Financial and Investment
obligations. These Credit Rating Agencies, thus, assist and
form an integral part of a broader programme of financialdisintermediation and broadening and deepening of thedebt market.Credit rating is used' extensively fqr evaluating debtinstruments. These include long-term instruments, likebonds and debentures as will as short-term obligations,like Commercial Paper. In addition, fured deposits, certificatesof deposits, inter-corporate deposits, structured obligationsincluding non-convertible portion of partly ConvertibleDebentures (PCDs) and preferences shares are also rated.The Securities and Exchange Board of India (SEBI), theregulator of Indian Capital Market, has now decided toenforce mandatory rating of all debt instruments irrespectiveof their maturity. Let us recall that earlier only debt issues
months maturity had to be compulsorily rated.
Credit Rating Agencies rate the aforesaid debt instrumentsof companies. They do not rate the companies, but theirindividual debt securities.
Rating is an opinion regardingthe timely repayment of principal and interest thereon; It isexpressed by assigning symbols, which have definitemeaning.
rating reflects default risk only, not the price risk associatedwith changes in the level or shape of the yield curve. It isimportant to emphasise that credit ratings are notrecommendations to invest. They do not take into accountmany aspects, which influence an investment decision. Theydo not, for example, evaluate the reasonableness of theissue price, possibilities of earning capital gains or take intoaccount the liquidity in the secondary market. Ratings alsodo not take into account the risk of prepayment by theissuer, or interest rate risk or exchange rate risks. Althoughthese are often related to the credit risk, the rating essentialis an opinion on the relative quality of the credit risk.. Ithas to be noted that there is no privity of contract betweenan investor and
rating agency and the investor is notprotected by the opinion of the rating agency.
Ratings arenot a guarantee against loss.
They are simply opinions,based on analysis of the risk of default. They are helpfulin making decisions based on particular preference of riskand return.
company, desirous of rating its debt instrument, needs toapproach
credit rating agency and pay
fee for thisservice. There is no compulsion on the.corporate sector to
obtain' or publicize the credit rating except for certaininstruments.
-company can use the rating as another
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