratings analysis the credit worthiness of corporate governess. The following are the ratings for corporate governance: (j) Level 1: Highest Level 2: High Level 3: Strong Level 4: Moderate Level 5: Adequate Level 6: inadequate Level 7: Poor Level 8: Lowest CRISIL Rating for Health Care Institution:

CRISIL rates the health care institutions in the terms of delivering Patient care. In addition to this some more components are considered to rate i.e. facilities, equipments, manpower and also the service quality. The following are the ratings: Grade A: Very good Grade B: Good Grade C: An average Grade D: Poor

(k) CRISIL Ratings for Credit Assessments: CRISIL rates different type of Credit Assessment, whether the borrower can pay the principal and interest timely or not. The following are the ratings as follows: 1: Very Strong Capacity 2, 3, 4: Strong Capacity 5, 6, 7: Adequate Capacity 8, 9, 10: Inadequate Capacity 11, 12, 13: Poor Capacity 14: Default

(l)

CRISIL Ratings for Collective Investment Scheme:

CRISIL rates investment schemes to assure the investor that whether they are going to get there return of investment or not. The followings are the ratings as follows: Grade 1: High Certainty Grade2: Adequate Certainty Grade 3: Moderate Certainty Grade4: Inadequate Certainty Grade5: High Uncertainty

3.4 FLOW CHART CRISILs RATING PROCESS

3.5 CRISILS PERFORMANCE AT A GLANCE

(Rs. Lacs) Particulars Total Income for the year was Profit before depreciation and taxes was Deducting there from depreciation of

Year ended Dec. 31, 2012 40,389.03 18,696.71 1,184.38

Year ended Dec. 31, 2011 27,088.00 10,481.23 1,333.87

17,512.33 Profit before tax was Deducting there from taxes of Profit after tax was The proposed appropriations are: Dividend Corporate Dividend Tax General Reserve Balance carried forward 5,057.50 859.52 1,373.78 17,663.64 3,774.52 13,737.81

9,147.36

2,080.28 7,067.08

1,806.25 337.07 706.71 8,775.36

CHAPTER NO.4 CRISIL PERFORMANCE ANALYSIS

4.1 COMPARISON OF BALANCE SHEETS FROM DEC08 TO DEC11

PARTICULARS

---------------In Rs. Cr.-------------Dec12 Dec11 Dec10 Dec09

SOURCES OF FUNDS TOTAL SHARE CAPITAL EQUITY SHARE CAPITAL RESERVES NETWORTH APPLICATION OF FUNDS NET BLOCK CAPITAL WORK IN PROGRESS INVESTMENTS SUNDRY DEBTORS CASH AND BANK BALANCE TOTAL CA, LOANS & ADVANCES TOTAL CL & PROVISIONS NET CURRENT ASSETS MISCELLANEOUS EXPENSES TOTAL ASSETS 101.11 99.85 0.44 0.08 49.44 63.67 54.65 4.04 7.01 7.01 7.10 7.10 7.23 7.23 7.23 7.23

358.21 355.41 365.22 362.51

405.00 339.19 412.23 346.42

108.41 117.51 85.81 63.60 96.42 34.40

181.49 186.49 69.50 72.73 80.32 19.32

401.57 323.68 246.30 178.62 155.27 145.06 0.00 0.00

288.63 244.93 171.01 143.69 117.62 101.24 0.00 0.00

365.22 362.51

412.23 346.42

SUMMARY: As per the balance sheet shown above, we can see that in Dec12the share capital was only 7.01 cr. as compared to Dec09 which was 7.23 cr. The reserves were high in Dec10 405.00 cr. which falls down to 358.21 cr. in Dce12.It indicates less issue of shares. The net worth increased from 346.42 cr. in Dec09 to 365.22 cr. in Dec12. As far as investments are concerned, investments made in Dec12 were less as compared to Dec09. Cash and bank balance increased from 19.32 cr. in Dec09 to 63.60 cr. in Dce12. Total net current assets also increased to 155.27 cr. in Dec12. The overall performance was good in Dec12.

4.2 KEY FINANCIAL RATIOS FROM FY2007 TO FY2012

4.3 CRISILS PROJECT GROWTH DURING FY2012

SUMMARY: As you can see Steel products creates higher revenue growth of over 18.1%. Airline services and Pharmaceuticals produces almost same growth rate which is of 16% and 16.1% respectively. Construction, Automobiles, Paper, Textiles shows growth between 11.3% to 11.6% which increases steadily. Shipping shows very less growth rate of only 4.5% in fy2012. Real estate indicates negative impact, as it is showing -5.1% growth.

4.4 SHARE PRICE ANALYSIS CRISILS SHARE PRICE AS ON 26TH MARCH 2012= 938.30 PRICE INFORMATION LIVE PRICE PREVIOUS CLOSE OPEN PRICE VOLUME DAYs HIGH DAYs LOW 52 WEEKs HIGH 52WEEKs LOW BSE 938.30 941.50 940.00 431 948.85 921.10 1,000.00 585.50 NSE 940.15 947.85 942.00 6,571 946.85 936.30 1,002.00 603.00

CRISIL STOCK RETURNS TIME SPAN TODAY WEEK MONTH THREE MONTHS SIX MONTHS ONE YEAR TWO YEARS THREE YEARS FIVE YEARS PRICE 938.30 936.40 908.00 897.40 799.03 585.00 502.89 221.12 262.28 CHANGE %CHANGE -3.20 5.10 33.50 44.10 142.47 356.50 438.61 720.38 679.22 -0.33 0.54 3.68 4.91 17.83 60.94 87.21 325.78 258.96

CHAPTER NO.5 CRISIL AN OVERVIEW

5.1 CRISIL BUSINESS AND SERVICES

CRISIL Limited is Indias leading Ratings, Financial News, Risk & Policy Advisory Company. CRISIL helps clients manage and mitigate business and financial risk, enables markets to function better through benchmarks and best practices and provides workable inputs in shaping public policy. CRISILs services and products span the entire value chain starting from data collection and management to providing opinions and integrated solutions. These products and services are backed by highest standards of integrity, independence and analytical rigor, making CRISIL the most credible provider of these services in the market. CRISILs clients depend upon it to constantly deliver objective opinions and the most workable solutions. Through a sustained theme of innovation and thought leadership, CRISIL has led the markets with new thoughts, new analytical frameworks and new approaches, placing it in its leading position in the Indian market place to all participants in the financial markets.

CRISIL Infrastructure Advisory Group provides workable policy and transaction level solution to Central and State governments, public sector and private sector entities, that help them make the difference. CRISIL Investment and Risk Management Group (part of CRISILs advisory services) and Global Data Services India Ltd (GDSIL), both CRISIL subsidiaries.

CRISIL Ltd provides business knowledge through research on industries, companies and the economy, GDSIL provides analytical data base to support CRISIL as well as external clients in their research and analysis. CRISILs news services (CRISIL Market wire CMW) are Indias leading provider of real time news and analysis on India debt markets.

5.2 CRISIL GROUP BUSINESSES

5.3 MILESTONES OF THE COMPANY

CRISIL is 24. At this important milestone, we reflect on our journey thus far and look into the horizon beyond. We began our journey as India's first rating agency. Today, we are a diversified global analytical platform with leadership positions in the ratings, research and advisory domains. Along the way, our growth has been closely intertwined with India's development milestones. We started in 1987 as a credit rating agency , at a time when lending rates in India were fixed, and there was, therefore, little demand for credit ratings. We firmly established ourselves as the country's leading rating agency, respected for our fiercely independent, highly credible, and analytically rigorous views. Shouldering the mantle of a pioneer and a market leader, we facilitated the development of India's credit market and built investor confidence in our risk assessment capabilities. India's transformation into a market-led economy greatly increased its need for capital, and required extensive reforms and institution building. Accordingly, we diversified into the infrastructure advisory and business research domains, and quickly built up a reputation for independent, reliable and incisive information, research, models and advisory services. Today, our services are key inputs in informed decision-making and the shaping of public policy in India. With increasing globalization, we also focused on making our income streams more global. We acquired Irevna, a pioneer in the investment research outsourcing space; Irevna has since been voted No.1 in high-end investment research and analytics outsourcing by the US-based Brown and Wilson Group two years in a row in 2006 and 2007. We have a thriving business that meets increasing global demand for better understanding of the Indian business environment, through the services offered by our research and advisory groups. Guided by our core values of integrity, independence, innovation, analytical rigor and commitment, we are proud to have built a globally-acknowledged institution of repute over these 20 years. We have facilitated the setting up of credit rating agencies in several countries around the world. Our association and integration with Standard & Poor's has further enhanced our capabilities and opened up newer vistas of opportunity, for our businesses and people. The macro environment trends, both in India and globally, present myriad business opportunities. At a youthful 20, we are ideally positioned to service the needs of our expanding client base by maintaining our focus on our mission: Making markets function better, helping clients manage and mitigate business and financial risks, shaping public policy.

CHAPTER NO.6 CONCLUSION

CONCLUSION
On the basis of my study I conclude that, Rating is not a judgement or statement regarding any aspect of public policy OR a political statement in favour of or against a particular person or administration but it is the symbolic indication of the current opinion regarding the relative capability of a corporate entity to service its debt obligations in time with reference to the instrument being rated. In todays world the importance of credit rating is increasing day by day. We saw the changes in world economy when worlds no.1 agency STANDARD AND POORs reduced the ratings of U.S.A. in 2011.Also when the MOODYs reduced the ratings of EUROPEAN COUNTRIES LIKE SPAIN, PORTUGAL and ITALY; it creates a lot of fluctuations in world economy. Credit rating agencies judge the repayment capacity if someone has took the loan and gives them rating accordingly.

In INDIA, CRISIL does the same work for many institutions, banks, corporate etc. CRISIL is one of the most trusted CRA in INDIA as it gives accurate ratings according to the firms capability. CRISIL is financially sound company. As the study points out that, it has continuous growth in terms of Net worth, Reserves, Current assets, Earning per share, etc. CRISIL possesses transparency, accountability, fairness in its business; also they have good records of book keeping without any malpractices. So every individual prefer CRISILs ratings rather than going to others.

BIBLIOGRAPHY E. GORDON, K. NATARAJAN FINANACIAL MARKETS AND SERVICES HIMALAYA PUBLISHING HOUSE.

WEBLOIGRAPHY WWW.CRISIL.COM WWW.SEBI.GOV.IN WWW.HINDU.COM WWW.WIKIPEDIA.ORG

WWW.DEFAULTRISK.COM WWW.EGYANKOSH.AC.IN WWW.WIKIINVEST.COM WWW.JOURNALOFFINANCE.IN