DISCUSSION ABOUT CREDIT RATING AGENCIES:

Our credit rating market is almost an oligopoly. The major CRAs are 
1. CRISIL
2. India Ratings and research
3. ICRA
4. CARE
5. Brickworks ratings
6. SMERA ratings
7. Infometrics valuation and ratings

PROCESS OF OBTAINING CREDIT RATING:

1. Receipt of request
2. Assignment to analytical team
3. Obtaining information
4. Plan visits and meetings with management
5. Presentation of findings
6. Rating committee meetings
7. Communication of decisions
8. Dissemination to public
9. Monitoring for possible change

TRAPS IN THE PROCESS:

1. Since there are few options for obtaining rating, the credit rating business is very competitive,
similar to market of audit firms. Among these CRISIL, CARE & ICRA account for 85% of the
ratings. So the CRAs somewhat tend to compromise on their independence at this stage itself.

2. During the stage where the CRAs send analysts to obtain information from management, the
management allows only selective disclosure & the CRAs also cannot pressurize them to reveal
all confidential information. They are forced to work with available information.

3. Once the ratings are decided by the ratings committee, the ratings will be communicated to the
management. They have the power to accept/reject the ratings. We must understand that this
entire process is an "Issuer Paid Research" and they dont charge a flat fee which means their
independence is obscured.

4. If the management chooses to reject the rating, then it will have two options.
a. Provide additional information to review the rating (for an upgrade).
b. Approach the next CRA and follow the same process. Only this time, the second rating
agency    will be forced to give a higher rating than given by the first rating agency once they are
cognizant of the fact that they had an experience of unacceptable rating.
The latter approach is called "Ratings shopping".

SUGGESTIONS:
To overcome the above problems, 
1. We can form a government controlled supervisory agency for CRAs to tighten the regulations.

2. The CRA can be "Investor paid model" instead of "Issuer Paid model" which will decrease
asymmetry of information between investors, management & CRA. But the drawbacks are
a. Investors will force the CRA to issue lower ratings in order to get higher coupons(higher cost
of borrowing).
b. Investors will resist downgrades as they will be holding such securities. 

2. The government can form its own CRA and enter into competition with private agencies.
Moreover, with confidential information filed in various forms, the government can also require
companies to provide all information necessary to incorporate a credit rating with confidentiality
assurance. 

Investors will also trust a government backed agency doing such ratings business. Moreover, the
government will be able to get first hand information in the process of ratings so that no more
ratings disaster like IL&FS happen.

The government could charge the same flat fee (but covering the costs to the agency) to every
client on a non-profit motive to avoid "Issuer paid rating" process.

This will bring more transparency into the rating process and will bring greater trust and depth of
debt market thereby reducing stress & reliance on banks & NBFCs for borrowing, thereby
diversifying away the risk from banking sector.

Hope I made your time worthwhile!