Comprehensive Project On Role of Credit Rating Agencies in Investment Decision And IPO Performance

Role of Credit Rating Agencies in Investment Decision And IPO Performance

A Project Report Submitted in Partial Fulfilment of award of MBA Degree

Project Guide Prof. Shweta Mehta

Submitted Hitesh Rupareliya-86 Soni Lalit - 100

S.K. PATEL INSTITUTE OF MANAGEMENT & COMPUTER STUDIES Gandhinagar, India February - 2010

CERTIFICATE

This is to certify that Mr. Lalit Soni and Mr. Hitesh Rupareliya of S.K. Patel Institute Of Management & Computer Studies, Gandhinagar have submitted their Social Project titled Role of Credit Rating Agencies In Investment Decision and IPO Performance in the year 2010-11 in partial fulfilment of Kadi Sarva Vishwavidyalaya requirements for the award of the title of Master of Business Administration.

Prof. Sonu V. Gupta Director

Prof. Prakash M. Chawla Coordinator

Prof. Shweta Mehta Grand Project Guide

Date:

DECLARATION
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We, hereby, declare that the Social Project titled, Role of Credit Rating Agencies and IPO Performance is original of the best of our knowledge and has not been published elsewhere. This is for the purpose of partial fulfilment of Kadi Sarva Vishawavidyalaya requirements for the award of the title of Master of Business Administration, only.

Students Names

Signature

Hitesh Rupareliya - 86 Soni Lalit - 105

Acknowledgements

If words are considered to be signs of gratitude then let these words Convey the very same our sincere gratitude to S.K.Patel Institute of Management & Computer Applications for providing us an opportunity to prepare this project to the best of our abilities.

We also thank Prof. Shweta Mehta, S. K. Patel Institute of management, Gandhinagar, who has sincerely supported us with the valuable insights into the completion of this project. We also thank to Prof. Sonu Gupta (Director) and Prof. Prakash Chawla (H.O.D) of SKPIMC, they have given us an opportunity to work in a corporate world.

We are grateful to all faculty members of S. K. Patel Institute of management, Gandhinagar, and our friends who have helped us in the successful completion of this project.

We also thank to our parents and last but not least the

GOD

Executive Summary
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In todays scenario the financial market is very fluctuate and risky. And number of scams is coming day by day. So it is very difficult to know that which company performing well or not and about the management and growth.

Research was carried out to find that Credit Rating Agencies give rate to the equity and IPO according to the fundamentals of companies but what is the behaviour of the investors towards the rate whether they are considering the rate or not and how much risk are they taking. The performance of IPO on the basis of their return.

This study suggests that fifty percentage investors are not considering the rate because investors are not aware about the procedure of the CRA and they dont trust because of the certain financial scams. There is less awareness of the rating. The performance of the initial public offers return on the basis of listing price and found that return on the long term is higher than the short term. And nine out of thirty three listed securities during the six months listed price is lower than the offer price in spite of good rating.

Through this report we were also able to understand and learnt, what is CRA and its working, process and criteria and the risk related to credit rate and awareness among investors and the return of the public offer is beneficial if we hold for long period.

Table of Content
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Chapter No.

Title

Page No.

Certificate Declaration Acknowledgement Executive Summery Chapter-1 Chapter-2 Introduction Theoretical Aspects What is Credit Rating? Process of CRA Rating Related Products And Activities General Criteria of CRA Credit Rating Symbols Benefits Initial Public Offer Chapter-3 Criteria for IPO Industry Profile CRISIL ICRA CARE FITCH BRICKWORKS Industry Analysis Credit Rating Industry 24 9 11

Chapter-4

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Life Cycle PEST-G analysis

a) Political factors b) Economic factors

c) Social factors, and d) Technological factors. e) Global factors

Five Force Porters Mode Chapter-5 Analysis Research Methodology Objectives Scope Research Design Statistical tools Limitations of the project Research or Analysis Data Analysis of Questionnaire HYPOTHESIS Analysis a) Age & rating consider by investor b) Qualification & rating consider by investor c) Risk position & rating consider by investor d) Risk position & rating consider by investor 47

Chapter-6

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IPO Performance
a) First Day performance

b) Second Day performance c) Six Months performance

Chapter-7 Chapter-8

Findings Learning Annexure Bibliography

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Chapter - 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 ~
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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 names are 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 Institutions in India form an integral part of a broader programme of financial disintermediation and broadening and deepening of the debt market. The CRA give rate in spite of this rate there are number of cases happened where a company having good rate but the scam came out like Satyam and Enron, these companies had good rate in spite of that the financial scam came out. So investors also consider the rate of the CRA at the time of investment and how much he rate consider while taking the risk. Credit rating is used' extensively for evaluating equity instruments. These include long-term instruments, like bonds and debentures as well as short-term obligations, like Commercial Paper. In addition, deposits, certificates of deposits, inter-corporate deposits, structured obligations including nonconvertible 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. Let us recall that ~
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earlier only debt issues " of over 18 months maturity had to be compulsorily rated. The grade is also give when company come up with new public offer, at that time company have to show the grade in the prospectus which shows the picture of the company performance and future expectation. For companies rate is given but for IPO grade is given. If grade 5 is given which shows good fundamental but if grade 1 given means very poor fundaments of the company. So we try to find out the relation of grade and listing price of the IPO and its return. So this whole study relate to the importance of the CRA when people in invest, their risk and return and the performance of the IPO during short term and long run return.

Chapter - 2 Theoretical Aspects

What is Credit Rating?

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Credit rating is the opinion of the rating agency on the relative ability and willingness of the issuer of a debt instrument to meet the debt service obligations as and when they arise. A credit rating estimates the credit worthiness of an individual, corporation, or even a country. It is an evaluation made by credit bureaus of a borrower's overall credit history. A credit rating is also known as an evaluation of a potential borrower's ability to repay debt, prepared by a credit bureau at the request of the lender. Credit ratings are calculated from financial history and current assets & liabilities. A credit rating tells a lender or investor the probability of the subject being able to pay back a loan. A poor credit rating indicates a high risk of default of a loan, and leads to high interest rate or the refusal of a loan by the creditor. It should be noted that a credit rating is assigned to the investment instrument and not to the company issuing it as a whole. It also gives the rate the overall performance of the companies working, management and future projects.

Process of CRA

Contract between Rater and Client : first of all the company management who want the credit rate for the company, they approach to the credit rating agencies and make the contract for the rating in which certain condition and provisions are included ~
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Sending expert team to client place: after that CRA sent their expert team to the company, where company exists and all necessary data available.

Data Collection: the expert committee collects all the necessary and confidential data which they require and give assurance of confidential.

Data Analysis: after collecting all the data they analysis the data with the help of their model to measure the working and condition of the company

Discussion now the expert committee makes discussion all the aspect of the analysis data and what they found after analysis all aspect of the company existence.

Credit Report Preparation: the committee will prepare the report after analysis and expert discussion

Submission to Grading Committee: the report will be submitted to the grade committee which gives the rate after study of whole analyzed report.

Grade Communication to client: at the end grade is given the company and the report with grade is to be given to the company.

Now if company want show the rate to the public, the responsibility is company to communicate grade to the public but an agencies cannot display the rate of the company to any one alse or in the public. If the company is not satisfied with the rate they can apply re-assessment or any other agencies for the rate. Every year the condition, performance, internal and external factors and working the company changing on so every year a company need to issue rate for the company. ~
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Rating related products and activities

CRAs in India rate a large number of financial products: ~
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o Equity/Company o Bonds/ debentures- [the main product] o Commercial paper o Structured finance products o Bank loans o Fixed deposits and bank certificate of deposits o Mutual fund debt schemes o Initial Public Offers (IPOs) CRAs also undertake customised credit research of a number of borrowers in a credit portfolio, for the use of the lender. CRAs 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. For example developer grading are carried out to assess the ability of the developers to execute.

GENERAL CRITERIA FOR RATING SECURITIES Some of the key risk factors that CRA analyses while arriving at a credit rating are discussed in the following sections ~
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Business Risk The business risk that an issuer is exposed to is a combination of the industry risk in its major product segments and its competitive position within the industry. Industry Risk The objective here is to understand the attractiveness of the industry in which the issuer operates. The aspects examined include: o Existing and expected demand-supply situation o Intensity of competition o Vulnerability to imports o Regulatory risks o Outlook for user industries o Working capital intensity o Overall prospects and outlook for the industry Issuers Competitive Position An assessment of the issuers competitive position within an industry is made on the basis of its operating efficiency as well as its market position. Some of the factors assessed are: o Scale of operations o Vintage of technology used o Capital cost position o Location advantage in terms of proximity to raw material sources as well as markets o Operating efficiencies (yields, rejection rates, energy consumption, etc.) o Market position as reflected in trends in market share, ability to command premium pricing, span of distribution network, and relationship with key customers ~
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New Project Risks The scale and nature of new projects can significantly influence the risk profile of an issuer. Unrelated diversification into new products is invariably assessed in greater detail. Besides the rationale for new projects, the other factors that are assessed include: (i) track record of the management in project implementation; (ii) experience and quality of the project implementation team; (iii) experience and track record of the technology supplier; (iv) extent to which the capital cost is competitive; (v) financing arrangements in place; (vi) raw material linkages; (vii) demand outlook; (viii) competitive environment; and (ix) marketing arrangement and plans. Financial Risk The objective here is to determine the issuers current financial position and its financial risk profile. Some of the aspects analysed in detail in this context are: o Operating profitability o Gearing
o Debt service coverage ratios o Working capital intensity Cash flow analysis

o Foreign currency related risks

o Tenure mismatches, and risks relating to interest rates and refinancing

o Contingent liabilities/Off-balance sheet exposures

o Financial flexibility

Strength of Promoters/Management Quality All debt ratings necessarily incorporate an assessment of the quality of the issuers management, as well as the strengths/weaknesses arising from the issuers being a part of its group. Usually, a detailed discussion is held with the management of the issuer to understand its business objectives, plans and strategies, and views on past ~
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performance, besides the outlook on the issuers industry. Some of the other points assessed are: o Experience of the promoter/management in the line of business concerned o Commitment of the promoter/management to the line of business concerned o Attitude of the promoter/management to risk taking and containment o The issuers policies on leveraging, interest risks and currency risks o The issuers plans on new projects, acquisitions, expansion, etc. o Strength of the other companies belonging to the same group as the issuer o The ability and willingness of the group to support the issuer through measures such as capital infusion, if required o The possible need to support other group entities, in case the issuer is among the stronger entities within the group Adequacy of Future Cash Flows Since the prime objective of the rating exercise is to assess the adequacy of the issuers debt servicing capability; ICRA draws up projections on the likely financial position of the issuer under various scenarios. These projections are based on the expected operating and financial performance of the issuer, the outlook for the industry concerned (in ICRAs view), and the issuers medium/long-term business plans. Sensitivity tests are also performed on certain key drivers, such as selling prices, input costs, and working capital requirements. Also of particular importance are the projected capital expenditure and debt repayment obligations of the issuer over the projection horizon.

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CREDIT RATING SYMBOLS

Credit Rating Agencies rate an instrument by assigning a definite symbol. Each symbol has a definite meaning. These symbols have been explained in descending order of safety or in ascending order of risk of non-payment. There are different symbols are given according to the different agencies. But ultimately it shows the risk. For example: CRISIL has prescribed the following symbols for debenture issues: AAA : indicates highest safety of timely payment of interest and principal. AA : indicates high safety of timely payment of interest and principal. A : indicates adequate safety of timely payment of interest and principal. BBB : offers sufficient safety of payment of interest and Institutions in India principal for the present. BB : offers inadequate safety of timely payment of interest and principal. B : indicates great susceptibility to default. C : indicates vulnerability to default. Timely payment of interest and payment is possible if favourable circumstances continue. D : indicates that the debenture is in default in payment of arrears of interest or principal or is expected to default on maturity. You will note that as the value of symbol is reduced say from AAA to AA, the safety of timely payment of interest and principal is decreased. While AAA indicates highest safety of timely repayment, D indicates actual default or expected default on maturity. Different symbols indicate different degrees of risk of repayment of principal and interest.

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BENEFITS
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.

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.

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.

Financial Intermediaries
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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.

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.

Regulators
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.

Initial Public offer

What is IPO grading? ~

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Grading of Initial Public Offerings (IPOs) is a service aimed at facilitating assessment of equity issues offered to the public. The Grade assigned to any individual IPO is a symbolic representation of rating agencys assessment of fundamentals of the issuer concerned relative to other listed securities. IPO Grades are assigned on a five-point point scale, where IPO Grade 5 indicates the highest grading and IPO Grade 1 indicates the lowest grading, i.e. a higher score indicates stronger fundamentals. An IPO Grade is not an opinion on the price of the issue, pre- or post-listing. IPO Grade 5: Strong fundamentals IPO Grade 4: Above-average fundamentals IPO Grade 3: Average fundamentals IPO Grade 2: Below-average fundamentals IPO Grade 1: Poor fundamentals An investor in a hitherto unlisted company may either have limited access to information on it, or may find it challenging to appropriately assess, on the basis of the information available, its business prospects and risks. An IPO Grade provides an additional input to investors, in arriving at an investment decision based on independent and objective analysis. In recent times, with the stock market participation of new and foreign investors increasing, there is need for greater value-added information on companies tapping the capital market and their intrinsic quality. In this context, IPO Grades, being simple, objective indicators of the relative fundamental positions of the issuers concerned, could help in both widening and deepening the market. IPO Grading is NOT a recommendation to buy sell or hold the securities Graded. Similarly, it is NOT a comment on the valuation or pricing of the IPO Graded nor is it an indication of the likely listing price of the securities Graded. ~ 22 ~

Criteria for IPO grading

Business and Competitive Position New ProjectsRisks and Prospects Financial Position and Prospects Management Quality Corporate Governance practices Compliance and Litigation History

Table: 1 IPO thought the Years 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-2000 2000-01 2001-02 ~
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No. IPOs 692 1239 1357 717 52 18 51 114 7 ~

2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

6 21 23 79 77 85 79 73

Source: Handbook of statistics on the Indian securities market 2010 According to the Indian securities market 2010, there were highest public offer 1357 in the year 1994-95 but after that it decline every year till to 2002-2003 because in this year there were only 6 public offer and again that again increased till to year 2007-08 but because of crisis it again declined.

Chapter - 3

Industry Profile
A Credit Rating Agency is a company that assigns credit ratings for issuers of certain types of debt obligations as well as debt instruments. There are following credit rating agencies in India.

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. ~ 24 ~

Of the total value of instruments rated, debentures' accounted for 3 1.196, famed 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 crore as compared to 293 instruments covering debt volume of Rs. 75,742 crore 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 ternr'instruments), 49.4% for Fixed Deposit programme (including mediumterm instruments), and 22.1% for Commercial Paper Programme (including short term investments). The corresponding figures of amount involved for these three broad rated categories was 23.8% for debentures, 52.2% for fixed deposits, and 24.0% for Commercial Paper. The factors that ICRA takes into consideration for rating depend on the nature of borrowing entity. The inherent ~
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protective factors, marketing strategies, competitive edge, competence and effectiveness of management, human resource development policies and practices, hedging of risks, trends in cash flows and potential liquidity, financial flexibility, asset quality and past record of servicing of debt as well as government policies affecting the industry are examined.

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. 'In January 1994, CARE commenced publication of CAREVIEW, a quarterly journal of CARE ratings. In addition to the rationale of all accepted ratings, CAREVIEW often carries special features of interest to issuers of debt instruments, investors and other market players.

FITCH
Fitch Ratings is an international rating agency that provides global capital market investors with the highest quality ratings and research. Dual headquartered in New York and London, Fitch rates entities in 75 countries and has some 1,100 employees in more than 40 local offices worldwide. Fitch Ratings provides ratings for Financial Institutions, Insurance, Corporates, Structured Finance, Sovereigns and Public Finance Markets worldwide. Recently, three well-known rating agencies were integrated into Fitch. IBCA, Duff & Phelps and Thomson Bank Watch which expanded our capabilities, coverage and markets.

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Fitch India is a 100% subsidiary of the Fitch Group. It is the only international rating agency with a presence on the ground in India. Fitch India is fully geared to extend the expertise and commitment of its foreign parent to Indian companies. Fitch India analysts have access to Fitch International's large global information network. Interacting with other areas of Fitch Ratings, such as the Sovereign, Structured Finance, Public Finance groups, enhances our analysts' insights into a global marketplace that is vast and evolving. We arrive at rating decisions in committees comprising senior management from Fitch International as well as sectoral specialists from Fitch India. This collaboration ensures a more comprehensive assessment as we profile an entity's strategic initiatives, competitive position, financial performance and the overall dynamics of the industry in which it operates. FITCH is an internationally acclaimed statistical rating agency recognised by the US Securities and Exchange Commission, the Federal Reserve Bank, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Commission, the National Credit Union Association and many state securities and legal investment authorities. In addition, it is recognised by many non-US authorities, including the Ministry of Finance of Japan, the Securities and Futures Authority of the United Kingdom, the Hong Kong Monetary Authority, the Central Banks of Finland, Ireland and the Netherlands, the Bank of Italy and the Bank of England

Brickwork
Brickwork India, was started in year 2008 for provide the services of the rating to securities, companies, Banks and IPO etc. this credit rating agency has started two years ago there is very less market share.

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Chapter - 4

Industry Analysis

Credit Rating Industry Life Cycle

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The above graph of the industry life cycle states that the credit rating industry is in introduction stage the credit rating is a new phenomenon in India but outside India it is having very good market slowly and gradually credit rating is expanding its horizons in the Indian market

The last few years have been truly significant for the Indian rating industry, in terms of increase in investor awareness about ratings and their general acceptability. From the times when ratings were used primarily for regulatory Compliance, till now when ratings are recognized as a measure of credit risk and thus an important pricing determinant, the transition has been significant. Currently, most of the credit ratings in India are for debt instruments for which rating is not mandatory. For most Indian businesses, too, the last few years mark ~ 29 ~

a phase of adjusting to the new realities of a changing economic landscape. With deregulation and lowering of government protection, the Indian business environment is witness to intense competition, both from a larger number of domestic competitors (following removal of artificial entry barriers), and from imports (with the lowering of tariff and non-tariff barriers). Currently, the economy is in the slowdown phase, even as the globalization-induced uncertainty because of exposure to dynamic demand-supply equations is chipping away at the growth and profitability figures. At the corporate level, most Indian companies are seeing their performance take a dip, resulting in a number of rating changes.

CR has recorded rapid strides. This growth has been caused by the increasing securitization of debts, by the increasing awareness of the risk of defaults and propelled by the globalization trends. In the recent past the CR industry has grown from 3.67 crore in 92-93 to 22 crore in 95-96 for 1st half only (source the economic times)

The ratings business in India is divided into three phase development:

Phase I During the first of these phases, as described above, there was no experience of credit ratings, and virtually no awareness, on the part of investors and issues CRISIL was the first rating agency to enter in the Indian market therefore its primary aim was to create awareness of the concept, and build up its credibility ~
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in the market, with issuers, investors and regulators. The consistency and quality of CRISILs work led to increasing levels of issuer and investor acceptance, and gradual establishment of its market position. This phase lasted about five years, from 1987 to around 1992.

Phase II The second phase saw the advent of regulatory support for credit ratings, with the introduction and increasing rigor of regulations covering primarily the markets for public issue of debt and for fixed deposits. In this phase the primary aim was protecting smaller investors, these measures also amounted to regulatory recognition of the role of credit ratings and the quality of the effort being made by credit rating agencies, in estimating credit quality. During these phase credit rating agencies saw an upward trend and domestic credit rating agencies came into pictures.

Phase III Recent years have seen a third phase of the markets development with public issues of debt reducing in volume; the focus has shifted to the market for private placements. Almost all the privately placed debt issued in the Indian market is rated, even though this is not a regulatory requirement. This shift is entirely driven by investors in these securities, who typically tend to be highly sophisticated financial sector entities besides this rating industry has spread its wings in other sectors also amongst which grading of healthcare institutions and equity grading are major part.

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Due to ever increasing demand of rating agencies and oligopolistic situation prevailing in the market, Credit rating agencies has a long way to go.

PEST-G ANALYSIS:
The PEST- G Analysis is a framework that strategy consultants use to scan the external macro-environment in which a firm operates. PEST- G is an acronym for the following factors:
o

Political factors ~
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o o o o

Economic factors Social factors, and Technological factors. Global factors

Political & Legal Factors

Regulatory authority Rating agencies are regulated by RBI & SEBI regulation for credit rating agencies (1999).

Contract enforcement law The client wanting to get rated a debt issue being floated by it requires the services of a credit rating agency. For this purpose they enter into a written agreement with a credit rating agency in a standardized format. The agreement specifies the charges for such rating services as well as for regular surveillance on the existing rating, to see whether it needs to be revised or otherwise. It becomes mandatory for the rating agency to abide by the contract and rate instrument issued by the client. Consumer protection This factor also affects the ratings assigned by the CRAs. The primary objective of a credit rating is to provide guidance to investors/creditors in determining a credit risk associated with a debt instrument/credit obligation though it does not indicate investors to invest in particular instrument

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Political stability Political stability in India is one of the vital factor which determines the level of stability of ratings & grading given by credit rating agencies if the political instability like unstable government or war situation is existing then it would surely has its effects on this industry so this indicate that in order to have an accurate ratings by CRAs it is necessary to have political stability in country

Service tax Government of India has notified imposition of service tax on twelve new services in 1998-99 unions Budget that covers credit rating industry. Service tax is payable both on the fee received for credit rating of the debt instrument and the surveillance fee.

Tax structure Value of the taxable service in relation to the service provided by a credit rating agency to a client, is the gross amount charged by such agency from the client for services rendered in connection with credit rating of any financial obligation, instrument or security in any manner.

Economic Factors
Economic growth The GDP growth rate from 2005-06 to till is the 7% to 8%. And according to the Reserve Bank of India the expected GDP of India would be in double digit. If this happens, it would be a major achievement. Thus the economy plays a ~ 34 ~

vital role for credit rating agencies as ratings given by the companys is depended on the internal as well as the external market condition. If the economy is in the growth condition or the markets are booming then there will be more number of companies coming with new debt issue in order to grab the opportunity of market boom.

Inflation & Interest rates Usually company prefer to go for debt issue in order to maintain adequate debt equity ratio and to get cheaper source of capital which will also help to take advantage of leverage so if looking at the present level of inflation in the economy which is nearly 4.7 % as a result of which interest rates of bank loans will be high so more companies will prefer to raise capital through debt market hence rating agencies will be benefited

Consumer confidence Consumer confidence is an important attribute for development of rating agencies business as companys rates the instruments only to get confidence from investors about soundness of the debt instruments issued by them. Rating agencies long-term survival depends mainly upon confidence of consumers upon their ratings so they always strive to maintain investors confidence in their ratings.

Well-Developed money market Money market is the important factor on which debt instruments issued by both government and private companies like treasury bills, commercial papers, bonds ~
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and majority of the debt instruments are rated by the CRAs. A well-developed money market will make a Boom in issue of debt instruments by companies and government.

Social Factors
The primary objective of rating is to provide guidance to investors\creditors in determining a credit risk associated with a debt instrument\credit obligation. Although it does not recommend buying such instruments but it definitely rates the instruments based on credit risk associated with the product. Rating agencies have to disclose the ratings given to the instrument issued by the issuer in public even if the ratings assigned does not indicate a sound financial position. It serves the social objective of providing information to the investors and creditors who are the ultimate consumers of such debt instruments.

Screening agents Credit ratings may provide information on the quality of a firm beyond publicly available information. Rating agencies may receive significant sensitive information from firms that is not public, as firms may be reluctant to provide information publicly that would compromise their strategic programs, in particular with regard to competitors. Credit ratings agencies are formed to act as screening agents certifying the values of firms that approach them. rating agencies could be seen as information-processing agencies that may speed up the dissemination of information to financial markets.

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Pooling of companies Credit rating can therefore act as a signal of overall firm quality. Firms would then be pooled with other firms in the same rating category, where in the extreme all firms within the same ratings group would be assessed similar default probabilities and associated yield spreads for their bonds if they are given the lower rating (even though they are only a marginally worse credit), they will be pooled into the group of all firms in that worse credit class. Likewise, firms that are near an upgrade will have an incentive to obtain that upgrade to be pooled with firms in the higher ratings category.

Purchasing power of consumers Higher purchasing power shows pumping of savings and investment in the money as well as capital market also besides this there are institutional investors and portfolio managers who will invest in debt instruments looking at the ratings given to them ratings assigned to debt instruments plays a major factor in taking such vital decisions so companies and government bodies always will urge for rating their debt instruments.

Technological Factors
New inventions and development The research and development plays a significant role for rating agencies as majority of the rating work is of technical nature and lot of information database about the company has to be collected for rating besides this financial data of the company has to be analyzed so use of new technological inventions of

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softwares helpful for such analysis, we can take example of Prowess & Capital line

Speed of technological obsolescence The speed at which technology gets outdated is reflected in rating agencies due to constantly changing parameters to grade the various instruments so constant changes and up gradation in the technology is to be done in order to provide accurate and timely information

Internet technology Internet technology has provided rating agencies a platform from where they can make their presence felt in the market. As credit rating industry is new phenomenon in our country internet technology provides it a sound base for development companies, institutional investors and creditors can know online about the ratings being assigned by CRAs and beside these rating agencies provide information about the rating methodologies and rating framework, rating factors, rating grades and also if the rating agencies is venturing into assigning new grades to other emerging sectors

Global Factors
Global scenario of rating industry In India there are four rating agencies, which are all, backed by international rating agencies like Fitch, Standard & Poor, and Moodys thus these international companies identified potential market in India. As a result the world has become a global village. Also country ratings are done by ~
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international a rating company, which determines the economic market condition in the country.

Global competition Rating industries in future may face global competition due to increasing market share and diversification of various rating instruments rating companies will try to establish its base in developing countries due to saturation of markets in developed countries and dependency of people on rating agencies. Like Fitch has enters into the Indian Market.

Five Force Porters Mode Analysis

As every industry has describe by Five force porters model as that model we cant apply directly we have make change in that and created the a credit Analysis which helps and doing the same work as porters which is shown below : ~
39

Default Risk Or
Rating Industry must face the problem of rating badly the instrument or any other firm

Regulation pressure from SEBI to Fulfill

SEBI

Rival Rating Agencies

Clients pressure to rate each one at the top rating

Clients

Moderate Weak Strong

Threat of new Entry

Threat of New Entrants

Potential New Threat of new entrants in Credit rating industry is very low as in India Rating Industry has not saw such a great success that new players are ready to get in the Industry. If anybody wants then they to follow certain rules by the Security Exchange Board of India. ~
40

As per the norms created by SEBI new entrants has to undergo 42 set of rules which should fulfil certain criteria like: o Application for grant of certificate o Promoter of credit rating agency o Eligibility criteria o Application to conform to the requirements o Furnishing of information, clarification and personal representation o Grant of Certificate o Conditions of certificate and validity period o Renewal of certificate o Procedure where certificate is not granted o Effect of refusal to grant certificate o Code of Conduct o Monitoring of ratings o Procedure for review of rating o Internal procedures to be framed o Disclosure of Rating Definitions and Rationale o Submission of information to the Board o Compliance with circulars etc., issued by the Board o Maintenance of Books of Accounts records, etc o Confidentiality o Rating process o Suspension of registration o Cancellation of Registration o Manner of Making Order of Suspension and Cancellation o Manner of Holding enquiry before Suspension or Cancellation ~
41

o Show-cause notice and order

o Effect of suspension and cancellation of registration of credit rating

agency Publication of Order of Suspension or Cancellation

Several other factors involved in credit rating:

o

Overall fundamentals and earnings capacity of the company and volatility of the same. Overall macro economic and business/industry environment. Liquidity position of the company (as distinguished from profits). Requirement of funds to meet irrevocable commitments. Financial flexibility of the company to raise funds from outside sources to meet temporary financial needs. Guarantee/support from financially strong external bodies. Level of existing leverage (borrowings) and financial risk.

o o o o

o o

Barriers to Entry
Because much of the national credit rating business is dominated by the four largest CRAs (Crisil, Care, Fitch, Icra), some commentators have claimed that various Because much of the international credit rating business is dominated by the three largest CRAs (Crisil, Care, Fitch, Icra), some commentators have claimed that various barriers to market entry unfairly limit competition in the CRA industry. Consequently, the Task Force questionnaire asked what, if any, factors exists in Task Force jurisdictions that may act as barriers to a new CRA entrants. For the most part, Task Force members noted that CRAs are not extensively regulated and those regulations that do exist are not onerous for new entrants. However, several Task Force members noted that the nature of the CRA ~
42

market makes it difficult for new CRA entrants to succeed. According to these members, issuers desire ratings from only those CRAs respected by investors. On the other hand, investors respect only those CRAs with a reputation for accuracy and timeliness in issuing credit ratings. Establishing such a reputation can take considerable time and resources. Furthermore, some commentators have suggested that issuers may prefer to retain, and investors may prefer to use the opinions of, CRAs that a government regulator or agency also uses. Where government CRA recognition criteria are based on how extensively a CRAs opinions are used by issuers and investors, such a situation arguably may discriminate against new entrants, with regulatory recognition being based on reliance by the market, and market reliance being influenced by regulatory recognition.

Challenges to New CRA

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: A 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 ~
43

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. A 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.

44

Because of inability to specialized know-how of firms already in the industry, cost and resource disadvantages, Economies of scale, Capital requirements, Regulatory policies and trade restrictions it is not every ones cup of tea to enter into the industry. Then also one reason is standard or reliability of the existing firm in rating or procedure of rating ion India is one question Mark. As we have to develop a new model for criteria to rate the instruments as well as firms. Thus we can say that the threat from new entrants is very low.

Rival Rating Agencies

It is very high among the existing firms in credit rating industry. There are only four players in credit rating viz, CRISIL, CARE, FITCH, ICRA out of four agencies CRISIL 60% & ICRA enjoys monopoly by covering 15% approx. of credit rating market because these two were having the advantage of entering into credit rating market before any one. But the rivalry among the four agencies is high in order to maintain the maximum market share & to earn a maximum profitability from the operation. So the level of rivalry among the existing firms is high.

Bargaining Power of The Clients

In Credit Rating Industry the Bargaining Power of Buyer is Moderate because as the debt market is growing at a faster speed it is becoming mandatory for the issuer company to rate their debt instruments. So it is a clear that the issuer company has to undergo rating of debt instruments so that the issuer company can get the trust of investors. It is obvious that individual investors cant ~ 45 ~

influence the terms & conditions but it is the group investors which can influence the terms & conditions. Rating agencies should implement procedures to manage potential conflict of interest that arise when issuers pays for ratings. There is an Oligopolistic situation thus customers can shift from one rating agency to another. One reason is also that we know today our economy is going with great boom & Equity & other instruments want to rate. So, the bargaining power of the buyers is Moderate. Switching cost of the companies is high as once issuer of the debt instruments is not satisfied by the ratings given to debt instruments of company it will switch over to next company for rating the present instruments or rating of other instruments in future.

SEBI
This model includes the force of SEBI on credit rating agencies is very high because the credit rating industry is subject to organized rules & regulations of SEBI which is controlling body. As there is very strict regulations of SEBI to fulfil the norms very High because the CRAs affect to a common man and there should be some control of government which is done by regulation organization SEBI. So the Guidelines of SEBI are Mandatory to all Rating Agencies.

46

Chapter-5
Research Methodology

Objectives I.
II.

To know the importance of Credit rating for security investment decision To analyze of performance IPO.

Scope

47

I.
II.

It helps us to know the importance of Credit rating among Ahmedabad and Gandhinagar retail investors. We analysis the performance of IPO on the basis of short term and long term return from the listing date from 1st January, 2010 to 31st June, 2010.

Research Design Descriptive research: Descriptive research includes surveys and fact finding enquires of different kinds. The major purpose of descriptive research is description of the state of affairs as it exists at present. Researcher has no control over the variables of this type of research. Data Collection Method:
a) Primary: Questionnaire b) Secondary:

Internet,

Magazines,

Reference

books,

Research

Papers, CRA, NSE, BSE, Chittogagh web sites etc. Sampling technique:
Stratified Random convenient Sampling Technique: In this sampling we

make the strata on the basis of the education investors and select on the basis of our convenience
Sample : All Retail Investors Sample size : 250 Investors Place : Ahmedabad and Gandhinagar

Research Tools:
Questionnaire: Structured questionnaire is framed. Statistical tools:-

48

A) Hypothesis 1. z-test 2. Chi-square test B) Standard deviation C) Median D) Maximum & Minimum E) Skweness

Limitations of the project

o Our primary data collection only from Ahmedabad and Gandhinagar. o We collected the secondary data for IPO which we have considered as authentic data for the return of the IPO o There are certain models which are used by different agencies for rating and grading so the CRA are not ready to expose.
o There is lack of expertise.

49

Chapter-6 Research Analysis and Findings

Data Analysis
A) How do you put yourself as far as risk is concern? RISK POSITION Risk averse Moderate risk taker High risk taker ~ NO.OF INVESTERS 51 128 61
50

Comment : We found that 128 out of 240 investors are moderate risk taker. And 61 investors are high risk takers generally they trade on their own analysis.

B) Do you know about the CREDIT RATING AGENCIES which rates securities? NO. OF Yes No INVESTERS 192 48

51

Comment : We found that 80% investors are aware about the CRA in india. And 20% not aware about the rating agencies because they investing according to other people guidance and most of those persons are less educated. So we can say that it is good awareness among the investors about the agencies but still need to take certain steps towards the invewtors to create awareness and considerartion of the rate.

C) Do you know the procedure of CRA?

NO. OF Yes No INVESTERS 62 178

52

Comment : Investors consider the rate but 74% investors are not aware about the procedure of the CRA they need to follow which create reliability among the investors.

D) Do you know the criteria of CRA? NO. OF Yes No INVESTERS 73 167

53

Comment : We come to know that 80% investors are aware about the CRA but the basic criteria which is followed by the CRA only 30% investors aware. So there is lack of awareness about the criteria so it is necessary to know investors so more and more people can consider the rate which secure their return and risk.

E) Do you consider the credit rate which is given by CRA for the securities for Investment purpose?

NO. OF Always Sometime Never ~ INVESTERS 41 94 105

54

Comment : All the CRA gives the rate to companies and IPO for secure the risk and show the real picture of the company to investors but 44% investors are not considering the rate so there is very less attractiveness of CRA in india. But there are 39% invesotors ara considering sometime because they cant comletely rely on these agencies

F) Why do you not consider rating of CRA? Reason Prefer rating Do not aware Do not trust Do not know criteria Do not know the procedure Any other NO. OF INVESTERS 135 52 43 4 2 4

55

Comment : There are 135 investors who prefer the rate either sometime or always but 105 people are not trust and aware about the CRA working and their existence so they dont consider the rate. So this is very critical situation for the CRA because the investors are not relying on their rate. And the reasons for that is some time in spite of good rate companies becomes insolvent and under scam. G) Which of the following agency rate do you prefers the most?

CRA CRISIL CARE ICRA FITCH Not consider

NO. OF INVESTERS 64 27 25 25 99

56

Comment : In india more than 60% market is covered by CRISIL and we found that 64 invesors have given their reliance towards CRISIL.

H) Up to what extent the rating do you prefer to invest? RATE AAA AA A BBB BB B Not consider NO. OF INVESTERS 55 35 32 12 2 5 99

57

Comment : Generally AAA and AA rates are given to safe companies equity so out of total 240 investos only 90 investors consider the safe rate AAA and AA. So this shows the invesots consider the rate for safety and minimize risk purpose.

I) Do you agree that CRA have an alarm system to provide alerts on significant relevant events? Give the rank from 1 to 5. (1 = Strongly Agree, 5= strongly Disagree) NO. OF INVESTERS Strongly agree 14 Agree 66 Neutral 100 Disagree 42 Strongly 18 disagree

58

Comment : Very few investors are agreed but 100(40%) investors are neutral because they believe the CRA not alarm all the time and there are 60% investors who are disagree because of the different scams.

J) What you think that the CRA shows the real picture of the companies securities? NO. OF INVESTERS Strongly agree 15 Agree 64 Neutral 110 Disagree 33 Strongly 18 disagree

59

Comment : Again the same condition that 110 investors are neutral so there is lack of completely reliance. And 61 investors are disagreeing because in spite of good rate number of company had been founded scams.

Chapter-7 HYPOTHESIS

1. Age & rating consider by investor: Null hypothesis (H0):There is no significant relation between age of an investors & rating consider by them for that security. Alternate hypothesis (H1):~
60

There is significant relation between age of an investor & rating consider by him for that security.

Age rating consider 15-25 25-35 35-45 45-55 Total

& Always

Sometime

Never

Total

6 16 6 12 40

20 34 28 11 93

10 57 32 8 107

36 107 66 31 240

Calculation:-

Actual frequency (fo) 6 20 10 16 34

Expected frequency (fe=Rt*Ct/n) 6 13.95 16.05 17.83 41.46 ~

(fo-fe)

(fo-fe)(fofe)

(fo-fe)(fofe)/fe

0 6.05 -6.05 -1.83 -7.46

61

0 36.6 36.6 3.35 55.65

0 2.62 2.28 0.19 1.34

57 6 28 32 12 11 8

47.7 11 25.58 29.43 5.17 12.01 13.82

9.3 -5 2.42 2.57 6.83 -1.01 -5.82

86.49 25 5.86 6.6 46.65 1.02 33.87

1.52 2.27 0.29 0.22 9.02 0.089 2.45 X^2=E[(fo-fe)(fo-

fe)/fe]=22.225

Degree of freedom:D.O.F= (R-1) (C-1) = (4-1) (3-1) =6 X^2 a (6, O.O5) = 12.592 Conclusion:As X^2> X^2 a null hypothesis will be rejected and alternate hypothesis will be accepted. So, there is significant relation between age of an investor & rating consider by him for that security.

62

2. Qualification & rating consider by investor:-

Null hypothesis (H0):There is no significant relation between qualification of an investor & rating consider by him for that security. Alternate hypothesis (H1):There is significant relation between qualification of an investor & rating consider by him for that security.

Qualification Always & rating

Sometime

Never

Total

63

consider 10 & 10+2 Graduate 2 8 2 34 39 20 95 24 48 24 8 104 28 90 83 39 240

Post graduate 20 Other Total 11 41

Calculation:-

Actual frequency (fo) 2 2 24 8 34 48 20

Expected frequency (fe=Rt*Ct/n) 4.78 11.08 12.13 15.38 35.63 39 14.18 ~

(fo-fe)

(fo-fe)(fofe)

(fo-fe)(fofe)/fe

-2.78 -9.08 11.87 -7.38 .-1.63 9 5.82

64

7.73 82.45 140.9 54.46 2.66 81 33.87

1.63 7.44 11.62 3.54 .075 2.08 2.39

39 24 11 20 8

32.85 35.97 6.66 15.44 16.9

6.15 -11.97 4.34 4.56 -8.9

37.82 143.28 18.84 20.79 79.21

1.15 3.98 2.83 1.35 4.69 X^2=E[(fo-fe)(fo-

fe)/fe]=42.765

Degree of freedom:D.O.F= (R-1) (C-1) = (4-1) (3-1) =6 X^2 a= (6,O.O5) = 12.592 Conclusion:As X^2> X^2 a null hypothesis will be rejected and alternate hypothesis will be accepted. So, there is significant relation between qualification of an investor & rating consider by him for that security.

65

3. Risk position & rating consider by investor:-

Null hypothesis (H0):There is no significant relation between qualification of an investor & rating consider by him for that security. Alternate hypothesis (H1):There is significant relation between qualification of an investor & rating consider by him for that security.

Qualification Always & rating consider

Sometime

Never

Total

66

10 & 10+2 Graduate

13 12

8 24 62 94

30 25 50 105

51 61 128 240

Post graduate 16 Total 41

Calculation:Actual frequency (fo) 13 8 30 12 24 25 16 62 50 Expected frequency (fe=Rt*Ct/n) 8.71 19.98 22.31 10.42 23.89 26.69 21.87 50.13 56 4.29 -11.98 7.69 1.58 0.11 -1.69 -5.87 11.87 -6 18.4 143.52 59.14 2.5 .0121 2.86 34.46 140.9 36 2.11 7.18 2.65 0.24 0.0005 0,11 1.58 2.81 0,64 X^2=E[(fo-fe)(fofe)/fe]=17.32 (fo-fe) (fo-fe)(fofe) (fo-fe)(fofe)/fe

Degree of freedom:D.O.F= (R-1) (C-1) ~

67

= (3-1) (3-1) =4 X^2 a= (4,O.O5)= 9.488 Conclusion:As X^2> X^2 a null hypothesis will be rejected and alternate hypothesis will be accepted. So, there is significant relation between risk position of an investor & rating consider by him for that security.

4. Risk position & rating consider by investor: Null hypothesis (H0):The proportion of investor consider credit rating are 0.5 (PH0=0.5) Alternate hypothesis (H1):The proportion of investor consider credit rating are less than 0.5 `(QH0=0.5) Calculation:p=135/240=0.5625 (consider rating) q=105/240=0.4375 (not consider rating) Standard error (p) = [Pho*QHo/n] = [0.5*0.5/240} ~
68

= o.o3227 Z= p- Pho/ p) = 0.5625-0.5/0.03227 = 1.94 Conclusion:As Z<Za (1.96) the null hypothesis will be accepted so there will be 50% of investor consider rating given by credit rating agency.

IPO Performance
The Initial Public offer (IPO) performance is measured on basis their return from the offer price at which shares are alloted. We have considered share issued in the year from 1st January, 2010 to 31st June, 2010. We considered the return of all 34 share which issued during these six months on the basis of short term (first day and Second day of listing) and six months return. The return is calculated on the basis of issue price.

Short Term

First Day(Linsting day) Performance

~
69

1st Performance opening Average SD Median Minimum Skewness N 8.80% 0.024565 4.82% -8.82% 2.09 34 low -0.97% 0.035828 1.02% 42.22% -41.11% 0.05 34 High 20.88% 0.046473 14.33% 75.00% -3.43% 1.18 34 Closing 8.33% 0.057088 5.15% 63.56% -37.12% 0.49 34

Maximum 68.75%

The above analysis shows the first day performance of the IPO s. The study reveals the average earnings of the offer open IPO is 8.80% and it ranges to the maximum of 20.88% and the minimum of -0.97%and at an average of 8.33% return on the first day of listing. Standard deviation also calculated and presented in the above table. The Standard deviation shows that how much price will be deviate from the expected average return, here we found the maximum and minimum deviation ranges between 0.057 to 0.024. The maximum average return on the first day 75% and minimum average return on the first day is -37.12%. Out of 34 IPO studied only 9 are listed below the issue price and 25 issues went above the issue price at the time of listing. The median of the first day highest is 14.33% it shows the middle value of the day trading. The skewness shows the positive return of the IPO it falls between + 3, if there is highest return in positive is 1.18 so there are chances of higher return. At all level there is positive skweness which shows positive return of the IPO.

Second Day of listing Performance

2st Performance ~
70

opening Average SD Median Maximum Minimum Skewness N 8.40% 0.069662 4.25% 72.22% -43.73% 0.26 34

low 5.29% 0.071919 3.51% 68.96% -47.33% 0.27 34

High 12.33% 0.081921 7.94% 81.00% -37.67% 0.29 34

closing 7.90% 0.080299 4.89% 81.00% -43.00% 0.28 34

The second day's performance of the IPOs return analysis shows that all the IPO investors gain on the listing day's performance and also on the second day. The maximum and minimum average return on the second day ranges from 12.33% to 5.29% respectively. The maximum return on the second day is ranges from 81% to 68.96% and the minimum return on the second day ranges from -43 to -37.67%. There is less positive return on the second day of the IPO because the skweness ranges of the day falls between 0.26 to 0.28. Which shows the positive return but less than the first day and the S.D. of the second day 0.081 to 0.067 which higher deviation return?

Long term

Six Months Performance

6 Month Performance opening Average 23.40% SD 0.438738 Median 5.44% Maximum 220.69%

low 20.26% 0.41764 2.40% 203.79% ~

71

High 27.71% 0.47552 11.50% 220.69% ~

closing 23.86% 0.46853 3.06% 220.00%

Minimum Skewness N

-60.22% 1.38 34

-61.22% 1.32 34

-57.56% 1.34 34

-59.56% 1.37 34

The 6 months performance which we have considered long term the average return fall from maximum to minimum 27.71% to 20.26% respectively. Which is higher return than the first and second day of the performance? The median or middle value of the long term return fall maximum to minimum 11.50% to 5.44%. And the maximum return of the six months 220% and minimum return is -60.22%. The skewness shows the higher positive results which is highest 1.38. From the above IPO performance we found that the return of the short term (first and second day) is good but if we compare with the long term (6 months) is less. Because if an investor buy at the issue price and sell after six months or one year long term it will give more return than the short term. The average return of the very first day highest is 20.88% but for six months average highest return is 27.71%. So if an investor sells the share on long term rather than short term there are more chances of the higher return.

72

Chapter-7 FINDINGS
The primary research shows that more than 50% investors are moderate risk taker so if they take slight risk then they will get more return It shows that 80% investors are aware abut CRA but more than 70% people are not aware about the procedure & criteria that CRA is consider. It shows that more than 50% of investors are considering rate given by CRA for security The main reason behind not consider the rates are lack of awareness & trust.

It shows that more investors are considering rate given by CRISIL & more preference given up to a rate for security.

It shows that investors are somewhat agree that CRA shows the true picture & alarm signal for market.

The IPO performance shows that long term return is good then short term return given by IPO. ~
73

Chapter-8 Learning
We did whole project on the Credit rating agencies and the public offering performance. Earlier we didnt know what CRA is but though this project we learnt following things: o The overall working of the credit rating agencies.
o

The process and the criteria which they consider during the credit rating procedure, which give reliable rate to the company and different debt instruments which show the real picture of the company.

o We come to know about risk position and rate relation and how much rate important is important among the investors. o The return of the public offer, when we can earn maximum return and give us positive return. ~
74

Annexure
Questionnaire for retail investor

Name: ___________________________________ Occupation: ___________________________________ Education: ____________________________________ Age: _____________________________________

1) Do you invest in the securities market? a) Yes b) No

2) In which of the following options do you invest? a) Equity b) Debenture c) IPO d) Bonds

3) How do you put yourself as far as risk is concern?

75

a) Risk Averse

b) moderate risk taker c) high risk taker

4) Do you know about the CREDIT RATING AGENCIES which rates Securities? a) Yes b) No

5) Which of the following CRA do you know? a) CRISIL b) ICRA c) CARE d) FITCH

6) Do you know the procedure of CRA? a) Yes b) No

7) Do you know the criteria of CRA? a) Yes b) No

8) Do you consider the credit rate which is given by CRA for the securities for Investment purpose? a) Always b) Some time c) Never

9) Why do you not consider rating of CRA? a) Do not aware c) Do not know the procedure e) Any other 10) Which of the following agency rate do you prefers the most? a) CRISIL b) ICRA c) CARE d) FITCH b) Do not know the criteria d) Do not trust

11) Up to what extent the rating do you prefer to invest? a) AAA b) AA c) A b) BBB c) BB d) B e) other

76

12) Do you agree that CRA have an alarm system to provide alerts on significant relevant events? Give the rank from 1 to 5. (1 = Strongly Agree, 5= strongly Disagree) 1. Strongly Agree 4. Disagree 2. Agree 3. Neutral

5. Strongly Disagree

13) What you think that the CRA shows the real picture of the companies securities? 1 .Strongly Agree 4. Disagree 2. Agree 3. Neutral

5. Strongly Disagree

Thank You

Bibliography

o About Credit Rating: Merchant Banking by Dr. S Guruswamy (Chap. No-25)

o

Credit pdf

Rating

Process:

http://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/CCRA030310_R2.

o Role of Credit Rating Agency: An Article by Radhika Jain

o

http://www.google.co.in/#hl=en&source=hp&biw=1024&bih=5 82&q=credit+rating+article+by+Radhika+Jain&aq=f&aqi=&aq

General Criteria for Security Analysis: http://www.crisil.com/index.jsp ~

77

Rating Agencies: Web site of CRISIL, ICRA, FITCH, CARE

o Advisoryresearchconsultancy_2009ipomarket.pdf o http://www.moneycontrol.com/news/ipo-newo listings/hathway-cable-to-listfeb-25_443649.html

o

www.chittodhgard.com (IPO performance)

o Moneycontrol.com

78