A PROJECT REPORT

ON

CREDIT RATING AGENCIES IN INDIA

Submitted to: KURUKSHETRA UNIVERSITY, KURUKSHETRA IN PARTIAL FULFILLMENT FOR THE DEGREE OF MASTER OF BUSINESS ADIMINISTRATION (Session 2009-2011) Under the supervision of : Dr Shalani Aggarwal H.O.D. MBA (JMIT) RADAUR Submitted By:Meenu kamboj MBA (Final) Uni. Roll No.

SETH JAI PARKASH MUKAND LAL INSTITUTE OF ENGINEERING AND TECHNOLOGY (Approved by AICTE, Affiliated to Kurukshetra University, KURUKSHETRA)
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ACKNOWLEDGEMENT It is my pleasure to be indebted to various people, who directly or indirectly contributed in the development of this work and who influenced my thinking, behavior, and acts during the course of study. I express my sincere gratitude to Prof Randhir Singh Principal for providing me an opportunity to undergo Research report at CREDIT RATING AGENCIES IN INDIA. I also extend my sincere appreciation to Dr Shalini Aggarwal who provided her valuable suggestions and precious time in accomplishing my project report. Lastly, I would like to thank the almighty and my parents for their moral support and my friends with whom I shared my day-to-day experience and received lots of suggestions that improved my quality of work.

(Meenu kamboj)

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DECLARATION
I Meenu kamboj, student of MBA IVth Semester, studying at SETH JAI PARKASH MUKAND LAL INSTITUTE OF ENGINEERING AND TECHNOLOGY, hereby declare that the Research report on CREDIT RATING AGENCIES IN INDIA submitted to Kurukshetra University, Kurkshetra in partial fulfillment of Degree of Masters of Business Administration is the original work conducted by me.

The information and data given in the report is authentic to the best of my knowledge.

This Research report is not being submitted to any other University for award of any other Degree, Diploma and Fellowship.

(Meenu kamboj)

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CERTIFICATE
This is to certify that the research work entitled CREDIT RATING AGENCIES IN INDIA has been undertaken by Meenu kamboj under my supervision in the partial fulfillment of requirement of post graduate course Master of Business Administration (MBA). The research work is candidates original work & this project report has not been submitted to any other university for any course. This is also certified that Meenu kamboj is student of MBA final in Seth Jai Parkash Mukand Lal Institute Of Engineering And Technology, Radaur, Yamunanagar. Project Guide: Dr. Shalani Aggarwal H.O.D M.B.A. JMIT,Radaur

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TABLE OF CONTENTS

S.No 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Objective Of Study Credit Rating

PARTICULARS

PG. No 1 2-4 5-9 10 11 12-13 14-15 16-20 21 22-62

International Scenario Advent In India Objective Of Credit Rating Functions Of Credit Rating Types Of Rating Rating Process Criteria For Rating Credit Rating Agencies Credit Rating Information Services Of India Limited (Crisil) Investment Information And Credit Rating (Icra) Credit Analysis And Research (Care)

11. 12. 13. 14. 15.

Recent Ratings Given By Different Agencies Benefits Of Credit Rating Disadvantages Of Credit Rating Conclusions & Recommendations Bibliography

63-65 66-71 72-73 74-75 76

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OBJECTIVE OF STUDY In these days where a lot of options are present beyond the investors to invest there deposit, it is quite difficult to choose an instrument which can give high safety with good returns. In this time credit rating agencies came into existence which suggests the safest mode. Thats why I have chosen this Research Topic with in Primary objective to know more about the agencies provided such services. Some other objectives are as follows: (i) (ii) To determine the process for credit rating To determine various credit rating agencies in India and the services provided by them. (iii) (iv) To determine the process adopted by these credit rating agencies. Are these credit rating agencies provided reliable services.

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CREDIT RATING Credit rating is a qualified assessment and formal evaluation of companys credit history and capability of repaying obligations. It measures the default probability of the borrower, and its ability to repay fully and timely its financial debt obligations. Rating usually expressed in alphabetical or alphanumeric symbols, are a simple and easily understood tool enabling the investor to differentiate between debt instruments on the basis of their under laying credit quality. The credit rating is thus a symbolic indicator of the current option of the relative capability of the issuer to service its debt obligation in a timely fashion, with specific reference to the instrument being rated. It is focused on communicating to the investors, the relative ranking of the defaults loss probability for a given fixed income investment, in comparison with other rated instruments. The rating is an opinion on the future ability and legal obligation of the issuer to make timely payments of the principals and interest on a specific fixed income security. The rating measures the probability that the issuer will default on the security over its life, which depending on the instrument, may be a matter of days to 30 years or more. In addition long term rating incorporates an assessment of the expected monetary loss should a default occur. Credit rating helps the investor by providing an easilty recognizable, simple tool that couples a possible unknown issuer with an informative and

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meaningfull symbol, of the opinion about the credit quality of the issuer of security/ instrument. A rating is specified to a debit instrument and is indented as a grade, an analysis of the credit risk associated with the particular instrument. It is based upon the relative capability and willingness of the issuer of the instrument to service the debit obligations i.e., Both Principal and thus a rating neither a

general Purpose evaluation of the issuer, nor an overall assessment of the credit risk likely you to involved in all debts contracted or to be contracted by such entity. The primary objective of rating is to provide guidance to investors, creditors in determining a credit risk associated with a debit instrument, credit and obligations It does not amount to a recommendation to buy, hold or sell an instrument as it does not take into consideration factors such as market prices, personal risks preferences and other consideration, which may influence an investment decision. The rating process in itself based on certain givens. The

agency, for instance, does not perform an audit. Instead, it is required to rely on information provided by the completeness or accuracy of the information on which the rating is based. To quote in determining a rating, both quantitative and qualitative analysis is employed. The judgment is qualitative in nature and the role of the quantitative analysis is to help make the best possible overall qualitative judgment because, ultimately a rating is on opinion.

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Why is credit rating necessary at all? Credit rating is an opinion expressed by an independent professional organisation, after making a detailed study of all relevant factors. Such an opinion will be of great assistance to investors in making investment decisions. It also helps the issuers of debt instruments to price their issues correctly and to reach out to new investors. Regulators like Reserve Bank of India (RBI) and Securities & Exchange Board of India (SEBI) often use credit rating to determine eligibility criteria for some instruments. For example, the RBI has stipulated a minimum credit rating by an approved agency for issue of Commerce Paper. In general, credit rating is expected to improve quality consciousness in the market and establish, over a period of time, a more meaningful relationship between the quality of debt and the yield from it. Credit Rating is also a valuable input in establishing business relationships of various types.

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INTERNATIONAL SCENARIO Credit Rating has its roots in America, in the process of creating infrastructure, rail roads, companies in U.S. resorted to capital market for raising funds to finance acquisition of land and stock. To sell their issue they were required to convince the prospective investors by providing them relevant data. Henry Poor to whom standard and Poors can trace its ancestry, started publishing relevant data for Rail road companies from 1854, John Moody, the founder of Moodys investors services, started analyzing the published data to extract more precise and accurate information investment decision making for railways bonds. On the basis of this extensive analysis the concept of rating started where in Moody put different bond in different categories as to their ability to pay interest due and redemption of Principal amount in time It was Moody who for the first time used the English Alphabets as symbols of different categories of bonds as per risk involved for repayment of interest in time. Formally, rating of debit obligation was first introduced in 1909. Ratings was made obligatory when in 1933 after great depression the US controller of currency required banks to purchase Securities rated at least BBB/Baa. Similarly to protect the interest of investors, 1970 onwards all commercial papers issued by US companies were required to be rated along with all types of corporate bonds. Such steps were the outcome of bankruptcy of very big companies prominent being Penn Central (a large chain of retail stores). Credit rating, which basically aim at guiding the lay investors about the corporate entities, exert now a very powerful influence in the domestic US market, while their importance is
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being increasingly recognized the value of ratings and introduced a credit rating requirement for corporate entities to explore the Euro-yen market. Today the credit rating agencies have been established in more than 25 countries to serve the needs of the investors and the corporate borrowers. Ratings thus, are none a universal phenomenon as developing as well as developed economics are opting for it. Since credibility was established in US countries through out world like Spain, Chile, Sweden, Portugal, UK, Canada, France, Thailand, Malaysia, Australia have rating agencies. In France all issues of certificate of deposits and other debt instrument with maturing over 2 yrs must publish the rating they have obtained from a specialized rating agency. All structured fancying must also be rated prior to sale. Three credit rating agencies are recognized worldwide: Standard & Poors Moodys Investor Service Fitch Ratings They assign domestic and external ratings at the borrowers request. Each of them is present in most of the countries and has a universal rating scale. Standard & Poors was established in 1860 by Henry Varnum Poor. company provided independent financial analysis and information worldwide. In 1906, Standard Statistics Bureau Company was formed to provide previously unavailable financial information on US companies. In 1916, Standard Statistics Bureau began to assign debt ratings to corporate bonds and sovereign debt. Municipal bond ratings have been introduced in 1940. The

agencys founding principle was the investor has the right to know. The

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In 1941, Poors Publishing and Standard Statistics merged to form the Standard & Poors Corporation. In 1966, The McGraw-Hill Companies, Inc. acquired Standard & Poors. Today Standard & Poors is a division of Corporation, which provides financial consulting, credit ratings, numerous analytical materials on securities, companies, banks (Bond Guide, Earnings Forecaster, New Issue Investor, Stock Guide, Analysts Handbook, Corporation Records, Poors Register, Securities Dealers of North America). Now the company has 21 offices and 1,200 analysts, including some of the worlds foremost economists. Moodys Investor Service. A leading global credit rating, research and risk analysis firm that publishes credit opinions, research and ratings on fixed-income securities, issuers of securities and other credit obligations. The company was established in New York by John Moody in 1900. Initially John Moody & Company published Moodys Manual of Industrial and Miscellaneous Securities. The manual provided information and statistics on stocks and bonds of financial institutions, government agencies, manufacturing, mining, utilities and food companies. In 1909, Moodys Analysis of Railroads Investments described for readers the analytic principles that Moody used to assess railroads operations, management, and finance. In 1913, the company expanded its base of analyzed companies, launching the evaluation of industrial companies and utilities. The Moodys ratings have become a factor in the bond market. On July 1st, 1914, Moodys Investor Service was incorporated.

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By 1924, Moodys ratings covered nearly 100% of the US bond market. Moodys continued to publish and monitor ratings during the Great Depression. In the 1970s, the Moodys ratings were further extended to the commercial paper market and to bank deposits. Now, Moodys Corporation comprises two subsidiaries: Moodys Investors Service and Moodys KMV. The corporation, which had reported revenue of $1.0 billion in 2002, employs approximately 2,100 people worldwide and maintains offices in 18 counties. Moodys has actively built alliances with leading local credit ratings agencies worldwide, such as Korea Investors Service (Korea), Dagong Global Credit Rating Co. (Peoples Republic of China), ICRA Ltd. (India), Clasificadora de Riesgo Humphreys Limitada (Chile), Humphreys Argentina S.A. (Argentina), and also Interfax in Russian Federation. Fitch Ratings. Agency provides credit ratings to corporate, municipal bonds, preferred stocks, commercial paper, and to non-commercial organizations. Fitch Ratings was founded as the Fitch Publishing Company on December 24th, 1913 by John Knowles Fitch in New York City. The Fitch Publishing Company began as a publisher of financial statistics whose consumers included the New York Stock Exchange. Soon Fitch became the recognized leader in providing critical financial statistics to the investment community through such publications as the Fitch Bond Book and the Fitch Stock and Bond Manual. Fitch was one of the three rating agencies first recognized as a nationally recognized statistical rating organization (NRSRO) by the Securities and Exchanges Commission in 1975.

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Fitch has a rating presence in 75 countries and 40 offices worldwide. It today has 1,300 employees, including 725 analysts. Fitch currently covers 2,300 banks and financial institutions, 1,000 corporates and maintains surveillance on 3,300 structured financings and 17,000 municipal bond ratings in the U.S. tax-exempt market. Fitch also rates over 700 insurance companies plus 70 sovereigns. Fitch has dual headquarters in New York and London.

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ADVENT IN INDIA Credit rating emerged in India with the Birth of Credit Rating Information Services of India Limited (CRISIL) in 1988 January. Corporate sector enterprises have depended in India for funds to finance their projects or expansion of existing projects upon the financial institutions and banks and it was the name of these institutions and banks associated with the company that enhanced the image in Public estimation of the company and of the public issues too. The need for credit Rating Agencies has been felt much more now when the capital market is grooving to attain efficiency and the corporate enterprises are raising funds from the issue of securities depending on the capital market. A move in the corporate sector firm debt age to free market finance age has further increased the chances for more credit rating agencies. This is the time for investor to measure risk as well as for the corporate units to use credit rating as a marketing tool. The growth of capital market is discernible from the fact that there are 21 stock exchanges operating in India with over 6500 listed companies and more than 1.5 crores individuals investors with increasing trend of invertible funds and increasing demand for funds from the industry. Investors have to rely upon rated instruments rather than following the advices of the financial intermediaries. Rating has not been made compulsory in India for companies going public. It is only debt instrument i.e. debentures, certificate of deposits or money market instruments like commercial paper for which rating is obligatory under the recent guidelines issued in this regard.

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OBJECTIVES OF CREDIT RATING

1.

It s primary objective is to provide guidance to the investors, creditors in determining the credit risk associated with debt instrument.

2.

To shift the primary burden of establishing corporate credit quality from the broker/underwriter to the rating agency and thus lessen potential conflicts of interest between underwriter and investors.

3.

Provide an increased disclosure, better accounting standards and improved financial information to institutional investors.

4.

Encourage the direct mobilization and saving from individuals rather than from intermediary lending institution.

5.

Providing benefits to the borrowing company by: a) b) Reducing interest cost for higher rated companies. Providing a marking tool in placing its debt obligations with an investors base level of risk.

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FUNCTIONS OF CREDIT RATING 1) Provide superior information: Provide superior information on credit risk

for three reasons : I. An independent rating agency, unlike brokers, financial

intermediatories, underwriters who have vested interest in an issue, is likely to provide an unbiased opinion. II. Due to professional & highly trained staff, their ability to assess risk is better ,& III. The rating firm has access to a lot of information which may not be publically available. 2) Low cost information: rating firm gathers, analyses, interprets and summaries complex information in a simple and readily understood formal manner. It is highly welcome by most investors who find it prohibitive and simply impossible to do such credit evaluation of their own. 3) Basis for a proper risk and return: if an instrument is rated by a rating agency, then such instrument enjoy higher confidence from investors. Investors have some idea as to what is the risk associated with the instrument in which he/she is likely to take, if investment is done in that security. 4) Healthy discipline on corporate borrowers : higher credit rating to any credit investment tends to enhance the corporate image and visibility and hence it induces a healthy discipline on corporates.

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5) Greater credence to financial and other representation: when credit rating agency rates a security, its own reputation is at stake. So it seeks financial and other information, the quality of which is acceptable to it. As the issues complies with the demands of a credit of this is acceptable to it. As the issues complies with the demands of a credit rating agency on a continuing basis, its financial and other representations acquire greater credibility. 6) Formation of public policy : public policy guidelines on what kinds of securities are eligible for inclusions in different kinds of institutional portfolios can be developed with greater confidence if debt securities are rated professionally.

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TYPES OF RATING The rating methodology and process discussed in primarily for debt instruments like debentures fixed deposits, bonds etc. This type of rating constitutes the major business of a rating company. With the passage of time these agencies have started providing other types of rating like:

1.

BOND/DEBENTURE RATING: Rating the debenture bonds issued by corporate, government etc. is called debenture a bond rating.

2.

EQUITY RATING: Rating of equity shares issued by a company is called equity rating.

3.

COMMERCIAL PAPER RATING:

Commercial paper are instruments

used for short term borrowings commercial paper used by manufacturing companies, finance companies, banks and financial institutions and rating of these instruments is called commercial paper rating.

4.

FIXED DEPOSITS RATING: Fixed deposits programmers are medium term unsecured borrowings. deposit rating. Rating of such programmers is called as fixed

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5.

INDIVIDUALS RATING: Consumer finance is gaining popularity in developing countries. The success of consumer finance depends on the credit worthiness of the consumer. Rating agencies may take up rating of such individual.

6.

MUTUAL FUND RATING: Mutual funds, which are popular world over are evaluated by rated agencies and it is known as mutual fund rating.

7.

SOVEREIGN RATING: It is primarily rating of a country as to its credit worthiness and probability to risk etc.

8.

RATING STRUCTURED OBLIGATIONS:

Structured obligation are also

debt obligation different to debenture or bond or fixed deposit programmers and commercial papers. Structured obligation is generally asset backed security. Credit rating agencies assessed the risk associated with the transaction with the main trust on cash flows emerging from the asset would be sufficient to meet committed payments, to the investors in worst case scenario.

RATING PROCESS
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Any rating agency assign a rating entry when there is adequate information available to form a credible opinion and only after extensive quantitative, qualitative and if appropriate legal analyses are performed. The process of rating is broadly three-tier system: a) b) c) Receipt of information Analysis of information. Granting rating symbols.

a)

Receipts of information: Rating exercise is based on information provided by the company or agency when the issuer approaches the credit rating agencies, it is to provided relevant information to them. The information required by the rating is such which gives the real picture of the issuer. The nature and source of information required from the issuer like voluntarily and from the outsider like banker, auditors, industry, experts and suppliers etc. The credit rating agency besides depending on the information provided by the issuer collects additional information from its own sources. The information required about the issuer is not only of the past but also about its features.

b)

Analysis of Information: The rating process of rating agencies is almost similar since the basic parameters to be observed to assess risks associated are same. Rating is a search for long-term fundamentals and the probabilities for

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charges in fundamentals which could affect the credit worthiness of the borrower. Rating fundamentals analysis not only financial profile of the concerned issuer in context of the instrument to be rated but also evaluate its business or compressive strengths or weaknesses. These

fundamentals are: i) Financial Profile: Financial profile for which an in depth study is made for issuer covers liquidity position, capital structure, financial flexibility, cash flow adequacy, profitability leverages, interest coverage etc., This historical fact and future projections both are extensively used for these parameters. Before considering these, the rating agency also critically evaluation accounting policies and practices with particular reference to practice of providing for depreciation, income recognition, stock evaluation, valuation of fixed assets, off balance sheet claims and liabilities etc. Extensive use is made of ratio analysis techniques. The major ratios computed are: Coverage Ratio: Coverage ratio is a measure of how many times the issuing company earned income and how the issuing company could pay the interest charges and other cost related to the debt issue. Financial Leverage Ratio:

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It is a set of ratios to assess proudly what is the mix of funds source. Liquidity Ratio: To know the firms ability to pay debts currently coming due, liquidity ratios are calculated. Cash Flow Ratio: If cast flow of a company is sufficient in relation to interest payment liability and total long term debts, the debt instruments of the company may get higher rating. Profitability Ratio: Another significant set of ratio is profitability ratio, which indicates profit earning capacity of a company. II. BUSINESS PROFILE:

The rating process as earlier is not limited to the evaluation of financial profile quality of debt instruments is influenced in many other variables, which are not which are covered in examination of financial profile. There can be so many other facts, which are not considered in financial analysis. All such factors for one variance are grouped under the head of business profile. The main factors are considered here: 1) Issuers Industry: a) b) c) The nature of industry Effect of economic cycles on the industry. Nature and intensity of the competition.

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d) e) 2.

Growth of industry. Labour situation

Issuers Competitors: a) b) Intensity of competition Structure of the industry and entry and exist barriers.

3.

Issuers Management: a) b) c) What is the background to what extent is the management professional. How effective is the control mechanism in the company.

4.

Issuers Instrument: Debt instrument to be rated spell out certain rights of the owners. The various protective provisions contained in the terms and conditions prospectus of debt instrument also raises the quality rating for the instrument. The issuer can subordinate other legal claims on its assets or income.

c)

Granting Rating Symbols: The process starts with the request of the prospective issuer formal request for rating. The issuer is generally asked to submit required information in a set Performa for essential items. The rating agency assigns an analytical team for the issue. The analyst takes up the assignment of collection of additional data, which they consider to be relevant. The team interacts with clients undertakes sites or premises visit to gather first hand information especially about quantitative aspects. They

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may have assessed to books of record. They can interact with the executive and other concerned officials. The review in detail the borrowers kay operating and financial plans, management policies and credit factors. The data base of the rating agency about industry concerned is also extensively used. Following this review and discussions, the primary analyst makes a recommendation and a rating committee meeting is conveyed. The committee discusses the recommendations and the pertinent facts supporting the rating. Finally, the committee votes or awards of the

recommendations. The borrower is subsequently notified of the rating and the major supporting consideration. Borrower or client has option not to accept the final rating and the company will not publish the rating or monitor it. A borrower can appeal against a rating decision prior to its publications.

CRITERIA FOR RATING

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 Share dividend

Past performance of the company and the prospectus Coverage Ratios Interest Cover Debt Service Coverage Ratio PAT + Depreciation - Extraordinary Income Debt Payable within one year + interest + Preference

Net Cash Accruals to total debt Capital Structure Gearing Total debt/Tangible Net worth Total debt/Adjusted Net worth Total debt + off balance sheet funding liabilities/TNW Total debt+off B/S liabilities/Adjusted Net Worth Credit Enhancements Group Support

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CREDIT RATING AGENCIES

Credit rating agencies play a very vital role in the debt market of an economy. In India however, a secondary debt market for corporate securities is virtually nonexistent. A lack of a vibrant debt market prevents the investors from knowing the true value of their bond holding. The credit rating agencies in India have evolved a s a prominent force and creating awareness among the investors over the years. Serving as information intermediaries between the issuers and investors, the rating agencies are in the process of developing new methods for performance measurement and are transiting into new areas. In its decades long existence, the rating Industry has evolved greatly and continuous to play a pivotal role in the Indian Market for. In India there are many credit rating agencies are present. These are: 1) 2) 3) 4) 5) Credit Rating information services of India Limited (CRISIL) Investment information and credit Rating (ICRA) Credit Analysis and Research (CARE) Duff & Phelps credit rating India private limited. Fitch Rating India Private Limited. In the above agencies the first three agencies i.e. CRISIL, ICRA and CARE are major agencies. We will have a brief study of all these agencies. The description of these agencies is as follows:

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CREDIT RATING INFORMATION SERVICES OF INDIA LIMITED (CRISIL) INTRODUCTION The Credit Rating Information Services of India Ltd (CRISIL) began operations in 1987, offering credit rating services in a market where the concept was totally new. Interest rates at that time were government determined, and CRISILs business was therefore built entirely on guiding the market for its investment decisions. CRISIL had the challenge of building a new business in an unknown area from a zero base.

OWNERSHIP CRISILs promoters represent a broad cross-section of the financial sector. The list includes major Indian Financial Institutions such as ICICI and HDFC, a large mutual fund (the Unit Trust of India), a number of Indian and foreign banks, and the Asian Development Bank (ADB), Manila. This distinguished and broad-based parentage ensured an initial market perception of CRISIL as a credible, professional and independent entity, an image that CRISIL strives to maintain.

A clear and comprehensive account of the ownership has been circulated in the public domain, and is updated whenever there are significant changes in the ownership.

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MANAGEMENT CRISIL is a professionally-managed company, where the management is independent of the ownership. The members of the CRISIL Board are distinguished professionals. Executive Directors, and other senior managers of CRISIL, are financial professionals who have exhibited excellence in their respective fields, and have a track record of significant achievement behind them in CRISIL

OBJECTIVE OF CRISIL The main objective of CRISIL is as under: To assist investors in making investment decisions To assist issuers in raising funds from a wider investor base To provide a marketing tool to entities placing debt with clients To provide regulators with a market driven system for bringing about the development of the capital markets. To institutionalise a viable and market-driven system of credit rating in India To facilitate individuals in investing in financial instruments rather than in Non-productive assets. To rate debt obligation of Indian Companies. Its rating provides a guide to the investors as to risk of timely payment of interest and principal on a particular debt instrument.
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STRATEGY OF CRISIL The strategy of crisil is three-folded: Creating awareness of the concept amongst all market participants Winning credibility, confidence and trust of participants Generating ratings business that would increase in size as a system of market driven interest rates came into play

Financial performance of CRISIL CRISILs revenues have been rising steadily over the last six years, as the chart below shows. Profits have increased significantly in the last financial year (ended 31st December 2010). Annual Results in Brief SALES OPERATING PROFIT INTEREST GROSS PROFIT EPS(Rs.) DEC 10 531.28 201.77 272.83 275.84 DEC 09 443.33 183.10 204.22 208.08 DEC 08 384.80 167.88 186.97 190.14 DEC 07 255.32 89.26 104.81 97.81 (Rs. Crore) DEC 06 146.75 50.35 0.01 60.46 55.33

CRISIL has, over time, built up a reputation for superior analysis, which is today widely accepted and respected by the investor community. CRISILs sustained campaign to enhance awareness amongst issuers, investors and other market entities has undoubtedly contributed to this, as have CRISILs rating actions,
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which have proved to be a good lead indicator for many economic measures like growth rate of GDP and growth rate of the Index of Industrial Production (IIP). CRISILs investor franchise has also benefited from timely rating actions taken in recent years. For many Indian investors, the CRISIL name is virtually synonymous with ratings. Report Card ATTRIBUTE PE ratio EPS (Rs) Sales (Rs crore) Face Value (Rs) Net profit margin (%) Last dividend (%) Return on average equity VALUE 24.77 275.84 144.39 10 36.13 275 54 DATE 15/04/11 Dec, 10 Mar, 11 Dec, 10 07/04/11 Dec, 10

A few noteworthy achievements of cricil : CRISIL was the worlds first agency to develop criteria for rating instruments carrying partial guarantees. CRISIL was the first agency in India to develop criteria for rating banks, state governments, and urban local bodies. CRISIL introduced ratings for structured finance instruments in India. CRISIL introduced performance ratings for o Real estate developers o Capital market brokers
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o Parallel marketers of petroleum products CRISIL also introduced ratings of healthcare institutions on quality of delivered care. Other major innovations include the creation of a software model for assessment and measurement of borrower risks, which has been productised and sold to major Indian banks and institutions

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SERVICES OFFERED BY CRISIL CRISIL is the pre-eminent provider of services in the areas of: (1) Credit Rating: Having rated over 1800 companies and 3600 instruments amounting to a debt volume of over 62.11 bn. Since its inception in 1987 the rating division work speaks for itself to boot there is its strategic alliances with the worlds leaguing poors USA (S &S) credit rating agency, standard and

(2)

CRISIL Advisory Services: The consultancy division of CRISIL CAS offer specialized advisory services in the areas of energy, Transportation and urban infrastructure, economy, Transportation and urban infrastructure, economy, capital markets, banking and finance, e-consultancy and the like.

(3)

CREDIBILITY FIRST RATING AND EVALUATION SERVCIES: Credibility first provides rating and evaluation services to a cross section of Indian companies. While the rating division focuses on top end corporate, of provides specialized credit and counter party rating services to a larger number of companies, especially informations is not easily available. small sized ones where

(4)

CRISIL TRAINING SERVICES: Pass on what you have learnt in the mantra of this division. CRISIL has thus leveraged its expertise in assessing credit and investment risk as

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well as its other analytical skill to provide a spectrum of standardize and customized training programmes. In addition to above CRISIL also offers a comprehensive range of integrated product and services offerings such as Real Time news, analyzed data, incisive insights and opinion and expert advise to enable investors, issuers, policy market to de risk their business, and financial decision making. CRISL delivers opinions and selections that: Help clients to mitigate and manage their business and financial risk. Make market function better.

CRISILS RATING PROCESS

CRISILs rating processes is as given below: 1. Request of the Company: The rating process begins at the request of a company decisions of having its issue obligations under proposed instrument rated by CRISIL. 2. Assignment to Analytical Team: On receipt of the above request, CRISIL assigns the job to an analytical team that will be responsible for carrying out the rating assignments.

3. Obtaining and processing of Data: The analytical team, which generally contains experts visit the companys plant and inspects the operations. And obtains requisite information from the client company and analyses the same. To obtain clarification and better
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understanding of clients operations the team meets and interacts with companys executives.

4. Findings Presentations: The findings of the team completion of investigation process are presented to rating committee, which comprises some directors not connected with any CRISIL shareholder which then decides on the rating. Within the

industry is evaluated from different angles i.e, market share and stability of markets share, competitive advantage through marketing distribution strength and weakness. Marketing/support service infrastructure, diversity of products and customers bases long term sales contract, strong marketing position of the company within the industry attracts better grade rating.

5. Operating Efficiency: Operating efficiency of the company is assessed vis--vis competitors comparison. For instance, thee pricing or cost advantage, availability cost,

quality or race material, availability of labour and labour relations, cost effectiveness of plant and equipments level of capital employed and productivity, energy cost etc. taken into consideration.

6.

Legal Position: Legal position of issue of debt instrument is assessed by : letter or offer,

terms of debentures trust deed, trustees and their responsibilities, system of timely payment of interest and principal, or protection of forgery and fraud . Thus, business covers all relevant aspects as related to business.
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7.

Communication of decision: The decision of the rating committee is communicated to the client

company with remarks.

That the company if it so likes, may present some

additional information for reconsideration of rating grade assigned to this instrument. In case the company has nothing to produce as additional fact, the rating grade is formally confirmed to the company by CRISIL.

8.

Monitoring of Change of Rating: Once the company has decides to use the rating, CRISIL is obliged to

monitor the rating, over the life of the instrument.

Depending upon new

information, or developments concerning the company. CRISIL may change the rating. Any change, so effected, is made public by CRISIL.

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THE RATING PROCESS CAN ALSO BE EXPLANED WITH THE HELP OF DIAGRAM:

O T R e

R R y p e q u e

W E R / I S C S R U I SE I R L t i t l e h e r Te y p e t i t l e s t f o r A a s R s ia g t ni n s g a n c o n d u c t s b t i o C n o Pl l e r ec

r e , h n

a l y t i c a l t e a m a s i c r e s e a r c in n f o r m a t i o

t a

p i oa nr a ot i fo t

APPEAL

Plant visit followed by Management Meetings

Rating Committee assigns rating

Communication of rating to issuers Dissemination of rating publication

Surveillance & Annual Review

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CRISILS RATING METHODOLOGY:

CRISIL analyses five factors while assessing the instrument. These factors are follows: 1) Business Analysis: All the relevant information concerning the business are covered under the following sub-heads: a) Industry Risk: CRISIL evaluates the industry risk by taking into

consideration various factors like nature and basis of competition, key success factors, demand and supply factors, structure of industry, government policies etc., Industry strength is evaluated within the economy considering factors like inflation, energy requirements and availability. International competitive situation and socio-political scenario, demand projection growth stages and maturity of markets, cost structure of industry in domestic and international scenario or government policies towards industry. Industry risk analysis may set upper limit on rating. b) Market Position of the company within the Industry: Market position of the company operations of the client company to assess all credit worthiness of the company.

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2.

FINANCIAL ANALYSIS: Under the financial analysis all relevant aspects connected with the business and financial position of the company are assessed. Such as qualification of auditors, method of Income recognition, deprecation policies and inventory calculations, under valued/ over valuing of assets or off balance sheet liabilities. Earning Potential Return, Profitability ratios, coverage ratios, earning on assets/capital employed, source of future earning or ability to finance growth internally. Adequacy of the cash flows is appraised in relation to debt and fixed and working capital requirements of the company, future cash flows, working capital management. Ability to attract capital, capital spending flexibility, asset redeployment potential or the debt service schedule.

3.

MANAGEMENT EVALUATION: The track record of management is evaluated by observation the roles and philosophies strategies and ability to overcome adverse

situations, judgement of management performance based on past operating and financial results, planning and control systems, depths of managerial talents and succession plans, shareholding pattern and constitution of board of directors relationship with shareholders or mergers and acquisition considerations.

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4.

REGULATORY AND COMPETITIVE ENVIRONMENT: CRISIL evaluates structure and regulatory framework of the financial systems in which it works. Trends in regulation/deregulation and their impact on the company are evaluated.

5.

FUNDAMENTAL ANALYSIS: It covers aspects on liquidity management, assets quality, profitability and financial position and interest and tax sensitively. Liquidity management includes aspects on capital structure, matching f assets and liabilities. Interest rte charges, revenues on non-fund based activities, accretion to reserves.

RATING SYMBOLS USED BY CRISIL

DEBENTURES 1). High investment grade: Symbols Definition Debentures rated AAA are judged to offer higher safety to timely payment of interest and principal. Though the circumstances providing this degree of safety are likely to change, such changes as can be envisaged are most unlikely to affect adversely the fundamentally story position of such issues.

AAA (Triple A) HIGH SAFTEY

AA (Double A) HIGH SAFETY

Debentures rated AAA are judged or offer high safety of timely payment of interest and principal. They differ in safety from AAA issues only.

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2). Investment Grades: Symbols A Adequate Safety Definition Debentures rated A: are judged to offer adequate safety of timely payment of interest and principal, however, change in circumstances can adversely affect such issues more than those in higher rated categories Debentures rated BBB are judged to offer sufficient safety of timely payment of interest and principal for the present, however, changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal than for debenture in higher rated categories.

BBB (Triple B) Moderate Safety

Debentures rated BB are judged to carry in adequate safety of timely payment of interest and principal while BB (Double B) they are less susceptible to default than other speculative Inadequate safety grade debentures in the immediate future the uncertainties that the issuer faces could lead to inadequate capacity to make timely interest and principal payments Debentures rated B are judged to have greater susceptibility to default, while currently interest and B principal payment are met, adverse business or economic high risk condition would lead to lack of ability or willingness to pay interest or principal Debentures rated C are judged to have factors present that make them vulnerable to default, timely, payment of C interest and principal is possible only if favourable Substantial Risk circumstances continue. Debentures rated D are in default and in arrears of interest or principal payments or are expected to default on maturity. Such debentures are extremely speculative and returns from these debentures may be realized only on reorganization liquidation.

D Default

FIXED DEPOSIT
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Symbols

Definition

This rating indicates that the degree of safety regarding FAAA (F Triple A) timely payment of interest and principal is very strong. Higher Safety This rating indicates that the degree of safety regarding timely payment of interest and principal is strong. FAA (F-Double A) However, the relative degrees of safety are not as high as for fixed deposits FAAA rating. High Safety

This rating indicates that the degree of safety regarding timely payment of interest and principal are satisfactory changes in circumstances can effect such issues more FA Adequate Safety than those in the higher rated categories.

The rating indicates inadequate safety of timely payment and interest and principal such issues are less susceptible to inadequate capacity to make timely interest and FB Inadequate Safety principal payments.

FC high risk

FD Default

This rating indicates that the degree of safety regarding timely payment of interest and principal is doubtful. Such issues have factors at present that make them vulnerable to default, adverse business or economic conditions would lead to lack of ability or willingness to pay interest or principal. This rating indicates that the issue is either in default or in expected to be in default upon maturity.

SHORT TERM INSTRUMENTS

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Symbols P-1

Definition This indicates that safety regarding strong.

P-2

This rating indicates that the degree of safety regarding timely payment on the instruments is strong, however the relative degrees of safety is lower than that for instrument rated P-1.

P-3

This rating indicates that the degree of safety regarding timely payment on the instrument is adequate, however the instrument is more vulnerable to the adverse effect of changing circumstances than an instrument rated in the two higher categories.

P-4

This rating indicates that the degree of safety regarding timely payment on the instrument is minimal and it is likely to be adversely affected by short term adversity or less favorable conditions.

P-5

This rating indicates that the instrument is expected to be in default on maturity or in default.

INVESTMENT INFORMATION AND CREDIT RATING AGENCY (ICRA)

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INTRODUCTION ICRA Ltd., has been promoted by industrial finance corporation of India (IFCI) as its main promoter with its Head quarters at New Delhi. It is an independent credit rating agency established in 1991. ICRA has been

contributed by a number of leading public sector banks and financial institutions such as IFCI, state Bank of India, UTI, GIC, PNB, Central Bank of India, Bank of Baroda, UCO Bank etc. In early December 1998, the US based international credit rating agency Moodys investors service and ICRA jointly agreed to Moodys taking up a minority stake in the equity capital of ICRA. Moodys has agreed to minority stake in a venture in a developing market. Moodys association with ICRA shall bring to India the global expertise and research, which Moodys has developed over decades. Besides, the tie-up will entail Moodys conducting regular training and business seminars for ICRA analyst on concepts and issues relating to the development of capital markets in India. ICRAs association with Moodys dates to 1996 when ICRA signed a business development and marketing agreement with financial preformed inc. (FPI), a Moodys company, to provide risk management software, credit education and consulting services to banks, financial and investment institutions, financial services companies and mutual fund in India.

OBJECTIVE OF ICRA

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1.

ICRA was established to provide. Information and guidance to institutional and individual investors and creditors.

2.

To enhance the ability of borrower/issuers to access the money market and capital market for tapping a larger volume of resources in the financial markets.

3.

To enable banks, investments bankers and brokers in placing debt with investors by providing them with a marketing tool.

4.

The provide regulator with a market driven system to encourage healthy growth of the capital markets in a disciplined manner without costing an additional burden on the government for this purpose.

SERVICE OFFERED BY ICRA: ICRA has broad based in services to the corporate and financial sectors, both in India and overseas, and presently offers its services under three banners namely: 1. 2. 3. 1. Rating Services. Information Services Advisory Services.

Rating Services ICRA Rating services includes credit rating of debt instruments, sub sovereign rating, credit assessment, asset securitization, rating of claims paying ability of insurance companies, credit assessment for

small/medium industry rating of collective investment schemes and evaluation/rating to parallel marketers of LPG and Kerosene.

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2.

Information Services ICRA information services is focused primarily on addressing the information needs of investors, the capital markets community, corporate managers, researchers and academicians.

3.

Advisory Services ICRA offers its expertise under five broad areas: a) Focused diagnostic studies for effective decision making and policy formulation by business corporate, regulatory authorities and industry/trade association. b) Top management issues focusing on how to improve business competitiveness. c) d) e) Formulating entry/growth strategies. Risk assessment and mitigation strategies in large projects. Building organizational capabilities in risk management.

ICRAS RATING PROCESS I) Rating Request Rating is initiated by a formal request from the prospective issuer. This mandate spells out the terms of the rating assignment, important issues that are covered include. Binding the credit rating agency to maintain confidentiality the right to the issuer to accept or not to accept the

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rating and issuer to provide information required by the credit rating agency for rating and subsequent surveillance. ii) Rating Team The team usually comprises two members. The composition of the terms if based on the expertise and skills required for evaluating the business of the issuer. iii) Information Requirements Issuers are provided a list of information requirements and broad framework for discussions. iv) Secondary Information ICRA also draws on the secondary source of information including its own research division. The credit rating agency also has a panel of industry experts who provide guidance on specific issues to the rating team. The secondary sources generally provide data and trends including policies about the industry. v) Management meetings and Plant Visits Rating involves assessment of number of qualitative factors with a view to estimate the future earnings of the issuer. This requires intensive interactions with issuers management specifically relating plants, future outlook, competitive position and funding policies, plant visits facilitates understanding of the production process, assess the state of equipment and main facilities. These visits also help in assessing the progress of project under implementation.

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VI)

Preview Meeting After completing the analysis, the findings are discussed of length in the internal committee, comprising senior analyst of the credit rating agency. All the issue having a bearing on the rating are identified. At the stage, an opinion on the rating is also formed.

vii)

Rating Committee Meeting This is the final authority for assigning ratings. A brief presentation about the issuers business and the management is made by the rating team. All the issues identified during discussions in the internal committee are discussed. The rating committee also considers the recommendations of the internal committee for the rating. Finally, a rating is assigned and all the issues which influence the rating are clearly spelt out.

viii)

Rating Communication The assigned rating along with the key issue is communicated to the issuers top management for acceptance. The ratings which are not accepted are either rejected or reviewed. The rejected ratings are not disclosed and complete confidentiality is maintained.

ix)

Rating Reviews if the rating is not acceptable to the issuer, he has a right to appeal for a review of the rating these review are usually taken up only if the issuer provides fresh inputs on the issues that were considered for assigning the rating. Issuers response is presented to the rating

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committee. If the inputs are convincing, the committee can revise the initial rating decision. x) Sur Veillance It is obligatory on the part of the credit rating agency to monitor the accepted ratings over the tenure of the rated instruments. The ratings generally reviewed every year. Unless the circumstances of the case warrents an early review. In a surveillance review the initial rating could be retained or revised.

RATING METHODOLOGY ICRA considers all relevant factor that have a bearing on the future cash generation of the issuers. These factors includes:- Industry characteristics, competitive position of the issuer, operation efficiency, management quality, commitment to new projects and other associate companies and finding policies of the issuer. A detailed analysis of the past financial statements is made to assess the performance under the real world business.

Dynamics. Key areas considered in a rating analysis includes the following:

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i)

Business Risk Industry characteristics, performance and outlook, operating position, capacity, market share, distribution system, marketing networks etc., Technological aspects, business cycle, size and capital intensity.

ii)

Financial Risk Financial management capital structure, liquidity position, financial flexibility and cash flow adequacy, profitability, leverage, Interest

coverage, accounting polices and practices. Income recognition, inventory valuation are evaluated. iii) Management Assessment Background and history of the issuer, corporate strategy and philosophy, organizational structure, quality of management and

management capability under stress, personnel policies including succession planning. iv) Environment Analysis Regulatory environment, operating environment, national economic outlook, areas of special significance to the company, pending litigation, tax status, possibility of default risk under a variety of future scenarios.

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Rating Symbols For Debt Funds The ICRA Rating Symbols for Credit Risk Rating of Debt Funds and their implications are as follows: MfAAA Indicates highest quality. The investment quality is of highest grade and is similar to that of fixed income obligations of highest safety.

mfAA+ mfAA mfAAmfA+ mfA mfAmfBBB+ mfBBB mfBBBmfBB+ mfBB mfBBmfB+ mfB mfBIndicates poor quality. The investment quality is of lowest grade and is similar to that of fixed income obligations that are risk prone. Indicates inadequate quality. The investment quality is of low grade and is similar to that of fixed income obligations of inadequate safety. Indicates moderate quality. The investment quality is of medium grade and is similar to that of fixed income obligations of moderate safety. Indicates adequate quality. The investment quality is of upper medium grade and is similar to that of fixed income obligations of adequate safety. Indicates high quality. The investment quality is of high grade and is similar to that of fixed income obligations of high safety.

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The ICRA Rating Symbols for Market Risk Rating of Debt Funds and their implications are as follows: M1 M2 M3 M4 M5 Indicates very low sensitivity to changing interest rates and other market conditions. Indicates low sensitivity to changing interest rates and other market conditions. Indicates moderate sensitivity to changing interest rates and other market conditions. Indicates high sensitivity to changing interest rates and other market conditions. Indicates very high sensitivity to changing interest rates and other market conditions.

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Credit Analysis & Research Ltd

INTRODUCTION Credit Analysis & Research Ltd. (CARE), incorporated in April 1993, is a credit rating, information and advisory services company promoted by Industrial Development Bank of India (IDBI), Canara Bank, Unit Trust of India (UTI) and other leading banks and financial services companies. In all CARE has 15 shareholders CARE assigned its first rating in November 1993, and upto August 31, 2003, had completed 2339 rating assignments for an aggregate value of about Rs 3572 billion. CARE's ratings are recognised by the Government of India and all regulatory authorities including the Reserve Bank of India (RBI), and the Securities and Exchange Board of India (SEBI). CARE has been granted registration by SEBI under the Securities & Exchange Board of India (Credit Rating Agencies) Regulations,1999 The rating coverage has extended beyond industrial companies, to include public utilities, financial institutions, infrastructure projects, special purpose vehicles, state governments and municipal bodies. CARE's clients include some of the largest private sector manufacturing and financial services companies as well financial institutions of India. CARE is well equipped to rate all types of debt instruments like Commercial Paper, Fixed Deposit, Bonds, Debentures and Structured Obligations.
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CARE's Information and Advisory services group prepares credit reports on specific requests from banks or business partners, conducts sector studies and provides advisory services in the areas of financial restructuring, valuation and credit appraisal systems. CARE was retained by the Disinvestment Commission, Government of India, for assistance in equity valuation of a number of state owned companies and for suggesting divestment strategies for these companies.

PROMOTERS CARE was promoted by Industrial Development Bank of India (IDBI), Canara Bank, Unit Trust of India (UTI), Private Sector Banks and non-banking finance companies.

IDBI is one of the largest development banks in the world, with an asset base of INR 666 bn as on March 31, 2002.

UTI, largest mutual fund in India with an investible fund base of INR 496 bn as on June 28, 2002.

Canara Bank, one of the largest bank in India with an asset base of INR 715 bn as on March 31, 2002.

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OBJECTIVES OF CARE 1) The main objective of CARE is credit rating of all types of debt instruments both short term and long term. Its rating provides a guide to the investors as to the risk of timely payment of interest and principal on a particular debt instrument. 2) Provide information services on company, industry or any local body required by a business enterprises.

SERVICES OFFERED BY CARE 1) Credit Rating of Debt Instruments

CARE undertakes credit rating of all types of debt instruments both short term and long term. Credit Rating is an opinion on the relative ability and willingness of an issuer to make timely payments on specific debt or relative obligations over the life of the instrument. Credit rating thus provide a relative ranking of the credit quality of debt instruments. 2) Information Services The broad objective of the information service will be to be make available information on any company, local body, industry or sector required by a business enterprise value addition through incisive analysis, will enable the users of the services, like individual, mutual funds, investment companies, residents or non-residents, to make informed decisions regarding investment. CARE also

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prepares credit-reports on companies, for the benefit of banks and business counterparts. 3) Advisory Services For financing its infrastructures India is increasingly relying on private sector participation. CARE uses the expertise gained in evaluating the credit risk of projects in areas such as roads, ports, power and telecom to advise investors and banks about the regulatory framework. Advisory services also includes: a) Financial Restructuring The business risk faced by Indian companies increased following the liberalization of Indian economy in 1991. To compete in the changed environment, companies have had to reassess their capital structure. CARE uses its knowledge about various industry sectors to advise companies about the optimal capital structure and the financial restructuring options. b) Valuation CARE carries out enterprise valuations for company management perspective and existing business partners or large investors. The disinvestment commission, Government of India, has used CAREs services for valuing 20 State owned enterprise. c) Credit Appraisal System CAREs advisory division also publishes a monthly bulletin Debt Market revenue on the happenings in the debt market and general development in the economy in the previous month.

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RATING PROCESS The rating process takes about three to four weeks, depending on the complexity of the assignment and the flow of information from the client. Rating decisions are made by the Rating Committee. client Requests for rating Submits information and detailed schedules Interacts with the team, provides any additional data necessary for the analysis Care 1. Assigns rating team 2. The team analyses the information. 3. The team interacts with and analyses data submitted by the client 4. Internal committee previews analysis. 5. RATING COMMITTEE awards rating to client Accepts rating * , ** 6. Notification in press 7. Periodic Surveillance * : Client may ask for a review of the rating assigned and furnish additional information for the purpose. ** : Client has option not to accept the final rating in which case, CARE will not publish the rating or monitor it. The rating process for structured financing differs from the traditional rating process. Issuers of structured financings aim to structure appropriate credit protections to achieve a 'desired' credit rating. The role of CARE is to arrive at the level of credit enhancements required to achieve the desired rating. FREQUENCY OF RATING ACTIONS The rating assigned is communicated to the client along with a detailed rationale.
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responds to queries raised and clients, undertakes site visits,

Only ratings accepted by the clients are published and then monitored on a continuous basis over the life of the instrument. CARE has a comprehensive inhouse data base which facilitates surveillance of the various industries and companies operating in these industries Each rating is reviewed formally at least once a year, when analysts meet the issuer's management. A review can also be triggered by a major development in the company or in the industry, which may have a significant bearing on the credit-worthiness of the company. As a part of the review exercise, actual financial performance is analysed in the light of the estimates made earlier and deviations are examined. CARE puts the rating under Credit Watch, when any event or deviation from the expected trend has occurred or is expected and additional information is necessary to take rating action. The rating may be retained, upgraded or downgraded based on the changed prospects for the issuer. A rating change is at the absolute discretion of CARE, without concurrence of the client

RATING METHODOLOGY CARE undertakes rating exercise based on information provided by the company, in-house database and data from other sources that CARE considers reliable. CARE does not undertake unsolicited ratings. The primary focus of the rating exercise is to assess future cash generation capability and their adequacy to meet debt obligations in adverse conditions. The analysis therefore attempts to

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determine the long-term fundamentals and the probabilities of change in these fundamentals, which could affect the credit-worthiness of the borrower. The analytical framework of CARE's rating methodology is divided into two interdependent segments. The first deals with the operational characteristics The second with the financial characteristics. Besides quantitative factors, qualitative aspects like assessment of management capabilities play a very important role in arriving at the rating for an instrument. The relative importance of qualitative and quantitative components of the analysis varies with the type of issuer. Rating determination is a matter of experienced and holistic judgement, based on the relevant quantitative and qualitative factors affecting the credit quality of the issuer. Key parameters considered in the rating exercise for industrial companies include the following: Economy and Industry Risks CARE's rating analysis begins by assessing the characteristics of the industry/industries in which the borrower operates. Some important factors are: Effect of economic cycles on the industry. Business cycles in the industry and their severity. Tariff structure, threat from imports, price competitiveness of the domestic industry, and pace of technological change.

Basis of competition and key success factors.

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Structure of the industry; entry and exit barriers. Environmental and political factors.

Business Risks Against the backdrop of the issuer's industry, CARE then assesses the issuer's strengths and weaknesses vis-a-vis its competitors. Factors considered include: Size of the company and market share. Locational advantages and disadvantages. Supply of raw materials and marketing arrangements. Bargaining power of the issuer's suppliers and customers. Diversification of income sources. Technology.

Financial Risk Financial management philosophy and track record (capital structure, profitability, liquidity position, financial flexibility and cash flow adequacy).

Financial projections (with particular emphasis on achieveability of sales targets, the components of cash flow and ability to meet debt obligations as and when they fall due).

Free cash flows and their sensitivity to various economic, industrial and business risks over the term of the instrument.

Inter-firm comparison of the financial structure and profitability margins. Accounting policies and practices.

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Management Assessment Background and history of the issuer. Corporate strategy and philosophy. Quality of management and management capabilities under stress. Organisational structure, personnel policies including succession planning . Instrument Terms Rating may vary according to such factors as: Maturity of instrument. Nature of security - secured or unsecured, senior or subordinated, covenants and other provisions that may reduce the amount of recovery in case of default.

Repayment terms - moratorium period, repayment in instalments or bullet repayment etc.

Coupon rates - floating, fixed, zero coupon etc. Options - conversion into equity, put and call options etc. Credit Reinforcements through guarantees or the backing of financial assets.

The criteria discussed above are specific to industrial companies. Credit rating methodology for banks, financial institutions and non-banking finance companies, in addition to some factors discussed above, focuses on the CRAMEL model:

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Capital adequacy Resource raising ability Asset quality Management quality Earnings quality Liquidity

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RATING SYMBOLS USED BY CARE A. Long Term & Medium Term Instruments Symbols CARE AAA CARE AAA (FD)/(CD)/(SO)/ (CPS)/(RPS) Definition Instruments carrying this rating are considered to be of the best quality, carrying negligible investment risk. Debt service payments are protected by stable cash flows with good margin. While the underlying assumptions may change, such changes as can be visualised are most unlikely to impair the strong position of such instruments. Instruments carrying this rating are judged to be of high quality by all standards. They are also classified as high investment grade. They are rated lower than CARE AAA securities because of somewhat lower margins of protection. Changes in assumptions may have a greater impact or the long-term risks may be somewhat larger. Overall, the difference with CARE AAA rated securities is marginal. Instruments with this rating are considered upper medium grade instruments and have many favourable investment attributes. Safety for principal and interest are considered adequate. Assumptions that do not materialise may have a greater impact as compared to the instruments rated higher. Such instruments are considered to be of investment grade. They indicate sufficient safety for payment of interest and principal, at the time of rating. However, adverse changes in assumptions are more likely to weaken the debt servicing capability compared to the higher rated instruments. Such instruments are considered to be speculative, with inadequate protection for interest and principal payments. Instruments with such rating are generally classified susceptible to default. While interest and principal payments are being met, adverse changes in business conditions are likely to lead to default. Such instruments carry high investment risk with likelihood of default in the payment of interest and principal.

CARE AA CARE AA (FD)/(CD)/(SO)/ (CPS)/(RPS)

CARE A CARE A (FD)/(CD)/(SO)/ (CPS)/(RPS)

CARE BBB CARE BBB (FD)/(CD)/(SO)/ (CPS)/(RPS) CARE BB CARE BB (FD)/(CD)/(SO)/ CARE B CARE B (FD)/(CD)/(SO)/ (CPS)/(RPS) CARE C CARE C (FD)/(CD)/(SO)/ (CPS)/(RPS) CARE D

Such instruments are of the lowest category. They are

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CARE D (FD)/(CD)/(SO)/ (CPS)/(RPS) FD CD SO CPS RPS

either in default or are likely to be in default soon.

Fixed Deposit Certificate of Deposit Structured Obligations Convertible Preference Shares Redeemable Preference Shares

B. Short term instruments Definition Instruments would have superior capacity for repayment of short-term promissory obligations. Issuers of such instruments will normally be characterised by leading market positions in established industries, high rates of return on funds employed etc. Instruments would have strong capacity for repayment of shortterm promissory obligations. Issuers would have most of the characteristics as for those with PR-1 instruments but to a lesser degree. Instruments have an adequate capacity for repayment of shortterm promissory obligations. The effect of industry characteristics and market composition may be more pronounced. Variability in earnings and profitability may result in changes in the level of debt protection. Instruments have minimal degree of safety regarding timely payment of short-term promissory obligations and the safety is likely to be adversely affected by short-term adversity or less favourable conditions

Symbols

PR 1

PR 2

PR 3

PR 4

C. Credit Analysis Rating Definition Excellent debt management capability. Such companies will normally be characterised as leaders in the respective industries. Very good debt management capability. Such companies would be regarded as close to those rated CARE-1, but with a lower capability to withstand changes in assumptions.
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Symbols CARE 1 CARE 2

CARE 3

CARE 4 CARE 5

Good capability for debt management. Such companies are considered medium grade; assumptions that do not materialise may impair debt management capability in future. Barely satisfactory capability for debt management. The capacity to meet obligations is likely to be adversely affected by shortterm adversity or less favourable conditions. Poor capability for debt management. Such companies are in default or are likely to default in meeting their debt obligations.

D. Long Term Loans Definition Loans carrying this rating are considered to be of the best quality, carrying negligible investment risk. Debt service payments are protected by stable cash flows with good margin. While the underlying assumptions may change, such changes as can be visualised are most unlikely to impair the strong position of such loans. Loans carrying this rating are judged to be of high quality by all standards. They are also classified as high investment grade. They are rated lower than CARE AAA loans because of somewhat lower margins of protection. Changes in assumptions may have a greater impact or the long-term risks may be somewhat larger. Overall, the difference with CARE AAA rated loans is marginal. Loans with this rating are considered upper medium grade and have many favourable investment attributes. Safety for principal and interest are considered adequate. Assumptions that do not materialise may have a greater impact as compared to the loans rated higher. Such loans are considered to be of investment grade. They indicate sufficient safety for payment of interest and principal, at the time of rating. However, adverse changes in assumptions are more likely to weaken the debt servicing capability compared to the higher rated loans. Such loans are considered to be speculative, with inadequate protection for interest and principal payments. Loans with such rating are generally classified susceptible to default. While interest and principal payments are being met, adverse changes in business conditions are likely to lead to default. Such loans carry high investment risk with likelihood of default
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Symbols

CARE AAA (L)

CARE AA (L)

CARE A (L)

CARE BBB (L)

CARE BB (L)

CARE B (L) CARE C (L)

in the payment of interest and principal. Such loans are of the lowest category. They are either in CARE D (L) default or are likely to be in default soon. As instruments characteristics/loan characteristics or debt management capability could cover a wide range of possible attributes whereas rating is expressed only in limited number of symbols, CARE assigns '+' or '-' signs to be shown after the assigned rating (wherever necessary) to indicate the relative position within the band covered by the rating symbol. E. PERFORMANCE RATING OF PARALLEL MARKETERS These rating are on a scale of 1 to 4 as notified by Govt. of India. 1-Good 2- Satisfactory 3- Low Risk 4- High Risk F. COLLECTIVE INVESTMENT SCHEMES Symbols CARE 1 (CIS) Definition Schemes carrying this rating are considered to be very strong, with high likelihood of achieving their objectives and meeting the obligations to investors. Schemes carrying this rating are considered to be strong, with adequate likelihood of achieving their objectives and meeting the obligations to investors. They are rated lower than CARE 1 (CIS) rated schemes because of relatively higher risk. Such schemes are considered to have adequate strengths for achieving their objectives and meeting the obligations to investors. They are considered to be investment grade. Schemes carrying this rating are considered to have inadequate capability to achieve their objectives and meet the obligations to investors. They are considered to be speculative grade. Such schemes are considered weak and are unlikely to achieve their objectives and meet their obligations to investors. They have either failed or are likely to do so in the near future

CARE 2 (CIS)

CARE 3 (CIS)

CARE 4 (CIS)

CARE 5 (CIS)

A '+' or '-' sign may be shown after the assigned grading to indicate the relative position within the band covered by the grading symbol.

RECENT RATINGS GIVEN BY DIFFERENT AGENCIES

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BY CRISIL: LIC Housing Finance Ltd : AAA rating of Rs. 3220.1 mn Mortgage backed PTCs issued by India MBS 2002 Series I Trust backed by residential mortgage receivables originated by Citibank N.A. and sold to LIC Housing Finance Ltd, reaffirmed Lease Plan India Ltd. : AAA(fso) rating for Rs. 300 mn redeemable Non Convertible Debentures backed by a guarantee from LeasePlan Corporation N.V. put on RatingWatch with negative implications Ceebros Property Development (P) Ltd. - DA2 rating assigned to Developer Rating CitiFinancial Consumer Finance India Limited (erstwhile Associates India Financial Services Limited) : AAA rating with Stable Outlook assigned to NCD programme & outstanding AAA rating with Stable Outlook of NCD programmes reaffirmed, P1+ rating of STD programme reaffirmed Kotak Mahindra Bank Ltd. (erstwhile Kotak Mahindra Finance Ltd) : provisional ratings AAA(so) with Stable Outlook and P1+(so) rating assigned to PTCs of Rs. 500 mn, backed by corporate loan receivables under the securitisation programme of Kotak Mahindra Bank Limited.

BY ICRA:

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 ICRA has rated the claims paying ability of The New India Assurance Company Limited, National Insurance Company Limited, United India Insurance Company Limited, and now The Oriental Insurance Company Limited. All the four companies have been assigned the highest rating of iAAA indicating highest claim paying ability and fundamentally strong position. ICRA Assigns CR2 Grade to Petron Civil Engineering Ltd. ICRA has assigned a credit risk grading of mfAAA & performance grading of mf3+to PNDF. ICRA Assigns CR1 Grade to L&T (ECC).

BY CARE:
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 CARE has assigned AA+ rating to Tier II Subordinated Bond issues of Andhra Bank. CARE has assigned A+ [Single A plus] rating to the Tier II Subordinated debt issue of Bharat Overseas Bank Ltd. and also assigned PR1+ rating to STD issue. CARE reaffirms AAA(SO) rating to RMBS 2002 Series I Senior Class A PTCs originated by Dewan Housing Finance Corp. Ltd. CARE has reaffirmed PR1+(SO) rating assigned to STD issue of ITI Ltd. CARE has assigned BBB+ [Triple B plus] rating to proposed Tier II Subordinated Bond issue of The Dhanalakshmi Bank Ltd. CARE has assigned A- [Single A minus] rating to United Western Banks existing bond issue. CARE has assigned AA- [Double A minus] rating to the proposed NCD issue of SAW Pipes Ltd. CARE downgraded rating assigned to the outstanding NCD issue of EMCO Ltd. CARE has assigned AA- (SO) rating to the proposed bond issue of Visakhapatnam Municipal Corporation. CARE has assigned A [Single] rating to the proposed Tier II Subordinated Bond issue of Dena Bank. CARE has assigned AA [Double A] rating to the proposed Tier II Capital Bond issues of UCO Bank. CARE has reaffirmed PR1+ [PR one plus] rating assigned to CP programme of Secure Meters Ltd.

RESEARCH METHODOLOGY
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Research methodology is a way to systematically solve the problem. It is a game plan for conducting research. In this we describe various steps that are taken by the researcher, All progress is born of inquiry. Doubt is often better than overconfidence, for it leads to inquiry and inquiry leads to invention. Research in a common parlance is a search for knowledge. Research is an art of scientific and systematic investigation. Thus research comprises defining and redefining problems, formulating hypothesis or suggested solutions; collecting, organizing and evaluating data, making deductions and reaching conclusions. Research methodology is the arrangement of condition for collection and analysis of data in a manner that aims to combine relevance to the research purpose with economy in procedure. Research Methodology is the conceptual structure within which research is conducted. It constitutes the blueprint for the collection measurement and analysis of the data. Research methodology is a framework for the study and is used as a guide in collecting and analyzing the data. It is a strategy specifying which approach will be used for gathering and analyzing the data. It also includes time and cost budget since most studies are done under these two constraints. The research methodology include over all research design, the sampling procedure, the data collection method and analysis procedure

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1 OBSERVATION Broad area of research interest identified

3 PROBLEM DEFINITION Research Problem Delineated

4 THEORETICAL FRAMEWORK Variables clearly identified and labelled

5 GENERATION OF HYPOTHESES

6 SCIENTIFIC RESEARCH DESIGN

7 DATA COLLECTION, ANALYSIS AND INTERPRETATION

2 PRELIMINARY DATA GATHERING Interviewing Literature Survey

No

8 DEDUCTION Hypotheses substantiated? Research question answered? Yes

9 Report writing

10 Report Presentat ion

11 Managerial decision making

RESEARCH PROCESS

RESEARCH DESIGN
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At the outset may be noted that there are several ways of studying and tackling a problem. The formidable problem that follows the task of defining the research problem is the preparation of the design of research project popularly known as research design.

EXPLORATORY RESEARCH DESIGN Exploratory research design is termed as formulating research studies. The main purpose of study is that of formulating a problem. The major emphasis in such study is on discovery of new ideas and insights. As such the research design appropriate for such studies must be flexible enough to provide opportunity for considering different aspects of problem. DESCRIPTIVE AND DIAGNOSTIC RESEARCH DESIGN Descriptive research designs are those design which are concerned with describing the characteristics of particular individual or of the group. Whereas diagnostic research studies determine the frequency with which something occurs or its association with some else. In descriptive and diagnostic study the researcher must be able to define clearly what he wants to measure and must find adequate method for measuring it.
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EXPERIMENTAL RESEARCH DESIGN These are those studies where the researcher tests the hypothesis of casual relationship between variables. Such study requires procedure that will not only reduce biasness and increase reliability but will permit drawing iIALuence about causality. Usually experiments meets this requirement, hence these research designs are prepared for experiment.

SAMPLING AND SAMPLING DESIGN

Sampling method is that method in which data is collected from the sample of items selected from the population and conclusions are drawn from them. The method of selecting a sample out of a given population is called sampling. In other words, sampling denotes the selection of a part of the aggregate statistical material with a view to obtaining information about the whole. Nowadays, there are various methods of selecting a sample from a population in accordance with various needs.

BENTIFITS OF CREDIT RATING

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For different class of persons different benefits accrue from use of rated instruments. Such benefits directly accruing to investors through rated instruments are:

(A)

BENEFITS TO INVESTORS: Investors are benefited in very many ways if the corporate society in which

they intend to invest their saving has been rated by credit ratings agency. Some of the benefits are:

(i)

Safeguards against Bankruptcy: Credit Rating of an instrument done by credit rating agency gives an idea to the investors about degree of financial strength of the issuer company which enables him to decide about the investment. Highly rated instruments of a company give an assurance to the investors of safety of instrument and minimum risk of bankruptcy.

(ii)

Recognition of Risk: Credit rating provides investors with rating symbols which carry information in easily recognizable manner for the benefit of investors to perceive risk involved in instrument. In becomes easier for the investors by looking at the symbol to understand the worth of the issuer company rating symbol gives them the idea about the risk involved or the expected advantages from the investment.

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(iii)

CREDIBILITY OF ISSUER: Rating symbols assigned to a credit instrument gives a clue to the credibility of the issuer company. The rating agency is quite independent of the issuer company and has no business connections or otherwise any relationship with it or its board of directors etc.,

(iv)

Easy Understandability of Investments Proposals: Rating symbol can be understood by an investor which needs no analytical knowledge on his part. Investor can take quick decision about the investment take quick decision about the investment not to be made in any particular rated security of a company.

(v)

Saving of Resources: Investors rely upon credit rating. This relieves investors from the botheration of ----- about the fundamentals of a company, its actual strength financial standing, management details etc. The analytic of credit rating done by professional experts of the credit rating agency reposes confidence in him to rely upon the rating for taking investment decisions.

(iv)

Independence of Investment Decisions: For making investment decision, investors name to seek advice of financial intermediaries, the stock broken, merchant banker, the portfolio managers etc. about the good investment proposal , but for rated instruments, investors need not depend upon the advice of these financial intermediaries as the rating symbol assigned to a particular instrument

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suggests the credit worthiness of the instrument and indicates the degree of risk involved in it.

(vii)

Choice of Investments: Several alternative credit rating instruments are available at a particular point of time for making investment is the capital market and the investors can make choice depending upon their own risk profile and diversification plan.

(viii) Benefits of Rating Surveillance: Investors get the benefit of credit rating agencys on-going surveillance of the rating and rated instruments of different companies. The credit rating agency down grades the rating of any instrument if subsequently the companys financial strength declines or any event takes place. In addition to above investors have other advantages like: a) Quick understanding of the credit instruments and weight the rating with advantages from instruments. b) Quick decision making for investment and also selling or buying securities to take advantages of market conditions; or c) (B) Perceiving of default risk by the company.

BENEFITS OF RATING TO COMPANY: Company which had its credit instrument or security rated by a

credit rating agency is benefited in many ways:

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(i)

Lower cast of borrowing: A company with highly rated instrument has the opportunity to reduce the cost of borrowing from the public by quoting lesser interest on fixed deposits or debentures or bonds as the investors with low risk preference would come forward to invest in safe securities though yielding marginally lower rate of return.

(ii)

Wider Audience for borrowing: A company with a highly rated instrument can approach the investor extensively for the resource mobilization using the press media. Investors in different strata of the society could be attracted by higher rated instrument as the investors understands the degree of certainty about timely payment of interest and principal on a debt instrument with better rating.

(iii)

Rating as Marketing Tools: Companies with rated instrument improve their own image and avail of the rating as a marketing tool to credit better image in dealing with its customer feel confident in the utility products manufactured by the companies carrying higher rating for their credit instruments.

(iv)

Reduction of cost in Public Issues: A company with higher rated instruments is able to attract the investors and with least efforts can raise funds. Thus, the rated company

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can economies and minimize cost of public issues by controlling expenses on media coverage, conferences and other publicity stunts and gimmicks. Rating facilitates best pricing and timing of issues. (v) Motivation for Growth: Rating provides motivation to the company for growth as the promoters feels confident in their own efforts and are encouraged to undertake expansion of their operations or new projects with better image created through higher credit rating the company can mobilize funds from public and instructions or banks from self assessment of its own status which is subject to self-discipline and self-improvement, it can perceive and avoid sickness. (vi) Unknown issuer: Credit rating provides recognition to a relatively unknown issuer while entering into the market through wider investor base who rely on rating grate rather than on name recognition. (vii) Benefits to Broker and Financial Intermediaries: Highly rated instruments put the brokers at an advantage to make less efforts in studying the companies credit position to convince their clients to select an investment proposal. This enables brokers and other financial intermediaries to save time energy, cost and manpower in convincing their clients about investment in any particular instrument. DISADVANTAGES OF CREDIT RATING i) Biased rating and misrepresentations

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In the absence of quality rating, credit rating is a curse for the capital market industry, carrying out detailed analysis of the company, should have no analysis of the company, should have no links with the company or the person interested in the company so that their reports impartial and judicious recommendations for rating committee. The companies having lower grade rating do not advertise or use the rating while raising funds from the public. In such case the investor cannot get information about the risk ness of instrument and hence is at loss. (ii) Static Study Rating is done on the present and past historic data of the company and this is only a static study. Prediction of the companys health through rating is momentary and anything can happen after assignment of rating symbols to the company. Many changes takes place in economic environment, political situation, government policy framework which directly affect the working of a company. (iii) Concealment of material information Rating company might conceal material information from the investigating team of the credit rating company. In such cases quality or rating suffers and renders the rating unreliable. (iv) Rating is no guarantee for soundness of company Rating is done for a particular instrument to assess the credit risk but it should not be construed as a certificate for the matching quality of the company or its management. Independent views should be formed by the user public in general of the rating symbol.

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(v)

Human Bias Finding off the investigation team, at times, may suffer with human bias for unavoidable personal weakness of the staff and might affect the rating.

(vi)

Reflections of temporary adverse conditions Time factor affects rating, sometimes, misleading conclusions are deriving. For example, company in a particular industry might be temporarily in adverse condition but it is given a low rating. This adversely affects the companys interest.

(vii)

Difference in rating of two agencies Rating done by the two different credit rating agencies for the same instrument of the issuer company in many cases would not be identical. Such difference is likely to occur because of value judgment differences on qualitative aspects of the analysis in two different agencies.

CONCLUSIONS & RECOMMENDATIONS

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1.

There are two main reasons that the information about credit rating are not available to the investors a) As per the SEBI guidelines a company does not required a credit rating if the maturity period of the debt is less than 18 months. A company can therefore avoid a rating by issuing bonds with shorter maturities and rolling them over if necessary b) A company does not need a credit rating if it borrows money from the banks of the financial institutions.

2.

The credit rating agencies play a vital role by providing rating to different companys debts but there are no agencies, which can rate to these credit rating agencies.

3.

Credit rating given by different credit rating agencies are no so much reliable that any body can believe on it with closed eyes.

4.

Rating does not advise an investor to buy. The reason is that some factors, which are of significance to an investor in arriving at an investment decision, are not taken into account by rating agencies. These include reasonableness of the issue price or the coupon rate, secondary market liquidity and pre-payment risk. Further, different investors have different views regarding the level of risk to be taken and rating agencies can only express their views on the relative risk

5.

Company can fulfill their requirement by having link with these credit rating agencies.

6.

In these days it is important for a company to gain a rating because they can use it as a marketing tool.

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7.

Same instrument is being rated by different rating agencies therefore lots of money, time & effort is wasted for rating a single instrument.

CONCLUSIONS India is a developing country and in developing countries they are short of financial resources. Therefore, they are more dependent on the deposits of public. Credit rating agencies fulfill the requirement of those companies by giving rating to them. This helps the investors to help them to invest in safe securities and they can earn good return. Although these credit rating agencies having some disadvantages but these can be control by proper check by the government and then it can really be useful for the investors. In the nutshell, we can conclude that the future of credit rating in India is a very bright.

BIBLIOGRAPHY
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(a) Recommended websites: www.indiainfoline.com www.crisil.com www.carerrating.com www.icra.com http://money.rediff.com

(b) Books: BHALLA V.K. INVESTMENT MANAGEMENT, S Chand, 10th edition

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