Project On Credit Rating

A PROJECT REPORT
ON
SIGNIFICANCE OF CREDIT RATING IN INDIA
BY
SHEEL KUMAR HANS
(MBA-Applied Manae!en"#
EN$NO$%&%'(''()*
SUBMITTED
TO
NIS ACADEMY+INDORE
(A di,i-i.n ./ NIS Spa0"a+ a Relian1e ADA G0.2p 1.!pan3#
PROJECT REPORT ON SIGNIFICANCE OF CREDIT RATING IN INDIA
CERTIFICATE OF PROJECT COMPLETION
This to certify that Mr. Sheel Kumar Hans a Bonafide student of Nis Academy
Institute of Management, Indore has completed the project title
SINGNIFICANCE OF CREDIT RATING IN INDIA4. The !roject "as
underta#en in degree of Master in Applied Management under $ni%ersity of
Annamalai during the academic year &''()&'*'.
He has carried out this project under my guidance and super%ision. His "or# is
found to +e satisfactory in all respects. He duly ac#no"ledged the source of
information and data used for the purpose of completion of the project report.
,e "ish him all the +est for his future endea%ors.
Mr. -ero. Banglo"ala !rof. A+hishe# Kumar /ain
01irector2 0!roject guide2
ACKNO5LEDGEMENT
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I ta#e this opportunity to pay my sincere than#s to all the people "ho ha%e helped
me directly or indirectly to complete my project successfully.
-irst of all, I "ould li#e to e3press my sincere gratitude to Mr. A+hishe# Kumar
/ain senior faculty of NIS Academy, "ho ga%e me the opportunity to carry out this
project.
I am e4ually grateful to Ms. Neha 5ha"ala, -aculty of Nis Academy, "ho in spite
of her +usy schedule pro%ided her %alua+le guidance and sufficient material needed
for the completion of my project. In fact, she has +een my guide throughout my
project.
I am also grateful to Mr. -ero. Banglo"ala, 1irector 0NIS Academy2, for granting
me an appro%al to underta#e this project, my sincere than#s to Mr. 6ajendra
7athor, for their in%alua+le guidance and support.
1ate8 Sheel Kumar Hans
!lace8 Indore MBA &
nd
year
-inancial Management
DECLARATION
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I here+y declare that the project entitled 6 Sini/i1an1e ./ C0edi" Ra"in in
India4 su+mitted for the degree of +usiness administration in Applied
Management is my original "or# and the project has not formed the +asis for the
a"ard of any degree, diploma, associate ship, fello"ship or similar other titles. It
has not +een su+mitted to any other uni%ersity or Institution for the a"ard of any
degree or diploma.
1ate8 Signature of the Student
!lace8 Name8
9nrolment no8 %&%'(''()*
INDE7
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INT7:1$5TI:N ';
5oncept of credit rating and features
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7easons for the origin of the credit rating agencies
-unctions and the "ay of "or#ing.
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5redit rating agencies in India and "or#ing procedures.
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BIBBI:67A!H< *?E
INTRODUCTION
In a mar#et, financial mar#ets play the role of efficient intermediary. They act as a
lin# +et"een sa%ers and in%estors, mo+ili.ing capital on one hand, and efficiently
allocating them +et"een competing users to the other hand. In addition to this an
in%estor can also +ase the in%estment decision on the grading offered +y credit
rating agencies.
C.n1ep" ./ C0edi" 0a"in-
A credit rating is a measure used +y creditors to determine ho" much they can trust
a certain +orro"er, "hether the +orro"er is an indi%idual, a corporation, or a
country. The credit rating is deri%ed using past financial data or the +orro"erGs
credit history. There are se%eral factors that can affect the credit rating of an
indi%idual including8
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the personGs a+ility to pay a loan F 7eflected +y the personGs salary and other
assets
the amount of credit in e3istence F This is "hat credit limits are for. If the
person is near his credit limit or has reached it is harder to get a loan. This
also reflects "hether the person is in the ha+it of going into de+t
credit history F Sho"s "hether the person ma#es payments on time. This
also reflects the persons spending and sa%ing patterns.
De/ini"i.n
The process of assigning a sym+ol "ith specific reference to the instrument +eing
rated, that acts as an indicator of the 5urrent opinion on relati%e capa+ility on the
issuer to ser%ice its de+t o+ligation in a timely fashion, is #no"n as credit rating.
According to the MoodyGs, A rating on the future a+ility and legal o+ligation of
the issuer to ma#e timely payments of !rincipal and interest on a specific fi3ed
income security. The rating measures the pro+a+ility that the issuer "ill default on
the security o%er its life, "hich depending on the instrument of the e3pected
monetary loss, should a default occur.
Acc to Standard H poorGs, it helps in%estors +y pro%iding
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An easily recogni.a+le, simple tool that couples a possi+ly
$n#no"n issuer "ith an informati%e and meaningful sym+ol of credit 4uality.
According to I57A, 5redit ratings are opinions on the relati%e capa+ility of
timely ser%icing of corporate de+t and o+ligations.
These are not recommendations to +uy or sellII.neither the accuracy nor are
completeness of the information guaranteed.
Fea"20e- ./ C0edi" 0a"in-
Specificity.
7elati%ity.
6uidance.
Not a 7ecommendation.
Broad !arameters.
No 6uarantee.
Duantitati%e and Dualitati%e.
F2n1"i.n ./ 10edi" 0a"in-
Superior Information
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Bo" cost information
Basis for proper ris#) return trade off
Healthy discipline on corporate +orro"ers
-ormulation of pu+lic policy guidelines on institutional in%estment
E8e01i-in 0e-p.n-i9ili"3
5redit is a part of e%eryday life. It ena+les people to +uy e%erything from
necessities to lu3uries. Ho"e%er, if you do not e3ercise responsi+ility in managing
your finances you "ill find that the concept of credit "ill cripple you instead of
empo"er you.
To ma#e sure you e3ercise responsi+ilities al"ays #eep trac# of your purchases,
loans, and o%erall e3penses. Keep yourself informed and do not fall for the +uy
no" pay laterJ mentality. Buy only "hat you need and if +uying for lu3uries ma#es
sure that it is planned and not a spontaneous +uy. !ay your +ills on time and do not
allo" yourself to go in de+t.
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In the end +eing responsi+le "ill not only yield in an e3cellent credit history +ut
"ill also ensure that you "ill ha%e more options for finding money fast in case you
need it in the future.
ORIGIN OF CREDIT RATING
:rigin in *(@' follo"ing the crisis in *(=;
The -irst Merchantile 5redit Agency "as set up in Ne" <or# +y Bouis
Tappan in *(@*.
-irst rating guide "as pu+lished in *(>?
/ohn Broad Street set up the similar agency in *(@? "hich pu+lished its
rating +oo#s in *(>;
In *?'' /ohn Moody founded MoodyGs In%estors Ser%ices and in *?'?
!u+lished his manual of 7ail 7oad Ser%icesJ
Hi-".03 ./ C0edi" Ra"in
The initial rating e3ercise "as started +y Henry !oor "ho pu+lished financial
statistics of 7ailroad companies in *(E'. In addition to his pu+lishing +usiness,
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/ohn Moody 0MoodyGs In%estors Ser%ices2 started pu+lishing ratings for railroad
+onds from the year*?'?.
The rating acti%ity got a +oost post 6reat 1epression of *?== "hen $S
6o%ernment 5ontroller of 5urrency directed the +an#s in $SA to purchase +onds
rated BBBKBaa and a+o%e and the rest came to +e #no"n as Ljun#G +onds. At
present in $S mar#ets all commercial +onds are in%aria+ly rated.
IMPETUS
The credit rating system originated in the $SA in se%enties.
The high le%els of default, "hich occurred after 6reat 1epression, in the $S
capital mar#ets, ga%e the impetus for the gro"th of credit rating.
The default of M(& million of commercial paper +y !enn 5entral in the year *?;'.
and the conse4uent panic of in%estor in commercial papers, resulted in massi%e
defaults and li4uidity crisis.
$S made rating Mandatory for institutions such as 6o%t !ension funds, and
Insurance companies.
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THE CREDIT RATING SYSTEM
5redit rating has facilitated authorities around the "orld to issue mandatory rating
re4uirements. -or instance, specific rules restrict the of ne" issues that are rated
+elo" a particular grade.
6ro"th -actors
5redi+ility and Independence.
5apital Mar#et Mechanism.
1isclosure re4uirements.
5redit 9ducation.
5reation of 1e+t Mar#et.
Major issues
In%estment Cs speculati%e 6rades.
5ontinuous Monitoring.
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6rade Sur%eillance.
7ating 5eiling.
9%aluation of Bine.
:"nership 5onsideration.
In%estment 6rade 7atings
SH! and :thers
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CRDIT SCORE

5redit score is a num+er "hich lenders use to assess the ris# of e3tending credit to
you.
In other "ords, credit score is an estimate of the ris# that a +an# "ill ta#e to lend
you money. It is also a snapshot of your credit file at a certain point in time.
The -I5: score is de%eloped +y -air Isaac 5orporation and +ased on credit files
maintained +y consumer credit reporting agencies. It is "idely used +y +an#s,
credit unions, insurance agencies, financing companies and other lenders.
Ho"e%er, it is not the only factor determining your a+ility to o+tain credit. :ther
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important factors include8 income, employment history, pre%ious and current
relationships "ith a lender, to name a fe". 9ach lender decides on its o"n "hat
"ill +e ta#en into account "hen it considers lending money to you.
Credit score is a mathematical formula "hich ta#es into account many different
pieces of information and compares it "ith hundreds of thousands of other credit
reports from the past, to create patterns, "hich identify statistical possi+ility of
future credit ris#.
9%ery person "ith a credit file has three credit scores +ased on
information from three credit +ureaus.
They are not e3actly the same, +ut for most people they "ill +e only slightly
different.
If your credit report does not contain enough information, your score cannot +e
calculated as there arenNt enough itemsJ to +e compared "ith generated patterns.
In that case, a different formula is used to pro%ide your credit rating to a lender.
It is important to remem+er that "hile most lenders use -I5: score, they decide
"hat score is accepta+le for a particular loan or credit product along "ith other
information.
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-or e3ample, a certain credit score might +e too lo" for one +an# to appro%e and
open a ne" credit card account, +ut high enough for another +an# to do so.
Tips to impro%e and maintain a good credit score
*. 5ollect credit report from 93perian, Trans$nion and 94uifa3. 7e%ie" the report
for any error or mista#e.
&. Try to reduce the de+t of those "ith high interest.
=. If not in full, try to ma#e payment of minimum +alance due of credit cards.
@. !ay all you +ills on time. Bate payment can do a serious damage to your report.
>. A%oid credit from financial companies. It can negati%ely affect your score.
E. 1onNt apply for too many credit accounts.5redit score determine your financial
status, so one should al"ays try to #eep it as good as possi+le and a%oid any such
actions that can affect it and result a lo" score.
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CREDIT RATING AGENCY
A credit ratings agency is a company that assigns credit ratings to institutions that
issue de+t o+ligations 0i.e. assets +ac#ed +y recei%a+les on loans, such as
mortgage)+ac#ed securities. These institutions can +e companies, cities, non)profit
organi.ations, or national go%ernments, and the securities they issue can +e traded
on a secondary mar#et.
A credit rating measures credit "orthiness, or the a+ility to pay +ac# a loan. It
affects the interest rate applied to loans ) interest rates %ary depending on the ris#
of the in%estment. A lo")rated security has a high interest rate, in order to attract
+uyers to this high)ris# in%estment. 5on%ersely, a highly)rated security 0carrying a
AAA rating, li#e a municipal +ond "hich is +ac#ed +y sta+le go%ernment
agencies2 has a lo"er interest rate, +ecause it is a lo")ris# in%estment. These lo")
ris# +onds are a%aila+le to a "ide range of in%estors, "hereas high)ris# +onds cater
to a narro" in%esting demographic.
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5ompanies that issue credit scores for indi%iduals are usually called credit +ureaus
and are distinct from corporate ratings agencies.
De/ini"i.n
"Cre!" Ra"!#g Age#$%" &ea#' a#% $(&&er$!a) $(#$er# e#gage
!# "*e +,'!#e'' (- $re!" ra"!#g (- a#% e+" (+)!ga"!(# (r (- a#%
.r(/e$" (r .r(gra&&e re0,!r!#g 1#a#$e2 3*e"*er !# "*e -(r& (-
e+" (r ("*er3!'e2 a# !#$),e' $re!" ra"!#g (- a#% 1#a#$!a)
(+)!ga"!(#2 !#'"r,&e#" (r 'e$,r!"%2 3*!$* *a' "*e .,r.('e (-
.r(4!!#g a .("e#"!a) !#4e'"(r (r a#% ("*er .er'(# a#% !#-(r&a"!(#
.er"a!#!#g "( "*e re)a"!4e 'a-e"% (- "!&e)% .a%&e#" (- !#"ere'" (r
.r!#$!.a)5 0Section E>0&*2 of -inance Act, *??@ as amended2
Bi T:0ee
The top three credit ratings agencies in the $nited States are8
MoodyNs
Standard H !oorNs
-itch 7atings
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In the "a#e of recent credit)mar#et turmoil, some niche agencies are pic#ing up
mar#et share or at least additional %isi+ility. Among the niche agencies are 1B7S
and 9gan)/ones.
C0edi" 0a"in aen1ie-
Agencies that assign credit ratings for corporations include8
M. Best 0$.S.2
Bay corp. Ad%antage 0Australia2
1ominion Bond 7ating Ser%ice 05anada2
5hina 5redit Information Ser%ice 05hina2
-itch 7atings 0$.S.2
/apan 5redit 7ating Agency 0/apan2
MoodyNs In%estors Ser%ice 0$.S.2
Standard H !oorNs 0$.S.2
7ating Agency Malaysia 0Malaysia2
9gan)/ones 7ating 5ompany 0$.S.2
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Rea-.n- /.0 ":e .0iin ./ 10edi" 0a"in aen1ie-
the increasing role of capital and money mar#ets conse4uent to
disintermediation.
Increased securiti.ation of +orro"ing and lending conse4uent to
disintermediation.
6lo+ali.ation of the credit mar#et.
The continuing gro"th of information technology.
The gro"th of confidence in the efficiency of the mar#et mechanism.
the "ithdra"al of 6o%t safety nets and the trend to"ards pri%ati.ation
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GRO5TH OF CRDIT RATING AGENCIES
*(@*) Merchantile 5redit Agency 0$SA2
*?'') MoodyGs In%estors Ser%ices 0$SA2
*?*E) !oor !u+lishing 5ompany 0$SA2
*?&&) Standard Statistics 5ompany 0$SA2
*?&@) !itch !u+lishing 5ompany 0$SA2
*?@*) Standard and !oor 0$SA2
*';@) Thomson Ban# ,atch 0$SA2
*?;>) /apanese Bond 7ating Institution 0/A!AN2
*?(;) 57ISIB +y I5I5I 0IN1IA2
*??*) I57A +y I-5I 0IN1IA2
*??@) 5A79 +y I1BI 0IN1IA2
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Ra"in G0ade-
9ach rating agency has de%eloped its o"n system of rating grades for so%ereign
and corporate +orro"ers. -itch 7atings de%eloped a rating grade system in *?&@
that "as adopted +y Standard H !oorNs. MoodyNs grading is slightly different.
MoodyNs sometimes argues that their ratings em+ed a conceptually superior
approach that directly considers not only the li#elihood of default +ut also the
se%erity of loss in the e%ent of default.

Long Term Credit Rankings
-itch 7atings and Standard H !oorNs use a system of letter sliding from the +est
rating OAAAO to O1O for issuers already defaulting on payments.
In%estment 6rade
AAA 8 +est 4uality +orro"ers, relia+le and sta+le "ithout a
foreseea+le ris# to future payments of interest and principal
AA 8 %ery strong +orro"ersP a +it higher ris# than AAA
A 8 upper medium gradeP economic situation can affect finance
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BBB 8 medium grade +orro"ers, "hich are satisfactory at the
moment
Non)In%estment 6rade
BB 8 lo"er medium grade +orro"ers, more prone to changes in the
economy, some"hat speculati%e
B 8 lo" grade, financial situation %aries noticea+ly, speculati%e
CCC 8 poor 4uality, currently %ulnera+le and may default
CC 8 highly %ulnera+le, most speculati%e +onds
C 8 highly %ulnera+le, perhaps in +an#ruptcy or in arrears +ut still
continuing to pay out on o+ligations
CI 8 past due on interest
R 8 under regulatory super%ision due to its financial situation
SD 8 has selecti%ely defaulted on some o+ligations
D 8 has defaulted on o+ligations and SH! +elie%es that it "ill
generally default on most or all o+ligations
NR 8 not rated
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MoodyNs grading follo"s a different system
In%estment 6rade
Aaa8 :+ligations rated Aaa are judged to +e of the highest 4uality,
"ith the Osmallest degree of ris#O
Aa*+ Aa;+ Aa<8 :+ligations rated Aa are judged to +e of high 4uality
and are su+ject to %ery lo" credit ris#, +ut Otheir suscepti+ility to
long)term ris#s appears some"hat greaterO.
A*+ A;+ A<8 :+ligations rated A are considered upper)medium grade
and are su+ject to lo" credit ris#, +ut that ha%e elements Opresent that
suggest a suscepti+ility to impairment o%er the long termO.
Baa*+ Baa;+ Baa<8 :+ligations rated Baa are su+ject to moderate
credit ris#. They are considered medium)grade and as such Oprotecti%e
elements may +e lac#ing or may +e characteristically unrelia+leO.
Non)In%estment 6rade
Ba*+ Ba;+ Ba<8 :+ligations rated Ba are judged to ha%e
O4uestiona+le credit 4uality.O
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B*+ B;+ B<8 :+ligations rated B are considered speculati%e and are
su+ject to high credit ris#, and ha%e Ogenerally poor credit 4uality.O
Caa*+ Caa;+ Caa<8 :+ligations rated 5aa are judged to +e of poor
standing and are su+ject to %ery high credit ris#, and ha%e
Oe3tremely poor credit 4uality. Such +an#s may +e in default...O
Ca8 :+ligations rated 5a are highly speculati%e and are Ousually in
default on their deposit o+ligationsO.
C8 :+ligations rated 5 are the lo"est rated class of +onds and are
typically in default, and Opotential reco%ery %alues are lo"O.
:thers
5R8 ,ithdra"n 7ating
NR8 Not 7ated
P8 !ro%isional
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Re1en" de,el.p!en"-
Since the +eginning of the credit crunch in early &''; rating agencies ha%e come
under fire for their high ratings of mortgage +ac#ed securities 0MBS2 that did not
reflect the financial sta+ility of the +orro"ers. This has also reopened a discussion
"hether rating agencies, "hich get paid +y +orro"ers for their rating, are not in a
conflict of interest.
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De-10ip"i.n M..d3=>- S?P Fi"1:
Ma3imum Safety Aaa AAA AAA
High grade Aa* AAQ AAQ
High grade Aa& AA AA
High grade Aa= AA) AA)
Higher medium 6rade A* AQ AQ
Higher medium 6rade A& A A
Higher medium 6rade A= A) A)
Bo"er medium 6rade Baa* BBBQ BBBQ
Bo"er medium 6rade Baa& BBB BBB
Bo"er medium 6rade Baa= BBB) BBB)
Speculati%e Ba* BBQ BBQ
Speculati%e Ba& BB BB
Speculati%e Ba= BB) BB)
Highly Speculati%e B* BQ
Highly Speculati%e B& B B
Highly Speculati%e B= B)
Su+stantially ris#y 555Q 555Q
Su+stantially ris#y 5aa 555 555
May +e in default 5a 55 55
93tremely Speculati%e 5 5 5
Income +onds ) not paying interest 5I
1efault 111
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1efault 11
1efault 1 1
CRITISISM FOR CREDIT RATING AGENCIES
5redit rating agencies ha%e +een su+ject to the follo"ing criticisms8
5redit rating agencies d. n." d.@n0ade 1.!panie- p0.!p"l3 en.2:.
-or e3ample, 9nronNs rating remained at in%estment grade four days +efore
the company "ent +an#rupt, despite the fact that credit rating agencies had
+een a"are of the companyNs pro+lems for months.
R>SRES
Some empirical
studies ha%e documented that yield spreads of corporate +onds start to
e3pand as credit 4uality deteriorates +ut +efore a rating do"ngrade, implying
that the mar#et often leads a do"ngrade and 4uestioning the informational
%alue of credit ratings.
R;S
This has led to suggestions that, rather than rely on
57A ratings in financial regulation, financial regulators should instead
re4uire +an#s, +ro#er)dealers and insurance firms 0among others2 to
use credit spreads "hen calculating the ris# in their portfolio.
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Barge corporate rating agencies ha%e +een critici.ed for ha%ing ".. /a!ilia0
a 0ela"i.n-:ip @i": 1.!pan3 !anae!en", possi+ly opening themsel%es
to undue influence or the %ulnera+ility of +eing misled.
R(S
These agencies
meet fre4uently in person "ith the management of many companies, and
ad%ise on actions the company should ta#e to maintain a certain rating.
-urthermore, +ecause information a+out ratings changes from the larger
57As can spread so 4uic#ly 0+y "ord of mouth, email, etc.2, the larger
57As charge de+t issuers, rather than in%estors, for their ratings. This has
led to accusations that these 57As are plagued +y conflicts of interest that
might inhi+it them from pro%iding accurate and honest ratings. At the same
time, more generally, the largest agencies 0MoodyNs and Standard H !oorNs2
are often seen as agents of glo+ali.ation andKor OAnglo)AmericanO mar#et
forces, that dri%e companies to consider ho" a proposed acti%ity might
affect their credit rating, possi+ly at the e3pense of employees, the
en%ironment, or long)term research and de%elopment. These accusations are
not entirely consistent8 on one hand, the larger 57As are accused of +eing
too co.y "ith the companies they rate, and on the other hand they are
accused of +eing too focused on a companyNs O+ottom lineO and un"illing to
listen to a companyNs e3planations for its actions.
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The lo"ering of a credit score +y a 57A can create a ,i1i.2- 131le, as not
only interest rates for that company "ould go up, +ut other contracts "ith
financial institutions may +e affected ad%ersely, causing an increase in
e3penses and ensuing decrease in credit "orthiness. In some cases, large
loans to companies contain a clause that ma#es the loan due in full if the
companiesN credit rating is lo"ered +eyond a certain point 0usually a
Ospeculati%eO or Ojun# +ondO rating2. The purpose of these Oratings triggersO
is to ensure that the +an# is a+le to lay claim to a "ea# companyNs assets
+efore the company declares +an#ruptcy and a recei%er is appointed to
di%ide up the claims against the company. The effect of such ratings triggers,
ho"e%er, can +e de%astating8 under a "orst)case scenario, once the
companyNs de+t is do"ngraded +y a 57A, the companyNs loans +ecome due
in fullP since the trou+led company li#ely is incapa+le of paying all of these
loans in full at once, it is forced into +an#ruptcy 0a so)called Odeath spiralO2.
These rating triggers "ere instrumental in the collapse of 9nron. Since that
time, major agencies ha%e put e3tra effort into detecting these triggers and
discouraging their use, and the $.S. Securities and 93change 5ommission
re4uires that pu+lic companies in the $nited States disclose their e3istence.
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Agencies are sometimes accused of +eing .li.p.li-"-,
R?S
+ecause +arriers to
mar#et entry are high and rating agency +usiness is itself reputation)+ased
0and the finance industry pays little attention to a rating that is not "idely
recogni.ed2. :f the large agencies, only MoodyNs is a separate, pu+licly held
corporation that discloses its financial results "ithout dilution +y non)ratings
+usinesses, and its high profit margins 0"hich at times ha%e +een greater
than >' percent of gross margin2 can +e construed as consistent "ith the type
of returns one might e3pect in an industry "hich has high +arriers to entry.
5redit 7ating Agencies :a,e !ade e00.0- ./ A2d!en" in 0a"in
-"021"20ed p0.d21"-, particularly in assigning AAA ratings to structured
de+t, "hich in a large num+er of cases has su+se4uently +een do"ngraded or
defaulted. The actual method +y "hich MoodyNs rates 51:s has also come
under scrutiny. If default models are +iased to include ar+itrary default data
and O7atings -actors are +iased lo" compared to the true le%el of e3pected
defaults, the MoodyGs RmethodS "ill not generate an appropriate le%el of
a%erage defaults in its default distri+ution process. As a result, the percei%ed
default pro+a+ility of rated tranches from a high yield 51: "ill +e
incorrectly +iased do"n"ard, pro%iding a false sense of confidence to rating
32 | P a g e
agencies and in%estors.O
R*'S
. Bittle has +een done +y rating agencies to
address these shortcomings indicating a lac# of incenti%e for 4uality ratings
of credit in the modern 57A industry. This has led to pro+lems for se%eral
+an#s "hose capital re4uirements depend on the rating of the structured
assets they hold, as "ell as large losses in the +an#ing industry.
R**SR*&SR*=S
AAA
rated mortgage securities trading at only (' cents on the dollar, implying a
greater than &'T chance of default, and (.?T of AAA rated structured
51:s are +eing considered for do"ngrade +y -itch, "hich e3pects most to
do"ngrade to an a%erage of BBB to BB). These le%els of reassessment are
surprising for AAA rated +onds, "hich ha%e the same rating class as $S
go%ernment +onds.
R*@S R*>S
. Most rating agencies do not dra" a distinction
+et"een AAA on structured finance and AAA on corporate or go%ernment
+onds 0though their ratings releases typically descri+e the type of security
+eing rated2. Many +an#s, such as AI6, made the mista#e of not holding
enough capital in reser%e in the e%ent of do"ngrades to their 51: portfolio.
The structure of the Basel II agreements meant that 51:s capital
re4uirement rose Ne3ponentiallyN. This made 51: portfolios %ulnera+le to
multiple do"ngrades, essentially precipitating a large margin call. -or
e3ample under Basel II, a AAA rated securiti.ation re4uires capital
allocation of only '.ET, a BBB re4uires @.(T, a BB re4uires =@T, "hilst a
33 | P a g e
BB 0)2 securiti.ation re4uires a >&T allocation. -or a num+er of reasons
0fre4uently ha%ing to do "ith inade4uate staff e3pertise and the costs that
ris# management programs entail2, many institutional in%estors relied solely
on the ratings agencies rather than conducting their o"n analysis of the ris#s
these instruments posed. 0As an e3ample of the comple3ity in%ol%ed in
analy.ing some 51:s, the A4uarius 51: structure has >* issues +ehind the
cash 51: component of the structure and another *&? issues that ser%e as
reference entities for M*.@ +illion in 51S contracts for a total of *('. In a
sample of just @' of these, they had on a%erage E>'' loans at origination.
!rojecting that num+er to all *(' issues implies that the A4uarius 51: has
e3posure to a+out *.& million loans.2
7atings agencies, in particular -itch, MoodyNs and Standard and !oors ha%e
+een implicitly allo"ed +y the go%ernment to fill a 4uasi)regulatory role, +ut
+ecause they are for)profit entities their incenti%es may +e misaligned.
5onflicts of interest often arise +ecause the rating agencies are paid +y the
companies issuing the securities U an arrangement that has come under fire
as a disincenti%e for the agencies to +e %igilant on +ehalf of in%estors. Many
mar#et participants no longer rely on the credit agencies ratings systems,
34 | P a g e
e%en +efore the economic crisis of &'';)(, preferring instead to use credit
spreads to +enchmar#s li#e Treasuries or an inde3. Ho"e%er, since the
-ederal 7eser%e re4uires that structured financial entities +e rated +y at least
t"o of the three credit agencies, they ha%e a continued o+ligation.
Many of the structured financial products that they "ere responsi+le for
rating, consisted of lo"er 4uality NBBBN rated loans, +ut "ere, "hen pooled
together into 51:s, assigned an AAA rating. The strength of the 51: "as
not "holly dependent on the strength of the underlying loans, +ut in fact the
structure assigned to the 51: in 4uestion. 51:s are usually paid out in a
N"aterfallN style fashion, "here income recei%ed gets paid out first to the
highest tranches, "ith the remaining income flo"ing do"n to the lo"er
4uality tranches i.e. VAAA. 51:s "ere typically structured such that AAA
tranches "hich "ere to recei%e first lien 0claim2 on the BBB rated loans cash
flo"s, and losses "ould tric#le up from the lo"est 4uality tranches first.
5ash flo" "as "ell insulated e%en against hea%y le%els of home o"ner
defaults. 5redit rating agencies only accounted for a W>T decline in national
housing prices at "orst, allo"ing for a confidence in rating the many of
these 51:s that had poor underlying loan 4ualities as AAA. It did not help
35 | P a g e
that an incestuous relationship +et"een financial institutions and the credit
agencies de%eloped such that, +an#s +egan to le%erage the credit ratings off
one another and NshopN around amongst the three +ig credit agencies until
they found the +est ratings for their 51:s. :ften they "ould add and
remo%e loans of %arious 4uality until they met the minimum standards for a
desired rating, usually, AAA rating. :ften the fees on such ratings "ere
M='',''' ) M>'',''', +ut ran up to M* million.
As part of the Sar+anes):3ley Act of &''&, 5ongress ordered the $.S. S95 to
de%elop a report, titled 7eport on the 7ole and -unction of 5redit 7ating Agencies
in the :peration of the Securities Mar#ets detailing ho" credit ratings are used in
$.S. regulation and the policy issues this use raises. !artly as a result of this report,
in /une &''=, the S95 pu+lished a Oconcept releaseO called 7ating Agencies and
the $se of 5redit 7atings under the -ederal Securities Ba"s that sought pu+lic
comment on many of the issues raised in its report. !u+lic comments on this
concept release ha%e also +een pu+lished on the S95Ns "e+site.
In 1ecem+er &''@, the International :rgani.ation of Securities
5ommissions 0I:S5:2 pu+lished a 5ode of 5onduct for 57As that, among other
things, is designed to address the types of conflicts of interest that 57As face. All
36 | P a g e
of the major 57As ha%e agreed to sign on to this 5ode of 5onduct and it has +een
praised +y regulators ranging from the 9uropean 5ommission to the $.S.
Securities and 93change 5ommission.
CREDIT RATING IN INDIA
5redit 7ating Information Ser%ice of India "as set up in *?(;.
In%estment Information and 5redit 7ating Agency of India "as promoted in
*??*.
37 | P a g e
5redit Analysis and 7esearch Bimited "as floated in *??=.
Ra"in Me":.d.l.3
The first analysis relates to the past performance of the company. The past
performance of the company H assessment of its prospects. The industry is studied
+y analy.ing demand H supply gro"th, nature H +asis of competition, go%t. policy
for the company H the effect of change in go%t. policy on the future of the
company. The position of the company "ithin the industry is studied to understand
ho" the company "ould fare in the future.
In e%aluating the ratings, crisil employs +oth 4ualitati%e H 4uantitati%e criteria.
CREDIT RATING AGENCIES IN INDIA
5redit rating information ser%ice ltd. 057ISIB2
In%estment Information and credit rating Agency of India 0I57A2
5redit Analysis and 7esearch 05A792
1uff p helps credit rating p%t. ltd. 0157 India2
38 | P a g e
:nida Indi%idual 5redit 7ating Agency 0:NI57A2
Credit Rating Information Services of India Ltd (CRISIL
57ISIB, the first credit agency "as floated on jan)**??(.
It "as started jointly +y I5I5I H $TI "ith an e4uity capital of 7s)@ cr. 9ach of
them holds *(T of the capital. :ther contri+utions to the capital are as follo"s8
*. Asian 1e%elopment +an# *>T
&. BI5, 6I5 H SBI >T each
=. H1-5 E.&T
@. Ban#s 0Indian2 *?.&>T
5. Ban#s 0-oreign2 Balance
:+jecti%es8
To assist +oth indi%idual H institutional in%estors in ma#ing in%estment
decisions in fi3ed income securities.
To ena+le corporate to raise large amounts at fair cost from a "ide
spectrum of in%estors.
39 | P a g e
To ena+le intermediaries in placing their de+t instruments "ith in%estors
+y pro%iding them
!rocess of 5redit 7ating8
-ollo"ing factors are ta#en into account "hile assigning specific ratings to the
issues.
a2 -inancial Analysis8
i. Duality of accounting such as profita+ility aspects, method
of income recognition, %aluation of in%entory, auditorsG
comments etc.
ii. Ade4uate cash flo"s
iii. -inancial fle3i+ility.
+2 Business Analysis8
i. Industry ris#,
ii. !roduct demand,
iii. Bocational ad%antages, a%aila+ility of s#illed la+our,
transportation etc.
c2 Management 5ompetency8 !hilosophy, outloo#, capacity, fle3i+ility of the
management
40 | P a g e
d2 7egulatory frame"or#.
57ISIB 7ating Sym+ols8
!ref. shares8 !fJ
-i3ed 1eposits8 -J
Short Term Instruments8 !J
1e+entures8
AAAJ8 Highest safety of timely payment of interest and principal.
AAJ8 :ffer high safety of interest and principal. 1iffer in safety from
AAA only marginally.
AJ8 Ade4uate safetyP ho"e%er changes in circumstances can affect
ad%ersely more than those in higher rated categories.
41 | P a g e
BBBJ8 Sufficient safety, ho"e%er change in circumstances li#ely to lead a
"ea#ened capacity.
BBJ8 Inade4uate safety +ut less suscepti+le to default than other
speculati%e grade de+entures.
BJ8 6reater suscepti+ility to default.
5J8 Culnera+le to default.
1J8 In default and in arrears of interest or principal or e3pected to
default on maturity.
Additionally 57ISIB also uses 0Q2 or 0)2 signs to denote higher or lo"er
safety "ithin the grade 0AAQ, AA) etc.2.
AAAKAA are considered High In%estment 6rades.
AKBBB are considered In%estment 6rades.
BBKBK5K1 are considered speculati%e grade.
In case of short term instruments 57ISIB uses sym+ols as !*K!&K!=K!@K!> to
denote %arious degrees attached to the instruments.
42 | P a g e
Investment Information and Credit Rating Agenc! of India (IICRA"
The iicra "as set up +y industrial finance corporation of india on *Eth jan *??*.it
is a pu+lic ltd company "ith an authori.ed share capital of 7s *'* cr. The initial
paid up capital of rs =.>' cr. Is su+scri+ed +y I-5, $TI, BI5, 6I5, SBI H *; other
+an#. II57A started its operation from *>thmar. *??*. during ?@)?> II57A rated
&*& de+t instruments co%ering a de+t %olume
of 7s. >=@= crores. 5umulati%e num+er of instruments co%ering a de+t %olume of
7s *;,E=( crores. I57A "as set up +y I5I5I and other leading in%estment
institutions and commercial +an#s and financial ser%ices companies.
7ating Scales8
Bong Term 01e+entures, Bonds, !ref. Shares28
B AAA Highest safety.
B AAQ X
B AAA X High safety
B AA) X
43 | P a g e
BAQ X
BA X Ade4uate safety
BA) X
B BBBQ X
B BBB X Moderate safety
B BBB) X
B BBQ X
B BB X Inade4uate safety
B BB) X
B BQ X
B B X 7is# !rone
B B) X
B 5Q X
B 5 X Su+stantial 7is#
B 5) X
44 | P a g e
B 1 1efault) 93tremely speculati%e.
Medium Term8 05ert. of 1eposits H -i3ed 1eposits2
M AAA to M 1.
Short Term8 0Including 5ommercial !apers2
A*Q K A* K A&Q K A& K A=Q K A= K A@Q K A@ K A>
Credit Ana#!sis and Researc$ Ltd% (CARE
The 5A79 "as promoted in*??= jointly "ith in%estment companies, +an#s H
finance companies. Ser%ices offered +y 5A79 are F
0*2.credit rating 0ii2 information ser%ice 0iii294uity research 0i%2rating H parallel
mar#et of B!6 H #erosene. Since its inception till the end of march*??>, 5A79
has rated &@? de+t instruments co%ering a total de+t %olume of 7s ?;&? crores.
5A79 "as promoted +y leading financial institutions, +an#s and pri%ate sector
finance companies. 5are prefi3es 5A79 to the ratings gi%en to the issue e.g.
5A79 AAA or 5A79 AA to the 1e+enture or Bond issue to indicate High
45 | P a g e
safety. Similarly in case of -i3ed K Short 1eposit issue the rating issued is 5A79
AAA 0-12 or 5A79 AA 0S12 and so on.
5A79 7ating Ser%ices
5A79 pro%ides rating ser%ices to the follo"ing de+t instruments.
1e+entures
5ertificate of deposits
5ommercial paper
-i3ed deposits.
46 | P a g e
USES OF RATINGS
A 10edi" 0a"in aen13 0CRA# assigns credit ratings for issuers of certain types
of de+t o+ligations as "ell as the de+t instruments themsel%es. In some cases, the
ser%icers of the underlying de+t are also gi%en ratings. In most cases, the issuers
of securities are companies, special purpose entities, state and local
go%ernments, non)profit organi.ations, or national go%ernments issuing de+t)li#e
securities 0i.e., +onds2 that can +e traded on a secondary mar#et. A credit rating for
an issuer ta#es into consideration the issuerNs credit "orthiness 0i.e., its a+ility to
pay +ac# a loan2, and affects the interest rate applied to the particular security
+eing issued. 0In contrast to 57As, a company that issues credit scores for
indi%idual credit)"orthiness is generally called a credit +ureau or consumer credit
reporting agency.2 The %alue of such ratings has +een "idely 4uestioned after the
&''( financial crisis. In &''= the Securities and 93change 5ommission su+mitted
a report to 5ongress detailing plans to launch an in%estigation into the anti)
47 | P a g e
competiti%e practices of credit rating agencies and issues including conflicts of
interest.
5redit ratings are used +y in%estors, issuers, in%estment +an#s, +ro#er)dealers, and
go%ernments. -or in%estors, credit rating agencies increase the range of in%estment
alternati%es and pro%ide independent, easy)to)use measurements of relati%e credit
ris#P this generally increases the efficiency of the mar#et, lo"ering costs for
+oth +orro"ers and lenders. This in turn increases the total supply of ris# capital in
the economy, leading to stronger gro"th. It also opens the capital mar#ets to
categories of +orro"er "ho might other"ise +e shut out altogether8 small
go%ernments, startup companies, hospitals, and uni%ersities.
Ra"in- 2-e 93 9.nd i--2e0-
Issuers rely on credit ratings as an independent %erification of their o"n credit)
"orthiness and the resultant %alue of the instruments they issue. In most cases, a
significant +ond issuance must ha%e at least one rating from a respected 57A for
the issuance to +e successful 0"ithout such a rating, the issuance may +e
undersu+scri+ed or the price offered +y in%estors too lo" for the issuerNs purposes2.
Studies +y the Bond Mar#et Association note that many institutional in%estors no"
prefer that a de+t issuance ha%e at least three ratings.
48 | P a g e
Issuers also use credit ratings in certain structured finance transactions. -or
e3ample, a company "ith a %ery high credit rating "ishing to underta#e a
particularly ris#y research project could create a legally separate entity "ith certain
assets that "ould o"n and conduct the research "or#. This Ospecial purpose entityO
"ould then assume all of the research ris# and issue its o"n de+t securities to
finance the research. The S!9Ns credit rating li#ely "ould +e %ery lo", and the
issuer "ould ha%e to pay a high rate of return on the +onds issued. Ho"e%er, this
ris# "ould not lo"er the parent companyNs o%erall credit rating +ecause the S!9
"ould +e a legally separate entity. 5on%ersely, a company "ith a lo" credit rating
might +e a+le to +orro" on +etter terms if it "ere to form an S!9 and transfer
significant assets to that su+sidiary and issue secured de+t securities. That "ay, if
the %enture "ere to fail, the lenders "ould ha%e recourse to the assets o"ned +y the
S!9. This "ould lo"er the interest rate the S!9 "ould need to pay as part of the
de+t offering.
The same issuer also may ha%e different credit ratings for different +onds. This
difference results from the +ondNs structure, ho" it is secured, and the degree to
"hich the +ond is su+ordinated to other de+t. Many larger 57As offer Ocredit
rating ad%isory ser%icesO that essentially ad%ise an issuer on ho" to structure its
+ond offerings and S!9s so as to achie%e a gi%en credit rating for a certain
de+t tranche. This creates a potential conflict of interest, of course, as the 57A
49 | P a g e
may feel o+ligated to pro%ide the issuer "ith that gi%en rating if the issuer follo"ed
its ad%ice on structuring the offering. Some 57As a%oid this conflict +y refusing to
rate de+t offerings for "hich its ad%isory ser%ices "ere sought.
Ra"in- 2-e 93 .,e0n!en" 0e2la".0-
7egulators use credit ratings as "ell, or permit ratings to +e used for regulatory
purposes. -or e3ample, under the Basel II agreement of the Basel 5ommittee on
Ban#ing Super%ision, +an#ing regulators can allo" +an#s to use credit ratings from
certain appro%ed 57As 0called O95AIsO, or O93ternal 5redit Assessment
InstitutionsO2 "hen calculating their net capital reser%e re4uirements. In the $nited
States, the Securities and 93change 5ommission 0S952 permits in%estment +an#s
and +ro#er)dealers to use credit ratings from ONationally 7ecogni.ed Statistical
7ating :rgani.ationsO 0or ON7S7:sO2 for similar purposes. The idea is that +an#s
and other financial institutions should not need to #eep in reser%e the same amount
of capital to protect the institution against 0for e3ample2 a run on the +an#, if the
financial institution is hea%ily in%ested in highly li4uid and %ery OsafeO securities
0such as $.S. go%ernment +onds or short)term commercial paper from %ery sta+le
companies2.
57A ratings are also used for other regulatory purposes as "ell. The $S S95, for
e3ample, permits certain +ond issuers to use a shortened prospectus form "hen
50 | P a g e
issuing +onds if the issuer is older, has issued +onds +efore, and has a credit rating
a+o%e a certain le%el. S95 regulations also re4uire that money mar#et funds
0mutual funds that mimic the safety and li4uidity of a +an# sa%ings deposit, +ut
"ithout -1I5 insurance2 comprise only securities "ith a %ery high N7S7: rating.
Bi#e"ise, insurance regulators use credit ratings to ascertain the strength of the
reser%es held +y insurance companies.
$nder +oth Basel II and S95 regulations, not just any 57ANs ratings can +e used
for regulatory purposes. 0If this "ere the case, it "ould present an o+%ious moral
ha.ard, since an issuer, insurance company, or in%estment +an# "ould ha%e a
strong incenti%e to see# out a 57A "ith the most la3 standards, "ith potentially
dire conse4uences for o%erall financial sta+ility.2 7ather, there is a %etting process
of %arying sorts. The Basel II guidelines 0paragraph ?*, et al.2, for e3ample,
descri+e certain criteria that +an# regulators should loo# to "hen permitting the
ratings from a particular 57A to +e used. These include Oo+jecti%ity,O
Oindependence,O Otransparency,O and others. Ban#ing regulators from a num+er of
jurisdictions ha%e since issued their o"n discussion papers on this su+ject, to
further define ho" these terms "ill +e used in practice. 0See The 5ommittee of
9uropean Ban#ing Super%isors 1iscussion !aper, or the State Ban# of !a#istan
95AI 5riteria.2
51 | P a g e
In the $nited States, since *?;>, N7S7: recognition has +een granted through a
ONo Action BetterO sent +y the S95 staff. -ollo"ing this approach, if a 57A 0or
in%estment +an# or +ro#er)dealer2 "ere interested in using the ratings from a
particular 57A for regulatory purposes, the S95 staff "ould research the mar#et to
determine "hether ratings from that particular 57A are "idely used and
considered Orelia+le and credi+le.O If the S95 staff determines that this is the case,
it sends a letter to the 57A indicating that if a regulated entity "ere to rely on the
57ANs ratings, the S95 staff "ill not recommend enforcement action against that
entity. These ONo ActionO letters are made pu+lic and can +e relied upon +y other
regulated entities, not just the entity ma#ing the original re4uest. The S95 has
since sought to further define the criteria it uses "hen ma#ing this assessment, and
in March &''> pu+lished a proposed regulation to this effect.
:n Septem+er &?, &''E, $S !resident 6eorge ,. Bush signed into la" the O5redit
7ating 7eform Act of &''EO.
R&S
This la" re4uires the $S Securities and 93change
5ommission to clarify ho" N7S7: recognition is granted, eliminates the ONo
Action BetterO approach and ma#es N7S7: recognition a 5ommission 0rather
than S95 staff2 decision, and re4uires N7S7:s to register "ith, and +e regulated
+y, the S95.S H ! protested the Act on the grounds that it is
an unconstitutional %iolation of freedom of speech.
R&S
In the Summer of &''; the
S95 issued regulations implementing the act, re4uiring rating agencies to ha%e
52 | P a g e
policies to pre%ent misuse of nonpu+lic information, disclosure of conflicts of
interest and prohi+itions against Ounfair practicesO.
R=S
7ecogni.ing 57AsN role in capital formation, some go%ernments ha%e attempted to
jump)start their domestic rating)agency +usinesses "ith %arious #inds of regulatory
relief or encouragement. This may, ho"e%er, +e counterproducti%e, if it dulls the
mar#et mechanism +y "hich agencies compete, su+sidi.ing less)capa+le agencies
and penali.ing agencies that de%ote resources to higher)4uality opinions.
Ra"in- 2-e in -"021"20ed /inan1e
5redit rating agencies may also play a #ey role in structured financial transactions.
$nli#e a OtypicalO loan or +ond issuance, "here a +orro"er offers to pay a certain
return on a loan, structured financial transactions may +e %ie"ed as either a series
of loans "ith different characteristics, or else a num+er of small loans of a similar
type pac#aged together into a series of O+uc#etsO 0"ith the O+uc#etsO or different
loans called OtranchesO2. 5redit ratings often determine the interest rate or price
ascri+ed to a particular tranche, +ased on the 4uality of loans or 4uality of assets
contained "ithin that grouping.
5ompanies in%ol%ed in structured financing arrangements often consult "ith credit
rating agencies to help them determine ho" to structure the indi%idual tranches so
53 | P a g e
that each recei%es a desired credit rating. -or e3ample, a firm may "ish to +orro"
a large sum of money +y issuing de+t securities. Ho"e%er, the amount is so large
that the return in%estors may demand on a single issuance "ould +e prohi+iti%e.
Instead, it decides to issue three separate +onds, "ith three separate credit ratings
UA 0medium lo" ris#2, BBB 0medium ris#2, and BB 0speculati%e2 0using Standard
H !oorNs rating system2. The firm e3pects that the effecti%e interest rate it pays on
the A)rated +onds "ill +e much less than the rate it must pay on the BB)rated
+onds, +ut that, o%erall, the amount it must pay for the total capital it raises "ill +e
less than it "ould pay if the entire amount "ere raised from a single +ond offering.
As this transaction is de%ised, the firm may consult "ith a credit rating agency to
see ho" it must structure each trancheUin other "ords, "hat types of assets must
+e used to secure the de+t in each trancheUin order for that tranche to recei%e the
desired rating "hen it is issued.
There has +een criticism in the "a#e of large losses in the collaterali.ed de+t
o+ligation 051:2 mar#et that occurred despite +eing assigned top ratings +y the
57As. -or instance, losses on M=@'.; million "orth of collaterali.ed de+t
o+ligations 051:2 issued +y 5redit Suisse 6roup added up to a+out M*&> million,
despite +eing rated AAA or Aaa +y Standard H !oorNs, MoodyNs In%estors Ser%ice
and -itch 6roup.
R@S
54 | P a g e
The rating agencies respond that their ad%ice constitutes only a Opoint in timeO
analysis, that they ma#e clear that they ne%er promise or guarantee a certain rating
to a tranche, and that they also ma#e clear that any change in circumstance
regarding the ris# factors of a particular tranche "ill in%alidate their analysis and
result in a different credit rating. In addition, some 57As do not rate +ond
issuances upon "hich they ha%e offered such ad%ice.
5omplicating matters, particularly "here structured finance transactions are
concerned, the rating agencies state that their ratings are opinions 0and as such, are
protected free speech, granted to them +y the OpersonhoodO of corporations2
regarding the li#elihood that a gi%en de+t security "ill fail to +e ser%iced o%er a
gi%en period of time, and not an opinion on the %olatility of that security and
certainly not the "isdom of in%esting in that security. In the past, most highly rated
0AAA or Aaa2 de+t securities "ere characteri.ed +y lo" %olatility and high
li4uidityUin other "ords, the price of a highly rated +ond did not fluctuate greatly
day)to)day, and sellers of such securities could easily find +uyers. Ho"e%er,
structured transactions that in%ol%e the +undling of hundreds or thousands of
similar 0and similarly rated2 securities tend to concentrate similar ris# in such a
"ay that e%en a slight change on a chance of default can ha%e an enormous effect
on the price of the +undled security. This means that e%en though a rating agency
could +e correct in its opinion that the chance of default of a structured product is
55 | P a g e
%ery lo", e%en a slight change in the mar#etNs perception of the ris# of that product
can ha%e a disproportionate effect on the productNs mar#et price, "ith the result that
an ostensi+ly AAA or Aaa)rated security can collapse in price e%en "ithout there
+eing any default 0or significant chance of default2. This possi+ility raises
significant regulatory issues +ecause the use of ratings in securities and +an#ing
regulation 0as noted a+o%e2 assumes that high ratings correspond "ith lo"
%olatility and high li4uidity.
TA7ABLE EBENTS AND SCOPE OF SERBCES
Ta3a+le ser%ice pro%ided to a client, +y a credit rating agency in relation to credit
56 | P a g e
rating of any financial o+ligation, instrument or security. 0Section E>0;&2032 of
-inance Act, *??@ as amended2
The credit rating agencies operating in India are registered "ith the 7eser%e Ban#
of India. These agencies pro%ide among others ratings in respect of corporate
+onds, commercial paper, fi3ed deposits, municipal de+t, infrastructure +ond,
utilities, asset +ac#ed securities, structured o+ligations, toll road +onds, mutual
funds, etc. All pu+lic issues of de+t are statutorily re4uired to +e rated. These
ratings help indi%idual and institutional in%estors frame their in%estment policies
+ased on +enchmar# ratings.
The rele%ant date for determining the Ser%ice Ta3 lia+ility "ould +e the date "hen
rating has +een assigned to a particular instrument. In the case of ongoing projects,
"here rating has +een assigned after the notified date i.e. *E
th
:cto+er, *??(, the
Ser%ice Ta3 "ould +e paya+le. 0MinistryGs -.No.B)**K=K?()T7$ dt.';.*'.*??(2
Bal2e ./ Ta8a9le Se0,i1e8
Calue of ta3a+le ser%ice shall +e the gross amount charged +y the ser%ice pro%ider
for such ser%ice rendered +y him. 0Section E; -inance Act, *??@ as amended2
The client "anting to get rated a de+t issue +eing floated +y it re4uires the ser%ices
57 | P a g e
of a credit rating agency. -or this purpose they enter into a "ritten agreement "ith
a 5redit rating Agency in a standardi.ed format. The agreement specifies the
charges for such rating ser%ices as "ell as for regular sur%eillance on the e3isting
rating, to see "hether it needs to +e re%ised or other"ise. The fees of the rating
agency are generally e3pressed as a percentage of the amount of de+t sought to +e
raised. The fees on any assignments are usually paid at the time of entering into an
agreement i.e. in ad%ance. Such amount is #ept as ad%ance against rating fee and is
recogni.ed as income only "hen the rating is assigned. After the rating is gi%en, it
is communicated to the client. The rating of any instrument remains under
sur%eillance until the entire de+t is repaid. The sur%eillance is a mandatory e3ercise
for rating agencies. After sur%eillance, the client is +illed as per the agreed fee
structure. Ser%ice Ta3 is paya+le +oth on the fee recei%ed for credit rating of the
de+t instrument and the sur%eillance fee.
The amount recei%ed in ad%ance for the ser%ice of rating to +e pro%ided to the
client, is only an ad%ance and the ser%ices can only deemed to ha%e +een pro%ided
only "hen the rating e3ercise has +een completed and "hen rating of any
instrument has +een assigned. In case rating is not done, for any reason and the
entire amount is returned +ac# to the client, it cannot +e said that ser%ices ha%e
+een rendered and hence Ser%ice Ta3 is not attracted. 0MinistryGs -.No.B)**K=K?()
T7$ dt. ';.*'.*??(2
58 | P a g e

E8e!p"i.n and E81l2-i.n-
The information and ad%isory ser%ices, if any, rendered +y credit rating agencies
"ould not attract Ser%ice Ta3 for the reason that ta3a+le ser%ices in respect of
credit rating agency means ser%ice pro%ided to a client only in relation to credit
rating of any financial o+ligation, instrument or security. Ser%ices of research and
information such as analysis of industries in specific sectors of financial and
+usiness aspects of a company, other customi.ed ser%ices on say +usiness houses
and capital mar#ets, inde3ing ser%ices and information ser%ices such as
pri%ati.ation policy for infrastructure projects, macro studies of infra)structure
sector, implication of go%ernment policy in respect of any sector, financial
modeling, +id e%aluation, po"er purchase agreement, restructuring of state
electricity +oards, etc are not ser%ices Nin relation toN the credit rating of any
financial o+ligation, instrument or security and are hence outside the gamut of
ser%ice as on the ser%ices of credit ratings. 0MinistryGs -.No.B)**K=K?()T7$
dt.';.*'.*??(2
E8e!p"i.n-
59 | P a g e
Information and ad%isory ser%ices
Analysis of industry in a specific sector
-inancial and +usiness outloo# of a company.
Information ser%ices
7esearch ser%ices
Bid e%aluation
Implications of 6o%t. policy
Inde3ing ser%ices
Ser%ices +y a non)credit rating agencyN
!erson lia+le to pay8 5redit 7ating Agency.
Head ./ A11.2n"
Sl. 5ode S551
Minor)head ''@@''*&= 5redit 7ating Agency Ser%ices ''@@''(;
60 | P a g e
Su+)head ''@@''*&='* Ta3 5ollection ''@@''(( **(
Su+)head ''@@''*&='& :ther 7eceipts ''@@''(? **=
Su+)head ''@@''*&='= 1educt 7efunds ''@@''?' **=
LIST OF DATA RECUIREMENTS FOR CREDIT RATING
LGU O//i1ial-
61 | P a g e
*. Bist of elected officials 0including the Sanggunian Mem+ers2 for last three
elections that occurred in the B6$.
&. Bio)data of the present official of the B6$ and their political party.
Re1.ni"i.n D A@a0d- 0for last fi%e years2
*. Bist of A"ards K recognition recei%ed +y the B6$.
!lease indicate the name of project, operating income and e3penses
0Bro#en do"n per year2, total project cost and source of payment
&. Bist of major accomplishments and future projects 0not socio)economic
projects2
P0.pe0"ie-
*. Bist of 6o%ernment properties
!lease indicate the land area 0in s4.m.2 mar#et %alue, assessed
%alue, and classification according to usage
62 | P a g e
Finan1ial- 0for last fi%e years2
*. 5:A audited financial statement
Balance Sheet and Income Statement
&. Statement of Inde+tedness 0i.e. loans, contract paya+les, other lia+ilities2
!lease indicate the creditor 0financial institution2, amount of loan,
outstanding +alance maturity date, repayment schedule, and terms
and conditions
=. Budget :peration Statement 0please see format2
@. A%erage dayGs maturity K aging of non)cash assets
>. A%erage dayGs maturity K aging of current lia+ilities
E. Ban# 1ealing and references
;. National and local pu+lic "or#s e3penditures
Ta8e-
*. Top &' Ta3payers for the preceding year 0for real property ta3 and +usiness
ta32
!lease indicate the amount of ta3 paid and the total amount of ta3
collected
63 | P a g e
&. 5ollection efficiency rate for the last fi%e years 0for +oth 7!T and BT2
S.1i. E1.n.!i1 Da"a
*. Batest de%elopment plan.
The following items are supposedly included in the development plan.
However, if the data is nowhere to be found in the development plan,
Kindly give us a copy of said data:
&. Historical de%elopment of the B6$
=. Seaport and Airport location
@. Batest count of the registered %oters
>. Batest population count
E. Batest per capital income
;. Num+er of telephone installed
(. Num+er of +usiness esta+lishments
?. B6$ organi.ation structure
*'.!roject organi.ation structure 0per project)major only2
64 | P a g e
**. 1oes the B6$ lie "ithin the gro"th corridorY If yes, please cite the gro"th
corridor
*&.1oes the B6$ ha%e a Special 9conomic ZoneY If yes, please cite the
economic gro"th .one
FUTURE OF CREDIT RATING IN INDIA
At present, commercial paper, # +onds and de+entures "ith maturities e3ceeding
*( months H fi3ed deposits of large non)+an#ing companies registered "ith 7BI
are re4uired to +e compulsorily rated. These are mo%es to ma#e rating
65 | P a g e
compulsorily for other types of +orro"ings such as fi3ed deposit programme of
manufacturing companies. In addition, the rating agencies are e3pected to +e called
upon to enlarge %olumes of securiti.ation of de+t H structuring of customi.ed
instruments to meet the needs of issuers or different class of in%estors. There are
num+er of areas "here rating agencies "ill ha%e to co%er ne" grounds in the
coming years. The rating of municipal +onds, state go%t. +orro"ings, commercial
+an#s H pu+lic sector

BENEFITS OF CREDIT RATING
Bo" 5ost Information
Duic# In%estment 1ecision
Independent In%estment 1ecision
In%estment !rotection
66 | P a g e
Spending too much on credit ris# research diminishes the return on in%estment. In
addition, unli#e under"riters and main +an#s, credit rating agencies are %alued for
their neutral %ie"point and e3pertise in credit ris# analysis. -or these reasons,
in%estors rely hea%ily on credit rating data.
Bene/i"- ". Ra"ed C.!panie-
Sources of additional certification
Attracting higher num+er of in%estors
-ore"arns ris#
9ncourages financial discipline amongst the corporates and +etter financial
planning
Merchant +an#ers jo+ made easy
-oreign colla+oration made easy
Bo" cost of +orro"ing
7ating as a mar#eting tool
5ompetiti%e rates of interest
Added in%estorsG confidence
A+ility to raise money from foreign mar#ets at cheaper rates
67 | P a g e
Helps to +uild reputation in the mar#et.
Bene/i"- /.0 ":e in,e-".0-
Sa%es the time and energy in studying companyGs financials,
Strong indicator of companyGs financial capacity,
7atings represent the informed opinion of a neutral third party.
Identification of the ris# in%ol%ed in the de+t instrument.
6uidance in ma#ing an in%estment decision +y +eing presented "ith a "ide
%ariety of safe choices.
5onstant monitoring and sur%eillance +y the agency on the de+t instrument
leading to effecti%e ris# management strategies.
!eriodical e%aluation of companyGs financial capacity +y rating agency helps
the in%estor to e3it the in%estment, in case rating is do"ngraded
su+se4uently.
Bene/i"- /.0 ":e i--2e0
93panded access to capital mar#ets.
Bo"er financing cost.
68 | P a g e
7ecognition to a first time and un#no"n issuer in order to esta+lish his
mar#et credi+ility.
9nhancement of good"ill.
Moti%ation for +etter performance.
E1.n.!i1 Bene/i"- ./ C0edi" Rep.0"in and S1.0in
5redit scoring offers multiple +enefits at e%ery le%el of the economy. 5redit scores
ha%e ena+led lenders to e3tend into historically underser%ed mar#et segments. In
addition, decisions are no" faster and more o+jecti%e "ith the majority of
applicants recei%ing ans"ers "ithin minutes, rather than days.
-inally, +y using credit scores to predict ris# more effecti%ely, lenders ha%e +een
a+le to reduce the cost of such %ital ser%ices as mortgages, personal loans and
credit cards. 1espite this e3pansion into traditionally underser%ed mar#ets, moral
ha.ard rates are actually lo"er "ith credit scores +ecause lenders can more
proacti%ely monitor ris# and maintain it at more appropriate le%els.
69 | P a g e
5redit scoring plays a %ital role in economic gro"th +y helping e3pand access to
credit mar#ets, lo"ering the price of credit and reducing delin4uencies and
defaults.
In the $nited States, credit scoring helps dri%e the American economy and ma#es
credit afforda+le.
-or consumers, scoring is the #ey to homeo"nership and consumer credit. It
increases competition among lenders, "hich dri%es do"n prices. 1ecisions can +e
made faster and cheaper and more consumers can +e appro%ed. It helps spread ris#
more fairly so %ital resources, such as insurance and mortgages, are priced more
fairly.
-or +usinesses, especially small and medium)si.ed enterprises, credit scoring
increases access to financial resources, reduce costs and helps manage ris#.
-or the national economy, credit scoring helps smooth consumption during cyclical
periods of unemployment and reduces the s"ings of the +usiness cycle. By
ena+ling loans and credit products to +e +undled according to ris# and sold as
securiti.ed deri%ati%es, credit scoring connects consumers to secondary capital
mar#ets and increases the amount of capital that is a%aila+le to +e e3tended or
in%ested in economic gro"th.
70 | P a g e
DISADBANTAGES OF CREDIT RATING
[ Biased rating and misrepresentation,
[ Static study,
[ 5oncealment of material information,
[ No guarantee for soundness of the company,
[ Human +ias,
[ 7eflection of temporary and ad%erse conditions,
[ !resent rating may change 0do"n grade2,
[ 1ifferences in rating of t"o agencies.
NEED AND IMPORTANCE OF CREDIT RATING
A "ide range of industries ta#e ad%antage of credit scores to impro%e fairness,
effecti%eness and efficiency. -inancial companies use credit scores to predict the
ris# of delin4uencies and losses, "hich ena+les them to +etter allocate costs.
Insurance companies use speciali.ed credit scores to ma#e fairer under"riting
71 | P a g e
decisions. 5redit scores e%en pro%ide +enefits at the macroeconomic le%el +y
helping small enterprises attain the funds they need and +y facilitating the
securiti.ation and sale of financial products in the secondary mar#ets, su+stantially
increasing the influ3 of capital into a country.
I!p.0"an1e ./ 10edi" -1.0e
5redit rating is an indicator that reflects ho" "ell or +adly you manage your
financial matters. By ha%ing a loo# at your credit rating, one can get much
information regarding your +usiness organi.ation and particularly the payments
made +y your organi.ation. There are se%eral credit +ureaus that compile this #ind
of information and later on sale it to their clients.
ItNs %ery important to #no" your credit score and understand it completely, as it
helps you to get loans, mortgage and e%en a jo+. 5redit report list personal
information such as name, address, date of +irth, social security num+er, num+er of
family mem+er, your employer etc. -inancial situations li#e +an#ruptcies, ta3 liens,
foreclosure, late payment of your +ill...etc, "ill also +e listed in the report.
<our credit score list plenty of information a+out your financial actions. <our loan
or credit account, and ho" you pay them, your current de+ts, type of de+ts...etc. All
these information are listed in the report. The creditors, lending agencies and other
72 | P a g e
companies "ill consider your credit score to determine if they can finance you
"ithout a ris#. Any dou+tful record creates a negati%e impact and can affect you in
many "ays. ItNs not only in case of sanctioning a loan +ut also determine the rate of
interest. Bo"er the score, higher "ill +e the interest.
According to the data of /ean 5hat.#y 0the financial editor for NB5Ns The Today
Sho"2, in May &''E, to 4ualify for the +est rates on a mortgage loan, home +uyer
needed a credit score of E&' or higher. /ust & year later in May &''(, you "ould
ha%e as#ed for a credit score of ;>' to 4ualify for those same rates. So itNs
important to re%ie" your report once in a year, so that you are a"are of your report
and #no" "hat the creditors say a+out you and also can "or# on impro%ing your
score. Kno"ing your credit report "ill help you ma#e important financial
decisions.
In the competiti%e mar#et, rating gi%es an edge to the company "hen they place
their +ondKde+enture or other de+t instruments in the mar#et for su+scription. The
in%estor relies on the independent rating agency since he does not ha%e the time,
e3pertise, analytical s#ills and the past data on the companyGs performance
a%aila+le "ith him. 5omparison +et"een & similar types of instruments is made
73 | P a g e
easier if rating of the issues is a%aila+le. The in%estor "ho #no"s the ris# he has
+argained for "hen he decides to ta#e a decision to in%est %is)a)%is his o"n ris#
appetite and the re"ards he could e3pect. 7ating helps the issuing companies to
place their issues at competiti%e rates of interest and reduce the cost of funds to a
reasona+le le%el #eeping "ith their credit standing, reputation and a+ility to repay
the de+ts in time.
It should +e noted that "hen a rating is attached to an issue, it +y no means, reflects
the total financial capacity of the company. In other "ords, rating agencies carry
out the rating e3ercise for an issue of de+t instrument and not a company as a
"hole. A company may get highest rating for a particular si.e of an issue "hereas
if si.e is increased +eyond a particular le%el, same issue may +e allotted a lo"er
rating if the companyGs financial capacity is una+le to sustain the ser%icing of the
issue. Also if after the issue is launched "ith a higher credit rating and company
underta#es operations "hich are li#ely to put their financial capacity under strain,
the credit rating may +e lo"ered +y the rating agency anytime during the maturity
of the instrument +efore it +ecomes due for payment.
74 | P a g e
By adopting a uni%ersally accepted measure of credit ris#, issuers of any
nationality can gain access to glo+al capital mar#ets. In addition, since the issuerNs
credit ris# is pu+licly announced, the issuer can o+tain financing at an appropriate
interest rate and a%oid unnecessary credit spreads that may arise from
misinformation or lac# of recognition.
:ften, issues are raised as to the credita+ility of credit rating agencies on account
of the fact that different credit rating agencies often come up "ith different ratings
for the same organi.ation. 7atings are determined through a comprehensi%e
e%aluation including 4uantitati%e factors 0financial indicators such as operating
profit ratio, e4uity ratio, etc.2, 4ualitati%e factors 0+usiness foundation including
industry trends, company characteristics, etc.2, and factors specific to the +ond
0issue conditions, +ond type, etc.2. Thus the differences in ratings emerge due to
the different stances of agencies to"ard each of these factors.
In%estment decisions can change considera+ly depending on "hich credit rating
data is used. $sually, in%estors use the lo"est rating in their analysis. Ho"e%er,
75 | P a g e
this %alua+le source of information "ill +e rendered useless unless applied "ith the
appropriate in%estment stance and in%estment criteria.
IMPORTANCE OF CREDIT RATING IN INDIA
esta+lish a lin# +et"een ris# and return
to in%estors in ma#ing in%estment decisions
credit rating sho"s the e3act "orth of the organi.ation
In the Indian conte3t itGs a sudden do"n gradation of ratings of an organi.ation, +y
three or more notches "ithin a fe" months in spite of no %isi+le fluctuations in the
mar#et. The rating agencies justify it on the ground that they suffer from a lac# of
ade4uate information, different agencies gi%e different "eightage to different
factors on account of there +eing no mar#et regulatory +ody as such to lay do"n
yardstic#s or monitor their ratings. Thus, it is e%ident that the system is still in its
nascent stage in India and the S9BI guidelines indicate a step for"ard in
institutionali.ing the process. The merit of the guidelines per se is of course, a
76 | P a g e
different issue that "ill +e dealt "ith in a different chapter. As of no" the issue is
merely concerned "ith ascertaining "hether 57As are here to stay and the ans"er
4uite definitely seems to +e in the affirmati%e.
PRACTICAL PROBLEMS 5ITH CREDIT RATING
The "idespread of +ranch net "or# of the rating agency may limit s#ills in
rating.
Ine3perienced, uns#illed or o%erloaded staff may not do justice to their jo+ H
the resulting ratings may not +e perfect.
The rating is not permanent +ut su+ject to changes H moreo%er the agencies
can not gi%e any guarantee for the in%estors.
The time factor greatly affects rating H gi%es misleading conclusions. a
company "hich ad%erse conditions temporarily "ill +e gi%en a lo" rating
judged on the +asis of temporary phenomenon.
Since the rating agencies recei%e a si.a+le fee from the companies for
a"arding ratings, a tendency to inflate the ratings may de%elop.
77 | P a g e
In%estment "hich ha%e the same rating may not ha%e identical in%estment
4uality
Ho"e%er, the pro+lems "ith the credit rating system are se%eral, and it "ould +e
unfair to say that these pro+lems are to +e found only in the Indian 57As as they
plague 57As all o%er the "orld. Some of them are listed +elo"8
There is often a possi+ility of +iased ratings and misrepresentation on
account of the lac# of accounta+ility in the process and the close ne3us
+et"een the agency and the issuer 0at least in the Indian conte3t2.
7ating only represents the past and present performances of the company
and therefore future e%ents may alter the nature of the rating.
7ating is +ased on the material pro%ided +y the company and therefore, there
is al"ays a ris# of concealment of information on the part of the latter.
78 | P a g e
7ating of a de+t instrument is not a guarantee as to the soundness of the
company.
7atings often on the de+t instruments of different agencies.
Small differences in degrees of ris# are usually not indicated +y 57As. Thus
issues "ith the same rating may actually +e of differing 4uality.
Similarly, default pro+a+ility need not +e specifically predicted. 5alculations
are usually done in relati%e terms.
57As cannot +e used as recommendations to +uy, sell or hold securities as
they do not comment on the ade4uacy of mar#et price, suita+ility of any
security for an in%estor or the ta3a+ility of the payments.
The information is o+tained from issuers, under"riters, etc. and is usually
not chec#ed for accuracy or truth. Thus ratings may change on account of
non)a%aila+ility of information or una%aila+ility of ade4uate information.
5hanges in mar#et considerations may result in loss that "ill not +e reflected
in 57As.
79 | P a g e
In India the chief pro+lems in the conte3t of 57As arises on account of the fact
that they are not the independent and autonomous entities that their international
counterparts are. The three primary 57As in India, %i.., I57A promoted +y I-5I
and other financial institutions and +an#s, 57ISIB, promoted +y I5I5I, Asian
1e%elopment +an# and others, and 5A79 promoted +y I1BI are all promoted +y
lending institutions. -urther most corporate +orro"ers are clients of these
institutions in terms of +orro"ing. -urther, institutions li#e I5I5I, I1BI also ha%e
sta#es in such client companies. Thus it is %ery important for these agencies to
distance themsel%es from their promoters if they "ant to gain credi+ility.
Thus, needless to say, the system of 57As needs some amount of reloo#ing and
o%erhauling in order to ma#e it effecti%e and %ia+le in the future. A positi%e step
has +een ta#en in this regard +y the S9BI 05redit rating Agencies2 7egulations,
*???, "hich has attempted to resol%e some of the aforesaid pro+lems, +ut much
still remains to +e done.
80 | P a g e

INDIBIDUAL CREDIT RATING IN INDIA
A P0i!e0 /.0 Indi,id2al-
,hen it comes to ris# management in Ban#s, the ris# that ta#es the priority is Othe
credit ris#O. The credit ris# +y definition means, ris# of loans dis+ursed to %arious
corporate and retail clients "ill +e paid +ac# or not. -or laymanNs understanding, a
+an# +roadly has t"o main functions %i.. Assets and Bia+ilities. The main jo+ of
the lia+ilities side of a +an#, is to channeli.e sa%ings in the economy, designs
%arious instruments, +y "hich, money can +e collected from the economy. This
could +e in the form of sa%ing +an# accounts, current accounts, -1s etc. The
money so collected, is a lia+ility on the +an# as it has to repay the same to its
81 | P a g e
customers "ith certain pre%ailing rate of interest and hence the function is called
Bia+ility. :nce money is collected from %arious sources, the same has to +e
deployed at a profita+le rate of return. The deployment could +e in the form of
corporate lending, in%esting in projects or simply retail lending in the form of
!ersonal Boans, Cehicle loans, home loans, SM9 lending etc.
The +asic principle of managing 5redit 7is#, is di%ersification of portfolio. This
means, that lending to corporate +orro"ers is di%ersified in terms of different
industries and "ithin an industry to different corporates. Bending is +ased on as per
the under"riting standards of the +an# e.g. the repute of the company, past
financials of the company including profita+ility o%er last se%eral years,
shareholding pattern, 4ualitati%e study of management, project feasi+ility of the
project to +e funded, future cash lo"s etc. Although all +an#s into corporate
lending de%elop their o"n indi%idual under"riting policies, they also depend on
the credit rating of a corporate +y accredited 5redit 7ating Agencies li#e 57ISIB,
I57A and 5A79. 9%en the Basel 5ommittee on Ban#ing 7egulation has
accentuated on the importance of use of e3ternal credit ratings.
82 | P a g e
The retail segment in India, ho"e%er, has +een de%oid of e3ternal agencies, "hich
are into credit rating of indi%iduals i.e. retail customers. The lending to retail
customers is done +asis purely on the lending policy of the +an#, "hich %ary from
+an# to +an#, depending on the +an#s ris# appetite. In the $nited States, there are
go%ernment funded repositories li#e 94uifa3, Trans)"orld, Trans $nion, 1un H
Bradstreet etc, "hich act as credit rating agencies for retail +orro"ers. They
pro%ide mem+er +an#sKNB-5s "ith credit history of an indi%idual in terms of
loans that he has paid in the past, loans that he is currently running, 5redit 5ards
that he has held or currently acti%e "ith repayment history of the same. There are
other %ital information that the agency report pro%ide %i.., if the +orro"er has e%er
filed for +an#ruptcy or if there is any litigation, court case etc. pending against
him. Based on the o%erall credit history of the customer, heKshe is gi%en a credit
rating, more popularly called, -I5: score. This may %ary from agency to agency
+ut the %ariation may not +e more than *'T.
Ho"e%er, the $S system of credit rating indi%idual could not +e replicated in India
+ecause of some practical difficulties. The most important +eing, a+sence of a
mechanism for identifying an indi%idual. In the $nited States, each indi%idual is
83 | P a g e
issued a Social Security Num+er or the SSN, "hen heKshe is +orn. This SSN is a
uni4ue num+er and all information related an indi%idual, including social history,
financial history, criminal history etc is lin#ed to ones SSN and therefore,
collecting information a+out indi%idual +ecomes much easier. This is further
facilitated +y the presence of a system, "hich ensures that the information flo"s
freely +et"een "ell coordinated go%ernment and pu+lic departments. Hence,
information related to indi%idual can +e stored at a common place and retrie%ed
"hen re4uired. Also, there are proper la"s in place, "hich re4uires all the
pu+licKpri%ate entities li#e +an#s, NB-5s etc. to share their customer related data
"ith the credit rating agencies.
In India, the scenario has +een different. The is no concept of Social Security
Num+er to identify an indi%idual. The only "ay to identify a customer is through
name, address, 1ate of Birth 01oB2 etc. Ho"e%er, "ith no sanctity of 1oB proofs
or address proofs, it is %ery easy to fool the system. Till sometime +an#, the only
"ay for a +an# to #no" the credit history of a prospecti%e customer "as through its
collection or field %erification agencies, "hich may or may not had information
a+out the customer. Besides, +an#s also did not pay any strict attention to the data
84 | P a g e
sanctity of the customer at their end. This is, particularly true to +an#s issuing
5redit 5ards.
,ith rising competition in the retail sector, there "as a sharp rise in delin4uency
le%el of +an#s. The need for 5redit 7ating Agency "hich could "or# li#e a
repository for credit information of indi%idual, "as "idely felt. As a first attempt in
this direction, The 5redit Information Bureau of India Btd or the 5IBIB "as
incorporated in &'''. 5IBIB "as an effort of The 6o%ernment of India and the
7eser%e Ban# of India. The first promoters and the mem+er +an#s "ere the State
Ban# of India 0SBI2 and H1-5. Necessary logistics and technology "as pro%ided
+y internationally reputed credit rating agencies li#e 1un H Bradstreet and Trans)
union. Ho"e%er, the attempt "as not efficacious initially, since most +an#s "ere
reluctant a+out sharing their customer data "ith other +an#s. This "as further
aggra%ated +y the fact that the +an#s "ere not under any legal o+ligation to share
their data. Ho"e%er, "ith 7BINs efforts, more and more +an#s and NB-5s ha%e
joined hand in pro%iding customer data to 5IBIB and in return get data on the
customers on payment of some fees from 5IBIB. This initiati%e called 5IBIB has
85 | P a g e
really +een helpful in cur+ing delin4uency and +an#s ha%e starting "ea%ing their
credit lending policy around 5IBIB.
The 4uality of 5IBIB reports ha%e further +een helped +y certain go%ernment
measures li#e introduction of !AN num+ers and ma#ing the same mandatory for
a%ailing most +an#ing ser%ices. The !AN num+er may +e considered as a %ery
crude form of a Social Security Num+er, since only ta3 paying indi%iduals apply
for it i.e. people not falling in ta3 +rac#et or not "anting to pay ta3, may or may
not ha%e !AN no. But "ith regulators li#e 7BI, Ta3 1epartments etc ma#ing !AN
no. mandatory for a%ailing +an#ing and in%estment ser%ices, more and more
percentage of population 0at least those "anting to a%ail credit2 are no" ha%ing a
%alid !AN no., "hich to a large e3tent has done the same jo+ "hat SSN does in the
$nited States.
Any technological ad%ancement in future, "hich may lead to +etter net"or#ing
+et"een +an#s, go%ernment agencies li#e judiciary, 7BI and 5IBIB "ill only
further impro%e the 4uality of 5IBIB reporting. As of no", 5IBIB has not
86 | P a g e
introduced any system of assigning any 5redit 7ating to indi%iduals li#e the -I5:
scoring as mentioned a+o%e. But this may +e just round the corner. Also, a
competition in the credit rating field i.e. more set ups li#e 5IBIB "ill not only see a
further impro%ement in 4uality in terms of ser%ices +eing pro%ided to the +an#s
and NB-5s +ut "ill also see cost rationali.ation.
!rior to 5IBIB and along "ith 5IBIB, there "as information a%aila+le in the
mar#et +ut it "as more scattered and specific. -or e3ample, Satyam 1ata+ase,
more popularly #no"n as M5N- data+ase 0Master 5ard Negati%e -eed+ac#2, is
a%aila+le in the mar#et. The M5N- data+ase is the data of data+ase of all
delin4uent customers "ho ha%e defaulted in their Master 5ard 5redit 5ard. The
customer could +elong to any +an# "hich issues Master 5ard 5redit 5ard. Besides
this, most of the %erification agencies in any particular area, are a rich source of
credit information, specially derogatory. Since most of these %erification agencies
are also in%aria+ly collection agencies for multiple +an#s, they ha%e their o"n
data+ase for derogatory customers.
87 | P a g e
There is a +asic limitation to +oth M5N- data+ase and data a%aila+le "ith
%erification agencies. :ne the data is %ery limited and does not co%er si.a+le
proportion of the credit see#ing population. M5N- co%ers only Master 5ard 5redit
5ard "hile %erification agencies ha%e data of their client +an#s only. Most of these
%erification agencies ha%e their area of operation limited to only one city or couple
of cities in the same state +ut not +eyond that. Second, the M5N- and Cerification
Agencies ha%e only derogatory data. So, if a match is found, then, the customer is a
+ad credit or ris#y to lend, +ut if there is no match, it "ill not +e prudent to assume
that the customer is a good credit or not ris#y to lend. 5IBIB is ho"e%er, a
+alanced approach, as it contains all the credit history a%aila+le for the customer,
+oth good and +ad.
H.@ D.e- I" I!pa1"- Indi,id2al-
,ith set ups li#e 5IBIB, there is a free flo" of credit information +et"een +an#s.
All mem+ers ha%e access to the 5IBIB data+ase. Hence, it is +ecoming,
increasingly difficult for chronic defaulters to o+tain credit from the +an#s. As
mentioned +efore, most +an# are "ea%ing their credit policy around 5IBIB, M5N-
and Cerification Agency records, it is %ery important for indi%iduals to +e a"are
and sensiti%e to their credit history.
88 | P a g e
It is a common o+ser%ation "ith the people of younger age group, that, they carry
multiple credit cards, more as a matter of style statement, than, ha%ing an actual
re4uirement of the same. This is coupled "ith o%er spending and in their ju%enile
spirit, not paying. ,hat they do not reali.e is that this derogatory information is
actually +eing stored against their name, add or !AN no. some"here, and "hen,
later in their life, they are in actual need for credit, they do not get it. The a+o%e
gi%en e3ample is of a "illful customer, +ut there are also common instances
ser%ice related issues "ith the +an#s, specially, credit card issuing +an#s e.g.
annual fee le%ied "hen free credit card promised or insurance premium charged
"ithout customerNs #no"ledge. Instances could +e numerous, +ut unfortunately, it
is the indi%idual, "ho is impacted negati%ely in such a situation. :ften, after
charging multiple late fees, interests etc, the default amount reported to 5IBIB or
Satyam data+ase, is 4uite high. Bending institution, prima facie, do not in%estigate
in the derogatory information and decline a loan or a credit card application
upfront. Since, all +an#s are free to ma#e their o"n credit policy, a +an# "ith lo"
ris# appetite and hence strict credit policy, is not li#ely to reconsider credit
application, e%en if, in reality, it "as not customerNs fault.
89 | P a g e
5:a" ". D. D 5:a" N." ". D.
The importance of a clean credit history is understood "hen emergency credit is
re4uired, for e3ample, a personal loan in order to meet immediate medical
e3penses or a home loan and the same is denied +ecause one did not +other to
repay his credit card de+ts or his auto loan 9MI or resol%e the dispute "ith a
financier in the past.
Since, most of us, specially in the middle class, salaried or +usinessmen, "ill
re4uire a credit at some point of time either for a personal need, +uilding a house or
for +usiness purpose or a credit card, there are a fe" precautions that an indi%idual
must ta#e in his financial dealings. :ne must +e %ery diligent and disciplined in
repaying his de+ts, 9MIs, 5redit 5ard payments etc. In rarity, if there is a delay in
payment, one should ma#e sure, that, the payment "ith late payment charges if
any, should not cross =' days past due. If late payment charges or any other
charges are "ai%ed off +y the +an# specifically in "ritten, then only, such charges
are not to +e paid. If there is a dispute in payment, specially in credit card related
payments, one should ma#e sure that the dispute is resol%ed and he has a "ritten
90 | P a g e
record of the same in his possession. Some people thin#, that settling an account
for something less that "hat is actual due is an easy "ay out. The settlement "ill
only gi%e them a settlement letter, "hich is an indicator that they did not pay the
full amount. Neither is their name or record ta#en off from the derogatory history
of the +an# and hence 5IBIBKSatyam records. In case, the +an# is at a fault, "hich
it agrees on also, it is %ery important to ac4uire an apology letter from the +an#,
clearly stating the issue and +an#Ns apology on the same.
Most of us, #eep getting calls from %arious 5redit 5ard issuing +an#Ns 1SA 01irect
Selling Associates2, "hich "ould ma#e loads of promises and "ould re4uest us to
at least #eep the card for a year and then destroy the same after informing the +an#
of your intention of not using the same. Such offers should +e a%oided, if one is
N:T in need of that credit card. Since, one does not need that card, it "ill +e lying
dormant in his poc#et for a year. He "ould e%en forget the date as to "hen the card
is to +e +loc#ed. Since the card is free for only the first year, ne3t year +eginning,
he "ould recei%e a statement "ith annual fees le%ied. He "ill dispute it, not pay it.
The +an# "ill #eep follo"ing up and le%ying late payment and other incidentals
charges, and report it as a derogatory card to the 5IBIB. The +an# cannot +lamed
for the same, since, as per its terms and conditions, the card "as free for first year
91 | P a g e
only and the customer did not +other to cancel it at the end of the year. So, "hy,
unnecessarily, call for a pro+lem, "hen it can +e easily a%oided +y politely
declining to accept for the card in the first place. The principle is simple. 1o N:T
a%ail a credit if you 1:NNT need it.
REGUALTORY FRAME5ORK
92 | P a g e
5redit rating has +een made mandatory in India for issuance of instruments.
-ollo"ing are some of the important regulatory agencies connected "ith credit
rating.
SEBIE As per the regulations of S9BI, a pu+lic issue of de+entures and +onds
con%erti+leKredeema+le +eyond a period of *( months, needs credit rating.
RBIE According to the guidelines of 7BI, one of the conditions for issuance of
commercial paper in India is that the issue must ha%e a rating not +elo" the !&
grade from 57ISIBKA& grade from I57AK!7& from 5A79.
Ra"in F0a!e@.0F
5redit rating at pro%iding an opinion on the relati%e credit ris# associated "ith an
instrument.
,hile assigning ratings, all the factors that ha%e a +earing on future cash
generation, and claims that re4uire ser%icing, are considered. The major factors that
determine the rating profile of a security issue are discussed +elo"8
Business -actors
93 | P a g e
Nature of industry
Mar#et position
9fficiency of operation.
!roject ris#
!rotecti%e factors
Duality of management.
-inancial -actors
-inancing !olicies.
-le3i+ility of financial structure.
!ast trac# record.
Duality of accounting policy.
-inancial performance indicators.
!rofita+ility.
6earing.
5o%erage ratios.
94 | P a g e
Bi4uidity.
5ash flo".
Ad,an"ae-
To in%estors
Information ser%ice.
Systematic ris# e%aluation.
!rofessional competency.
9asy to understand.
Bo" cost.
9fficient portfolio management.
:ther +enefits.
To Issuers
Inde3 of faith.
95 | P a g e
Bench mar#.
,ider in%estor +ase.
To Intermediaries
9fficient practice.
9ffecti%e monitoring
D0a@9a1F-
6uidance, not recommendation.
Based on assumptions.
5ompetiti%e ratings.
S9BI 6$I19BIN9S
96 | P a g e
No credit rating agencies shall rate a security issued +y its promoters.
1ual rating is compulsory for pu+lic H rights issue of de+t instrument of 7s
*'' crore or more.
The net "orth of rating agencies has +een fi3ed at 7s >cr.
7ating agencies can choose their methodology of operation +ut self
regulatory mechanism "ill gi%e a +etter maturity status for agencies.
!eriod of %alidity of registration shall +e = years.
Se+i has decided to incorporate a clause in the listing agreement of stoc#
e3changes re4uiring companies to corporate "ith agencies +y pro%iding
correct information. 7efusal to do so many lead to +reach of contract
+et"een rating agency H client.
It is also suggested that a penal clause +e
Rei-"0a"i.n ./ C0edi" Ra"in Aen13
97 | P a g e
&. Application for grant of certificate
0*2 Any person proposing to commence any acti%ity as a credit rating agency on or
after the date of commencement of these regulations shall ma#e an application to
the Board for the grant of a certificate of registration for the purpose.
0&2 Any person, "ho "as immediately +efore the said date carrying on any acti%ity
as a credit rating agency, shall ma#e an application to the Board for the grant of a
certificate "ithin a period of three months from such date8
!ro%ided that the Board may, "here it is of the opinion that it is necessary to do so,
for reasons to +e recorded in "riting, e3tend the said period upto a ma3imum of si3
months form such date.
0=2 An application for the grant of a certificate under su+)regulation or su+)
regulation shall +e made to the Board in -orm A of the -irst Schedule and shall +e
accompanied +y a nonFrefunda+le application fee, as specified in -orm A of the
second Schedule, to +e paid in the manner specified in !art B thereof.
0@2 Any person referred to in su+)regulation "ho fails to ma#e an application for
the grant of a certificate "ithin the period specified in that su+)regulation shall
cease to carry on rating acti%ity.
=. !romoter of credit rating agency
98 | P a g e
The Board shall not consider an application under regulation 0=2 unless the
applicant is promoted +y a person +elonging to any of the follo"ing categories,
namely8
0a2 a pu+lic financial institution, as defined in section @ A of the 5ompanies Act,
*?>E 0* of *?>E2P
0+2 a scheduled commercial +an# included for the time +eing in the second
schedule to the 7eser%e Ban# of India Act, *?=@ 0& of *?=@2P
0c2 a foreign +an# operating in India "ith the appro%al of the 7eser%e Ban# of
IndiaP
0d2 a foreign credit rating agency recogni.ed +y or under any la" for the time
+eing in force in the country of its incorporation, ha%ing at least fi%e years
e3perience in rating securitiesP
0e2 any company or a +ody corporate, ha%ing continuous net "orth of minimum
rupees one hundred crores as per its audited annual accounts for the pre%ious fi%e
years prior to filing of the application "ith the Board for the grant of certificate
under these regulations.
@. 9ligi+ility criteria
The Board shall not consider an application for the grant of a certificate under
regulation =, unless the applicant satisfies the follo"ing conditions, namely8
99 | P a g e
0a2 the applicant is set up and registered as a company under the 5ompanies Act,
*?>EP
0+2 the applicant has, in its Memorandum of Association, specified rating acti%ity
as one of its main o+jectsP
0c2 the applicant has a minimum net "orth of rupees fi%e crores.
!ro%ided that a credit rating agency e3isting at the commencement of these
regulations, "ith a net "orth of less than rupees fi%e crores, shall +e deemed to
ha%e satisfied this condition, if it increases its net "orth to the said minimum
"ithin a period of three years of such commencement.
0d2 the applicant has ade4uate infrastructure, to ena+le it to pro%ide rating ser%ices
in accordance "ith the pro%isions of the Act and these regulationsP
0e2 the applicant and the promoters of the applicant, referred to in regulation @ ha%e
professional competence, financial soundness and general reputation of fairness
and integrity in +usiness transactions, to the satisfaction of the BoardP
0f2 neither the applicant, nor its promoter, nor any director of the applicant or its
promoter, is in%ol%ed in any legal proceeding connected "ith the securities mar#et,
"hich may ha%e an ad%erse impact on the interests of the in%estorsP
0g2 neither the applicant, nor its promoters, nor any director, of its promoter has at
any time in the past +een con%icted of any offence in%ol%ing moral turpitude or any
economic offenceP
100 | P a g e
0h2 the applicant has, in its employment, persons ha%ing ade4uate professional and
other rele%ant e3perience to the satisfaction of the BoardP
0i2 neither the applicant, nor any person directly or indirectly connected "ith the
applicant has in the past +een F
0I2 refused +y the Board a certificate under these regulations or
0II2 su+jected to any proceedings for a contra%ention of the Act or of any
rules or regulations made under the Act.
93planation8 -or the purpose of this clause, the e3pression Odirectly or indirectly
connected personO means any person "ho is an associate, su+sidiary, inter)
connected or group company of the applicant or a company under the same
management as the applicant.
0j2 the applicant, in all other respects, is a fit and proper person for the grant of a
certificateP
0#2 grant of certificate to the applicant is in the interest of in%estors and the
securities mar#et.
>. Applica+ility of Securities and 93change Board of India 05riteria for -it and
!roper !erson2 7egulations, &''@.
101 | P a g e
The pro%isions of the Securities and 93change Board of India 05riteria for -it and
!roper !erson2 7egulations, &''@ shall, as far as may +e, apply to all applicants or
the credit rating agencies under these regulations.
E. Application to conform to the re4uirements
Any application for a certificate, "hich is not complete in all respects or does not
conform to the re4uirement of regulation > or instructions specified in -orm A shall
+e rejected +y the Board8
!ro%ided that, +efore rejecting any such application, the applicant shall +e gi%en an
opportunity to remo%e, "ithin thirty days of the date of receipt of rele%ant
communication, from the Board such o+jections as may +e indicated +y the Board.
!ro%ided further, that the Board may, on sufficient reason +eing sho"n, e3tend the
time for remo%al of o+jections +y such further time, not e3ceeding thirty days, as
the Board may consider fit to ena+le the applicant to remo%e such o+jections.
;. -urnishing of information, clarification and personal representation
0*2 The Board may re4uire the applicant to furnish such further information or
clarification as the Board may consider necessary, for the purpose of processing of
the application.
102 | P a g e
* Inserted +y S9BI 05riteria for -it and !roper !erson2 7egulations, &''@, ".e.f.
*'.=.&''@.
0&2 The Board, if it so desires, may as# the applicant or its authorised
representati%e to appear +efore the Board, for personal representation in connection
"ith the grant of a certificate.
(. 6rant of 5ertificate
0*2 The Board, on +eing satisfied that the applicant is eligi+le for the grant of a
certificate of registration, shall grant a certificate in -orm LBG.
0&2 The grant of certificate of registration shall +e su+ject to the payment of the
registration fee specified in !art A of the Second Schedule, , in the manner
prescri+ed in !art B thereof.
?. 5onditions of certificate and %alidity period
0*2 The certificate granted under regulation ( shall +e, su+ject to the follo"ing
conditions, namely8
103 | P a g e
0a2 the credit rating agency shall comply "ith the pro%isions of the Act, the
regulations made there under and the guidelines, directi%es, circulars and
instructions issued +y the Board from time to time on the su+ject of credit rating.
0+2 0*2 "here any information or particulars furnished to the Board +y a credit
rating agency8
0i2 is found to +e false or misleading in any material particular P or
0ii2 has undergone change su+se4uently to its furnishing at the time of the
application for a certificateP the credit rating agency shall forth"ith inform
the Board in "riting.
0&2 the period of %alidity of certificate of registration shall +e three years.
*'. 7ene"al of certificate
0*2 A credit rating agency, if it desires rene"al of the certificate granted to it, shall
ma#e to the Board an application for the rene"al of the certificate of registration.
*0*A2 An application for rene"al of certificate of registration made under su+)
regulation
0*2 shall +e accompanied +y a non refunda+le application fee as specified in
the Second Schedule.
104 | P a g e
0&2 Such application shall +e made not less than three months +efore e3piry
of the period of %alidity of the certificate, specified in su+)regulation0&2 of
regulation ?..
0=2 The application for rene"al made under su+)regulation 0*2) F
0a2 shall +e accompanied +y a rene"al fee as specified in the second
schedule and * Inserted +y S9BI 05redit 7ating Agencies2
0Amendment2 7egulations, &''E,".e.f. ;)?)&''E
0+2 as far as may +e, shall +e dealt "ith in the same manner as if it "ere
an application for the grant of a fresh certificate under regulation =.
**. !rocedure "here certificate is not granted
0*2 If, after considering an application made under regulation = or regulation *' as
the case may +e, the Board is of the opinion that a certificate should not +e granted
or rene"ed, as the case may +e, it may, after gi%ing the applicant a reasona+le
opportunity of +eing heard, reject the application.
0&2 The decision of the Board, not to grant or not to rene" the certificate under
su+)regulation 0*2 shall +e communicated +y the Board to the applicant "ithin a
period of thirty days of such decision, stating the grounds of the decision.
0=2 Any applicant aggrie%ed +y the decision of the Board rejecting his application
under su+)regulation 0*2 may, "ithin a period of thirty days from the date of receipt
105 | P a g e
+y him of the communication referred to in su+)regulation 0&2 apply to the Board
in "riting for reconsideration of such decision.
0@2 ,here an application for re)consideration is made under su+)regulation 0=2 the
Board shall consider the application and communicate to the applicant its decision
in "riting, as soon as may +e.
*&. 9ffect of refusal to grant certificate
0*2 An applicant referred to in su+)regulation 0*2 of regulation ** "hose
application for the grant of a certificate has +een rejected under regulation **, shall
not underta#e any rating acti%ity.
0&2 An applicant referred to in su+)regulation 0&2 of regulation =, "hose application
for the grant of a certificate has +een rejected +y the Board under regulation **,
shall, on and from the date of the receipt of the communication under su+)
regulation 0&2 of regulation **, cease to carry on any rating acti%ity.
0=2 If the Board is satisfied that it is in the interest of the in%estors, it may permit
the credit rating agency referred to under su+)regulation 0*2 or 0&2 to complete the
rating assignments already entered into +y it, during the pendency of the
application or period of %alidity of the certificate.
106 | P a g e
0@2 The Board may, in order to protect the interests of in%estors, issue directions
"ith regard to the transfer of records, documents or reports relating to the acti%ities
of a credit rating agency, "hose application for the grant or rene"al of a certificate
has +een rejected.
0>2 The Board may, in order to protect the interests of in%estors, appoint any person
to ta#e charge of the records, documents or reports relating to the rating acti%ities
of a credit rating agency referred to in su+)regulation 0@2 and for this purpose also
determine the terms and conditions of such appointment.
GENERAL OBLIGATIONS OF CREDIT RATING AGENCIES
*=. 5ode of 5onduct
9%ery credit rating agency shall a+ide +y the 5ode of 5onduct contained in the
Third Schedule.
*@. Agreement "ith the client
9%ery credit rating agency shall enter into a "ritten agreement "ith each client
"hose securities it proposes to rate, and e%ery such agreement shall include the
follo"ing pro%isions, namely8)
107 | P a g e
0a2 the rights and lia+ilities of each party in respect of the rating of securities shall
+e definedP
0+2 the fee to +e charged +y the credit rating agency shall +e specifiedP
0c2 the client shall agree to a periodic re%ie" of the rating +y the credit rating
agency during the tenure of the rated instrumentP
0d2 the client shall agree to co)operate "ith the credit rating agency in order to
ena+le the latter to arri%e at, and maintain, a true and accurate rating of the clients
securities and shall in particular pro%ide to the latter, true, ade4uate and timely
information for the purpose.
0e2 the credit rating agency shall disclose to the client the rating assigned to the
securities of the latter through regular methods of dissemination, irrespecti%e of
"hether the rating is or is not accepted +y the clientP
0f2 The client shall agree to disclose, in the offer documentP)
0i2 the rating assigned to the clientGs listed securities +y any credit rating agency
during the last three years and
0ii2 any rating gi%en in respect of the clientGs securities +y any other credit rating
agency, "hich has not +een accepted +y the client.
0g2 the client shall agree to o+tain a rating from at least t"o different rating
agencies for any issue of de+t securities "hose si.e is e4ual to or e3ceeds, rupees
one hundred crores.
108 | P a g e
*>. Monitoring of ratings
0*2 9%ery credit rating agency shall, during the lifetime of securities rated +y it
continuously monitor the rating of such securities.
0&2 9%ery credit rating agency shall disseminate information regarding ne"ly
assigned ratings, and changes in earlier rating promptly through press releases and
"e+sites, and, in the case of securities issued +y listed companies, such
information shall also +e pro%ided simultaneously to the concerned regional stoc#
e3change and to all the stoc# e3changes "here the said securities are listed.
*E. !rocedure for re%ie" of rating
0*2 9%ery credit rating agency shall carry out periodic re%ie"s of all pu+lished
ratings during the lifetime of the securities.
0&2 If the client does not co)operate "ith the credit rating agency so as to ena+le the
credit rating agency to comply "ith its o+ligations under regulation *> of this
regulation, the credit rating agency shall carry out the re%ie" on the +asis of the
+est a%aila+le information.
!ro%ided that if o"ing to such lac# of co)operation, a rating has +een +ased on the
+est a%aila+le information, the credit rating agency shall disclose to the in%estors
the fact that the rating is so +ased.
109 | P a g e
0=2 A credit rating agency shall not "ithdra" a rating so long as the o+ligations
under the security rated +y it are outstanding, e3cept "here the company "hose
security is rated is "ound up or merged or amalgamated "ith another company.
*;. Internal procedures to +e framed
9%ery credit rating agency shall frame appropriate procedures and systems for
monitoring the trading of securities +y its employees in the securities of its clients,
in order to pre%ent contra%ention of F
0a2 the Securities and 93change Board of India 0Insider Trading2 7egulations,
*??&P
0+2 the Securities and 93change Board of India 0!rohi+ition of -raudulent and
$nfair Trade !ractices relating to the Securities Mar#et2 7egulations, *??>P and
0c2 other la"s rele%ant to trading of securities.
*(. 1isclosure of 7ating 1efinitions and 7ationale
0*2 9%ery credit rating agency F
0a2 shall ma#e pu+lic the definitions of the concerned rating, along "ith the sym+ol
and,
0+2 shall also state that the ratings do not constitute recommendations to +uy, hold
or sell any securities
110 | P a g e
0&2 9%ery credit rating agency shall ma#e a%aila+le to the general pu+lic
information relating to the rationale of the ratings, "hich shall co%er an analysis of
the %arious factors justifying a fa%oura+le assessment, as "ell as factors
constituting a ris#.
*?. Su+mission of information to the Board
0*2 ,here any information is called for +y the Board from a credit rating agency
for the purposes of these regulations, including any report relating to its acti%ities,
the credit rating agency shall furnish such information to the Board F
0a2 "ithin a period specified +y the Board or
0+2 if no such period is specified, then "ithin a reasona+le time.
0&2 9%ery credit rating agency shall, at the close of each accounting period, furnish
to the Board copies of its +alance sheet and profit and loss account.
&'. 5ompliance "ith circulars etc., issued +y the Board
9%ery credit rating agency shall comply "ith such guidelines, directi%es, circulars
and instructions as may +e issued +y the Board from time to time, on the su+ject of
credit rating.
111 | P a g e
*;'A$ App.in"!en" ./ C.!plian1e O//i1e0
0*.2 9%ery credit rating agency shall appoint a compliance officer "ho shall +e
responsi+le for monitoring the compliance of the Act, rules and regulations,
notifications, guidelines, instructions etc issued +y the Board or the 5entral
6o%ernment.
0&.2 The compliance officer shall immediately and independently report to the
Board any noncompliance o+ser%ed +y him.S
&*. Maintenance of Boo#s of Accounts records, etc.
9%ery credit rating agency shall #eep and maintain, for a minimum period of fi%e
years, the follo"ing +oo#s of accounts, records and documents, namely8
0a2 copy of its +alance sheet, as on the end of each accounting periodP
0+2 a copy of its profit and loss account for each accounting periodP
0c2 a copy of the auditorGs report on its accounts for each accounting period.
0d2 a copy of the agreement entered into, "ith each clientP
0e2 information supplied +y each of the clientsP
0f2 correspondence "ith each clientP
112 | P a g e
0g2 ratings assigned to %arious securities including upgradation and do"n gradation
0if any2 of the ratings so assigned.
* Inserted +y S9BI 0In%estment Ad%ice +y Intermediaries2 0Amendment2
7egulations, &''*, ".e.f.&?)>)&''*.
0h2 rating notes considered +y the rating committeeP
0i2 record of decisions of the rating committeeP
0j2 letter assigning ratingP
0#2 particulars of fees charged for rating and such other records as the Board may
specify from time to time.
0&2 9%ery credit rating agency shall intimate to the Board the place "here the
+oo#s of account, records and documents re4uired to +e maintained under these
regulations are +eing maintained.
&&. Steps on auditorGs report
9%ery credit rating agency shall, "ithin t"o monthGs from the date of the auditorGs
report, ta#e steps to rectify the deficiencies if any, made out in the auditorGs report,
insofar as they relate to the acti%ity of rating of securities.
113 | P a g e
&=. 5onfidentiality
9%ery credit rating agency shall treat, as confidential, information supplied to it +y
the client and no credit rating agency shall disclose the same to any other person,
e3cept "here such disclosure is re4uired or permitted +y under or any la" for the
time +eing in force.
&@. 7ating process
0*2 9%ery credit rating agency shall F
0a2 specify the rating processP
0+2 file a copy of the same "ith the Board for recordP and file "ith the Board
any modifications or additions made therein from time to time.
0&2 9%ery credit rating agency shall, in all cases, follo" a proper rating process.
0=2 9%ery credit rating agency shall ha%e professional rating committees,
comprising mem+ers "ho are ade4uately 4ualified and #no"ledgea+le to assign a
rating.
0@2 All rating decisions, including the decisions regarding changes in rating, shall
+e ta#en +y the rating committee.
0>2 9%ery credit rating agency shall +e staffed +y analysts 4ualified to carry out a
rating assignment.
114 | P a g e
0E2 9%ery credit rating agency shall inform the Board a+out ne" rating instruments
or sym+ols introduced +y it.
0;2 9%ery credit rating agency, shall, "hile rating a security, e3ercise due diligence
in order to ensure that the rating gi%en +y the credit rating agency is fair and
appropriate.
0(2 A credit rating agency shall not rate securities issued +y it.
0?2 7ating definition, as "ell as the structure for a particular rating product, shall
not +e changed +y a credit rating agency, "ithout prior information to the Board.
0*'2 A credit rating agency shall disclose to the concerned stoc# e3change through
press release and "e+sites for general in%estors, the rating assigned to the
securities of a client, after periodic re%ie", including changes in rating, if any.
RESTRICTION ON RATING OF SECURITIES ISSUED BY PROMOTERS
OR BY CERTAIN OTHER PERSONS
115 | P a g e
&>. 1efinitions
In this 5hapter, unless the conte3t other"ise re4uiresP)
0a2 OassociateO , in relation to a promoter, includes a +ody corporate in "hich the
promoter holds ten percent or more, of the share capitalP
0+2 OpromoterO means a person "ho holds ten percent or more, of the shares of the
credit rating agency.
&E. Securities issued +y promoter
0*2 No credit rating agency shall rate a security issued +y its promoter.
0&2 In case promoter is a lending institution, itGs 5hairman, director or employee
shall not +e a 5hairman, director or employee of credit rating agency or its rating
committee.
!ro%ided that su+)regulation 0&2 shall come into force "ithin three months from
commencement of these regulations.
&;. Securities issued +y certain entities, connected "ith a promoter, or rating
agency not to +e rated
0*2 No credit rating agency shall, rate a security issued +y an entity, "hich isP)
116 | P a g e
0a2 a +orro"er of its promoterP or
0+2 a su+sidiary of its promoterP or
0c2 an associate of its promoter, if
0i2 there are common 5hairman, 1irectors +et"een credit rating
agency and these entities.
0ii2 there are common employees.
0iii2 there are common 5hairman, 1irectors, 9mployees on the rating
committee.
0&2 No credit rating agency shall rate a security issued +y its associate or
su+sidiary, if the credit rating agency or its rating committee has a 5hairman,
director or employee "ho is also a 5hairman, director or employee of any such
entity
*!ro%ided that the 5redit 7ating Agency may, su+ject to the pro%isions of su+)
regulations 0*2, rate a security issued +y its associate ha%ing a common
independent director "ith it or rating committee if,)
0i2 such an independent director does not participate in the discussion on
rating decisions, and
0ii2 the 5redit 7ating Agency ma#es a disclosure in the rating announcement
of such associate 0a+out the e3istence of common independent director2 on
its Board or of its rating committee, and that the common independent
117 | P a g e
director did not participate in the rating process or in the meeting of its
Board of 1irectors or in the meeting of the rating committee, "hen the
securities rating of such associate "as discussed.
93planation8 ) 0*2 -or the purposes of this su+)regulation the e3pression
Lindependent directorG means a director "ho, apart from recei%ing remuneration as
a director, does not ha%e any other material pecuniary relationship or transactions
"ith the company, its promoters, its management or its su+sidiaries, "hich in the
judgment of the +oard of the company, may affect the independence of the
judgment of such director.
&(. Securities already rated
Nothing in this 5hapter shall apply to securities "hose rating has +een already
done +y a credit rating agency +efore the commencement of these regulations, and
such securities may, su+ject to the pro%isions of the other 5hapters of these
118 | P a g e
regulations, continue to +e rated, "ithout the need to comply "ith the restrictions
imposed +y the regulations contained in this chapter.
PROCEDURE FOR INSPECTION AND INBESTIGATION
&?. BoardGs right to inspect
0*2 The Board may appoint one or more persons as inspecting officers, to
underta#e inspection or in%estigation of the +oo#s of account, records and
documents of the credit rating agencies, for any of the purposes specified in su+)
regulation 0&2.
0&2 The purposes referred to in su+)regulation 0*2 shall +e the follo"ing, namely8
0a2 to ascertain "hether the +oo#s of account, records and documents are
+eing maintained properlyP
* Inserted +y the S9BI 05redit 7ating Agencies20Amendment27egulations,
&''=, ".e.f. *?)&)&''=
0+2 to ascertain "hether the pro%isions of the Act and these regulations are
+eing complied "ithP
0c2 to in%estigate into complaints recei%ed from in%estors, clients or any
other person on any matter ha%ing a +earing on acti%ities of the credit rating
agencyP
119 | P a g e
0d2 in the interest of the securities mar#et or in the interest of in%estors.
0=2 The inspections ordered +y the Board under su+)regulation 0*2 shall not
ordinarily go into an e3amination of the appropriateness of the assigned ratings on
the merits.
0@2 Inspections to judge the appropriateness of the ratings may +e ordered +y the
Board, only in case of complaints "hich are serious in nature.
0>2 Inspections referred to in su+)regulation 0@2 shall +e carried out either +y the
officers of the Board or independent e3perts, "ith rele%ant e3perience or
com+ination of +oth.
='. Notice +efore inspection or in%estigation
0*2 Before ordering an inspection or in%estigation under regulation &?, the Board
shall gi%e not less than ten days "ritten notice to the credit rating agency for that
purpose.
0&2 Not"ithstanding anything contained in su+)regulation 0*2 "here the Board is
satisfied that in the interest of the in%estors, no such notice should +e gi%en, it may,
120 | P a g e
+y an order in "riting, direct that the inspection or in%estigation of the affairs of
the credit rating agency +e ta#en up "ithout such notice.
0=2 1uring the course of an inspection or in%estigation, the credit rating agency
against "hom the inspection or in%estigation is +eing carried out shall +e +ound to
discharge all its o+ligations as pro%ided in regulation =*
=*. :+ligations of credit rating agency on inspection or in%estigation +y the Board
0*2 It shall +e the duty of e%ery credit rating agency "hose affairs are +eing
inspected or in%estigated, and of e%ery director, officer or employee thereof, to
produce to the inspecting or in%estigating officer such +oo#s, accounts and other
documents in its or his custody or control and furnish him "ith such statements
and information relating to its rating acti%ities, as the inspecting officer may
re4uire "ithin such reasona+le period as may +e specified +y the said officer.
0&2 The credit rating agency shall F
0a2 allo" the inspecting officer to ha%e reasona+le access to the premises
occupied +y such credit rating agency or +y any other person on its +ehalfP
0+2 e3tend to the inspecting officer reasona+le facility for e3amining any
+oo#s, records, documents and computer data in the possession of the credit
rating agencyP and
121 | P a g e
0c2 pro%ide copies of documents or other materials "hich, in the opinion of
the inspecting officer, are rele%ant for the purposes of the inspection or
in%estigation, as the case may +e.
0=2 The inspecting officer, in the course of inspection or in%estigation, shall +e
entitled to e3amine, or record the statements, of any officer, director or employee
of the credit rating agency for the purposes connected "ith the inspection or
in%estigation.
0@2 9%ery director, officer or employee of the credit rating agency shall +e +ound to
render to the inspecting officer all assistance in connection "ith the inspection or
in%estigation "hich the inspecting officer may reasona+ly re4uire.
=&. Su+mission of 7eport to the Board
The inspecting officer shall, as soon as possi+le, on completion of the inspection or
in%estigation, su+mit a report to the Board. !ro%ided that if directed to do so +y the
Board, he may su+mit an interim report.
*<< A1"i.n .n in-pe1"i.n .0 in,e-"ia"i.n 0ep.0"
The Board or the 5hairman shall after consideration of inspection or in%estigation
report ta#e such action as the Board or 5hairman may deem fit and appropriate
122 | P a g e
including action under the Securities and 93change Board of India 0!rocedure for
Holding 9n4uiry +y 9n4uiry :fficer and Imposing !enalty2 7egulations, &''&
PROCEDURE FOR ACTION IN CASE OF DEFAULT
;Lia9ili"3 /.0 a1"i.n in 1a-e ./ de/a2l"
* Su+stituted +y S9BI 0!rocedure -or Holding 9n4uiry +y 9n4uiry officer and
Imposing !enalty2 7egulation, &''& ".e.f. &;)?)&''&. !rior to its su+stitution it
read as follo"s.
==. 5ommunication of -indings etc. to the 5redit 7ating Agency
0*2 The Board shall, after consideration of the inspection report or the interim
report referred to in regulation =&, communicate the findings of the inspecting
officer to the credit rating agency and gi%e it a reasona+le opportunity of +eing
heard in the matter.
0&2 :n receipt of the e3planation, if any, from the credit rating agency, the Board
may call upon the credit rating agency to ta#e such measures as the Board may
deem fit in the interest of the securities mar#et and for due compliance "ith the
pro%isions of the Act and these regulations.
123 | P a g e
& Su+stituted +y the S9BI 0!rocedure for Holding 9n4uiry +y 9n4uiry :fficer and
Imposing penalty2 7egulations, &''&.".e.f.&;)?)&''&.!rior to its su+stitution it
read as follo"s.
=@. Bia+ility for action in case of default
0*2 A credit rating agency "hich8 )
0a2 fails to comply "ith any condition su+ject to "hich a certificate has +een
grantedP
0+2 contra%enes any of the pro%isions of the Act or these regulations or any
other regulations made under the ActP shall +e dealt "ith in the manner
pro%ided under the Securities and 93change Board of India
0!rocedure for holding 9n4uiry +y 9n4uiry officer and Imposing penalty2
7egulations, &''&.
*<G ". %; (.!i""ed#
0*2 contra%enes any of the pro%isions of the Act or these regulations or any other
regulations made under the ActP shall +e lia+le to either of the penalties specified in
su+)regulation 0&2.
0&2 The penalties referred to in su+)regulation 0*2 are8)
0a2 suspension of registrationP or
124 | P a g e
0+2 cancellation of registration.
* Su+stituted +y S9BI 0!rocedure for Holding 9n4uiry +y 9n4uiry officer and
Imposing !enalty2 7egulation, &''& ".e.f. &;)?)&''&. !rior to its omission,
regulation @& "as amended +y S9BI 0Appeal to Securities Appellate Tri+unal2
0Amendment2 7egulations, &''', ".e.f. &(.'=.&'''. !rior to omission regulation
=> to @& read as follo"s.
=>. Suspension of registration
A penalty of suspension of the certificate of registration of a credit rating agency
may +e imposed +y the Board, if the case falls under su+)regulation 0*2 of
regulation =@.
=>. 5ancellation of 7egistration
0*2 A penalty of cancellation of certificate of registration of a credit rating agency
may +e imposed +y the Board, if8
0a2 the credit rating agency is guilty of fraud, or has +een con%icted of an
offence in%ol%ing moral turpitude or an economic offenceP or
0+2 in case of repeated defaults of the nature mentioned in su+)regulation 0*2
of regulation =@.
125 | P a g e
0c2 the credit rating agency is declared insol%ent or "ound upP
0&2 The Board shall furnish to the credit rating agency reasons in "riting for
cancellation of registration.
=;. Manner of Ma#ing :rder of Suspension and 5ancellation
No order of suspension or of cancellation of the certificate of registration, shall +e
passed +y the Board, e3cept after holding an en4uiry in accordance "ith the
procedure specified in regulation =(.
!ro%ided that the holding of such an en4uiry shall not +e necessary in cases "here8
0a2 the credit rating agency is declared insol%ent or is "ound upP or
0+2 the credit rating agency fails to pay to the Board registration fees or rene"al fee
as per these regulations.
!ro%ided further that an opportunity of hearing shall +e gi%en +efore any action
against the credit rating agency is ta#en.
=(. Manner of Holding en4uiry +efore Suspension or 5ancellation
126 | P a g e
0*2 -or the purpose of holding an en4uiry under regulation =;, the Board may
appoint one or more en4uiry officers.
0&2 The en4uiry officer shall issue to the credit rating agency a notice at the
registered office or the principal place of +usiness of the credit rating agency,
setting out the grounds on "hich action is proposed to +e ta#en against it and
calling upon it to sho" cause against such action "ithin a period of fourteen days
from the date of receipt of such notice.
0=2 The credit rating agency, may, "ithin fourteen days from the date of receipt of
such notice, furnish to the en4uiry officer a "ritten reply, together "ith copies of
documentary or other e%idence relied on +y it or sought +y the Board from the
0@2 The en4uiry officer shall gi%e a reasona+le opportunity of hearing to the credit
rating agency, to ena+le it to ma#e its su+mission in support of its reply made
under su+)regulation 0=2.
0>2 Before the en4uiry officer, the credit rating agency may either appear in person
or through any person duly authorised on this +ehalf.
!ro%ided that no la"yer or ad%ocate shall +e permitted to represent the credit rating
agency at the en4uiryP
127 | P a g e
!ro%ided further that "here a la"yer or an ad%ocate has +een appointed +y the
+oard as a presenting officer under su+)regulation 0E2, it shall +e la"ful for the
credit rating agency to present his case through a la"yer or ad%ocate.
0E2 If it is considered necessary, the en4uiry officer may re4uest the Board to
appoint a presenting officer to present its case.
0;2 The en4uiry officer shall, after ta#ing into account all rele%ant facts and
su+missions made +y the credit rating agency, su+mit a report to the Board and
recommend the penalty, if any to +e imposed upon the credit rating agency as also
the grounds on the +asis of "hich the proposed penalty is justified.
=?. Sho")cause notice and order
0*2 :n receipt of the report from the en4uiry officer, the Board shall consider the
same and issue a sho")cause notice to the credit rating agency, as to "hy the
penalty as proposed +y the en4uiry officer should not +e imposed.
0&2 The credit rating agency shall, "ithin fourteen days of the date of receipt of the
sho")cause notice, send a reply to the Board.
0=2 The Board, after considering the reply of the credit rating agency to the sho")
cause notice, shall as soon as possi+le pass such order as it deems fit.
128 | P a g e
0@2 9%ery order passed +y the Board under su+)regulation 0=2 shall +e self)
contained and shall gi%e reasons for the conclusions stated therein, including
justification of the penalty if any imposed +y that order.
0>2 The Board shall send to the credit rating agency a copy of the order passed
under su+)regulation 0=2.
@'. 9ffect of suspension and cancellation of registration of credit rating agency
0*2 :n and from the date of suspension of the certificate of registration, the credit
rating agency shall cease to carry on any rating acti%ity during the period of
suspension and shall +e su+ject to such directions of the Board "ith regard to any
records, documents securities or reports that may +e connected "ith in its rating
acti%ities, as the Board may specify.
0&2 :n and from the date of cancellation of the certificate of registration, the credit
rating agency shall8 )
0a2 cease to carry in any rating acti%ity and
0+2 shall +e su+ject to such directions of the Board "ith regard to the transfer
of records, documents, securities or reports connected "ith its rating
acti%ities "hich may +e in its custody or control as the Board may specify.
129 | P a g e
0=2 Not"ithstanding the suspension or cancellation of certificate of a credit rating
agency, if the Board is satisfied that it is in the interest of the in%estors to grant
such permission, the Board may grant to the credit rating agency permission to
carry on such acti%ities relating its assignments underta#en prior to such
suspension or cancellation, as the Board may specify.
@*. !u+lication of :rder of Suspension or 5ancellation
The order of suspension or cancellation of certificate of registration, passed under
su+)regulation 0=2 of regulation 0=?2 shall +e pu+lished +y the Board in at least t"o
daily ne"spapers.
@&. Appeal to the Securities Appellate Tri+unal
Any person aggrie%ed +y an order of the Board made, on and after the
commencement of the Securities
Ba"s 0Second Amendment2 Act, *???, 0i.e., after *Eth 1ecem+er *???2, under
these regulations may prefer an appeal to a Securities Appellate Tri+unal ha%ing
jurisdiction in the matter
R!rior to amendment &(.=.&''' it read as follo"s8
130 | P a g e
@=. Appeal to the 5entral 6o%ernment
Any person aggrie%ed +y an order of the Board under these 7egulationsP
0a2 Suspending a certificate of registrationP
0+2 5ancelling certificate of registration, may prefer an appeal to the 5entral
6o%ernment against such order, in accordance "ith the Securities and
93change Board of India 0Appeal to 5entral 6o%ernment2 7ules, *??=S
FIRST SCHEDULE - FORM A
SECURITIES AND E7CHANGE BOARD OF INDIA (CREDIT RATING
AGENCIES# REGULATIONS+ *))) R796$BATI:N =0=2S
A!!BI5ATI:N -:7 67ANT :- 597TI-I5AT9 K 79N9,AB :-
597TI-I5AT9
NAM9 :- A!!BI5ANT
5:NTA5T NAM9 8
T9B9!H:N9 N:8
-AA N:8
INST7$5TI:NS -:7 -IBBIN6 $! -:7M )
131 | P a g e
*. Applicants must su+mit to the Board a completed application form together "ith
appropriate supporting documents. Supporting documents should +e attested as
true +y a notary pu+lic.
&. This application form should +e filled in accordance "ith the regulations.
=. Application for registration "ill +e considered, only if it is complete in all
respects.
@. All ans"ers must +e typed.
>. Information "hich needs to +e supplied in more detail may +e gi%en on separate
sheets "hich should +e attached to the application form.
E. All signatures on the application must +e original.
;. 9%ery page of the form as "ell as e%ery additional sheet must +e initialed +y the
authorised signatory of the applicant.
*$' PARTICULARS OF THE APPLICANT
*.* Name, address of the registered office, address for correspondence, telephone
num+er0s2, fa3 num+er0s2 and name of the contact person of the company. Address
of +ranch offices, if any.
*.& 1ate of incorporation of the Applicant company 0enclose certificate of
incorporation and memorandum and articles of association2. Specify the follo"ing8
0a2 :+jects 0Main H Ancillary2 of the Applicant company
132 | P a g e
0+2 Authorised, issued, su+scri+ed and paid up capital
*.= 5ategory to "hich the Applicant company +elongs to8S
0a2 Bimited company ) !ri%ateK!u+lic.
0+2 $nlimited company.
If listed, names of Stoc# 93changes and latest share price to +e gi%en.
*.@ 5ategory to "hich the Applicant company +elongs to 0refer regulation =2
0a2 5ompany already in the +usiness of underta#ing rating acti%ities
0+2 5ompany proposing to underta#e rating acti%ities for the first time.
;$' ELIGIBILITY CRITERIA
&.* 5ategory to "hich the promoter 0s2 of the Applicant company +elong to 0refer
regulation @2.
&.& Name the promoters and indicate their shareholding in the company.
&.= 9nclose a 5hartered AccountantGs certificate certifying the continuous net
"orth of 7s.*'' crores for fi%e years, in case the promoter referred to in regulation
@0e2.
&.@ Net "orth of the company as per the last audited accounts not earlier than three
months from the date of application Rrefer regulation > 0c2S. 9nclose a 5hartered
AccountantGs certificate certifying the same.
133 | P a g e
<$' PARTICULARS OF DIRECTORSDKEY PERSONNEL
=.* !articulars of 1irectors of the company, "hich shall include name,
4ualification, e3perience, shareholding in the company and directorship in other
companies.
=.& !articulars of Key !ersonnel of the company, "hich shall include name,
designation in the company, 4ualification, pre%ious positions held, e3perience, date
of appointment in the company and functional areas
%$' INFRASTRUCTURE
@.* 1etails of infrastructure including computing facilities, facilities for research
and data+ase a%aila+le "ith the company and "hether the e3isting infrastructure is
ade4uate to carry on the rating acti%ities proposed to +e underta#en +y the
company. Any further plan for additionalK impro%ed infrastructure to +e indicated.
G$' MAJOR SHAREHOLDERS
>.* Bist of major shareholders 0holding >T and a+o%e of applicant directly or
along "ith associates2
134 | P a g e
Shareholding as on 8 \\\\\\\\\\\\\\\\\\\\\\\\\\\\\\
Name of shareholder No .of Shares held T age of total paid up capital of the
company
H$' ASSOCIATE CONCERNS
E.* !articulars of associate companiesKconcerns "hich shall include name, address,
type of acti%ity handled, nature of interest of the Applicant company in the
associate, nature of interest of promoter0s2 of the applicant in the associate.
E.& ,hether the Board has grantedK refused registration as credit rating agency to
any associate of the applicant. 6i%e the details li#e date of application, date of
refusalK registration, reasons for refusal etc.
&$' BUSINESS INFORMATION OF THE COMPANY
;.* History, major e%ents and present acti%ities. 1etails of 93perience in 5redit
7ating acti%ities and other related acti%ities
;.& If the company is proposing to engage in credit rating acti%ities for the first
time, +usiness plan of the company "ith projected %olume of acti%ities and income
for "hich registration is sought to +e specifically gi%en.
;.= Securities 7ating acti%ities handled during the last three years as per the ta+le
+elo" Name of 5lient Type of security Si.e of issue <ear of Issue SecurityK
135 | P a g e
Instrument rated listed K unlisted
;.@ 1etails of other rating acti%ities underta#en during last three years.
;.> Any other information considered rele%ant to the nature of ser%ices rendered +y
the applicant.
($' FINANCIAL INFORMATION ABOUT THE APPLICANT
($* Ne" @.0": (R-$ In La1-#
Items <ear prior to the preceding year of the current year
!receding year
5urrent year
0a2 !aid)up capital
0+2 -ree reser%es 0e3cluding re%aluation reser%es2
Total 0a2 Q 0+2
0c2 Accumulated losses
0d21eferred re%enue e3penditure not "ritten off
Net "orth 0a2Q0+2)0c2)0d2
(.& !lease enclose audited annual accounts for the last three years. ,here
unaudited reports are su+mitted, gi%e reasons. If minimum net"orth re4uirement
has +een met after last audited annual accounts, audited statement of accounts of a
later date also +e su+mitted.
136 | P a g e
(.= Name and Address of the !rincipal +an#ers of the Applicant company .
(.@ Name and address of the Auditors.
)$' OTHER INFORMATION
?.* 1etails of all pending litigations against the applicant company, directors and
employees8
Nature of dispute Name of the party Status
?.& Indictment or in%ol%ement in any fraud or economic offences +y the applicant
or any of its 1irectors, or #ey managerial !ersonnel, in the last three years.
*'$' DECLARATION
*'.* 6i%e the follo"ing declarations signed +y t"o directors8
IK,e here+y apply for registration.
IK,e "arrant that IK,e ha%e truthfully and fully ans"ered the 4uestions a+o%e and
pro%ided all the information "hich might reasona+ly +e considered rele%ant for the
purposes of my registration.
IK,e declare that the information supplied in the application form is complete and
correct -or and on +ehalf of
\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\
0Name of Applicant2
137 | P a g e
\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\
1irector
Name in Bloc# Betters
1ate
FORM B
SECURITIES AND E7CHANGE BOARD OF INDIA
(CREDIT RATING AGENCIES# REGULATIONS+ *)))
R796$BATI:N ( 0*2S
CERTIFICATE OF REGISTRATION
I. In e3ercise of the po"ers conferred +y su+)section 0*2 of section *& of the
Securities and 93change Board of India Act, *??&, read "ith the rules and
regulations made there under the Board here+y grants a certificate of registration to
\\\\\\\\\\\\\\\\\\\\\\\\\\\\as a credit rating agency in accordance "ith and
su+ject to the conditions in the regulations to carry out the acti%ity of the credit
rating agency8)
II. 7egistration 5ode for the credit rating agency is 57AK K K
138 | P a g e
III. This certificate shall +e %alid from \\\\\\\\\\\\\ to \\\\\\\\\ and may +e
rene"ed as specified in regulation *' of Securities and 93change Board of India
05redit 7ating Agencies2 7egulations, *???.
!lace8
1ate
By :rder
SdK)
-or and on +ehalf of
Securities and 93change Board of India
*SECOND SCHEDULE
* Su+stituted +y S9BI 05redit 7ating Agencies2 0Amendment2 7egulations, &''E
9arlier it read as follo"s8
Application fee 07s2 &>, '''K)
7egistration fee for grant of certificate 07s2 >, '', '''K)
7ene"al fee 07s.2 =, '', '''K)
(CREDIT RATING AGENCY# REGULATIONS+ *)))
R796$BATI:N = 0=2, (0&2, *'0=2S
FEES
139 | P a g e
PART A
Amount to +e paid as fees
Application fee 07s2 >', '''K)
7egistration fee for grant of certificate 07s2 >, '', '''K)
7ene"al fee 07s.2 *', '', '''K)
PART B
* The fees specified a+o%e shall +e paid +y "ay of a +an# draft in fa%our of
OSecurities and 93change Board of IndiaO paya+le at Mum+ai.
*THI71 S5H91$B9
* Su+stituted +y the S9BI 05redit 7ating Agencies20Second Amendment2
7egulation, &''= ".e.f *)*') &''=. 9arlier it "as amended +y the S9BI
0In%estment Ad%ise +y Intermediaries2 0Amendment2 7egulations &''*, ".e.f.&?)>)
&''*.
140 | P a g e
THIRD SCHEDULE
CODE OF CONDUCT FOR CREDIT RATING AGENCIES
0796$BATI:N *=2
0*2 A credit rating agency in the conduct of its +usiness shall o+ser%e high
standards of integrity and fairness in all its dealings "ith its clients.
0&2 A credit rating agency shall fulfil its o+ligations in an ethical manner.
0=2 A credit rating agency shall render at all times high standards of ser%ice,
e3ercise due diligence, ensure proper care and e3ercise independent professional
judgement. It shall "here%er necessary, disclose to the clients, possi+le sources of
conflict of duties and interests, "hile pro%iding un+iased ser%ices.
0@2 The credit rating agency shall a%oid any conflict of interest of any mem+er of
its rating committee participating in the rating analysis. Any potential conflict of
interest shall +e disclosed to the client.
0>2 A credit rating agency shall not indulge in unfair competition nor shall they
"ean a"ay client of any other rating agency on assurance of higher rating.
0E2 A credit rating agency shall not ma#e any e3aggerated statement, "hether oral
or "ritten, to the client either a+out its 4ualification or its capa+ility to render
certain ser%ices or its achie%ements in regard to ser%ices rendered to other clients.
141 | P a g e
0;2 A credit rating agency shall al"ays endea%or to ensure that all professional
dealings are effected in a prompt and efficient manner.
0(2 A credit rating agency shall not di%ulge to other clients, press or any other party
any confidential information a+out its client, "hich has come to its #no"ledge,
"ithout ma#ing disclosure to the concerned person of the rated company K client.
0?2 A credit rating agency shall not ma#e untrue statement or suppress any material
fact in any documents, reports, papers or information furnished to the Board or to
pu+lic or to stoc# e3change.
0*'2 A credit rating agency shall not generally and particularly in respect of issue
of securities rated +y it +e party to )
0a2 creation of false mar#etP
0+2 passing of price sensiti%e information to +ro#ers, mem+ers of the stoc#
e3changes, other players in the capital mar#et or to any other person or ta#e
any other action "hich is unethical or unfair to the in%estors.
0**2 A credit rating agency shall maintain an armGs length relationship +et"een its
credit rating acti%ity and any other acti%ity.
0*&2 A credit rating agency shall a+ide +y the pro%isions of the Act, regulations and
circulars "hich may +e applica+le and rele%ant to the acti%ities carried on +y the
142 | P a g e
RInserted on &>)?)&''* 0** A2 0a2 A credit rating agency or any of his employees
shall not render, directly or indirectly any in%estment ad%ice a+out any security in
the pu+licly accessi+le media, "hether real F time or non) real time, unless a
disclosure of his interest including long or short position in the said security has
+een made, "hile rendering such ad%ice.
S95$7ITI9S AN1 9A5HAN69 B:A71 :- IN1IA 05791IT 7ATIN6
A69N5I9S2 796$BATI:NS, *???
R7egulation *=S
CODE OF CONDUCT
*$ A credit rating agency shall ma#e all efforts to protect the interests of in%estors.
;$ A credit rating agency, in the conduct of its +usiness, shall o+ser%e high
standards of integrity, dignity and fairness in the conduct of its +usiness.
143 | P a g e
<$ A credit rating agency shall fulfill its o+ligations in a prompt, ethical and
professional manner.
%$ A credit rating agency shall at all times e3ercise due diligence, ensure proper
care and e3ercise independent professional judgment in order to achie%e and
maintain o+jecti%ity and independence in the rating process.
G$ A credit rating agency shall ha%e a reasona+le and ade4uate +asis for performing
rating e%aluations, "ith the support of appropriate and in depth rating researches. It
shall also maintain records to support its decisions.
H$ A credit rating agency shall ha%e in place a rating process that reflects consistent
and international rating standards.
&$ A credit rating agency shall not indulge in any unfair competition nor shall it
"ean a"ay the clients of any other rating agency on assurance of higher rating.
($ A credit rating agency shall #eep trac# of all important changes relating to the
client companies and shall de%elop efficient and responsi%e systems to yield timely
and accurate ratings. -urther a credit rating agency shall also monitor closely all
rele%ant factors that might affect the credit"orthiness of the issuers.
)$ A credit rating agency shall disclose its rating methodology to clients, users and
the pu+lic.
*'$ A credit rating agency shall, "here%er necessary, disclose to the clients,
possi+le sources of conflict of duties and interests, "hich could impair its a+ility to
144 | P a g e
ma#e fair, o+jecti%e and un+iased ratings. -urther it shall ensure that no conflict of
interest e3ists +et"een any mem+er of its rating committee participating in the
rating analysis, and that of its client.
**$ A credit rating agency shall not ma#e any e3aggerated statement, "hether oral
or "ritten, to the client either a+out its 4ualification or its capa+ility to render
certain ser%ices or its achie%ements "ith regard to the ser%ices rendered to other
clients.
*;$ A credit rating agency shall not ma#e any untrue statement, suppress any
material fact or ma#e any misrepresentation in any documents, reports, papers or
information furnished to the +oard, stoc# e3change or pu+lic at large.
*<$ A credit rating agency shall ensure that the Board is promptly informed a+out
any action, legal proceedings etc., initiated against it alleging any material +reach
or non)compliance +y it, of any la", rules, regulations and directions of the Board
or of any other regulatory +ody.
0+2 In case an employee of the credit rating agency is rendering such ad%ice, he
shall also disclose the interest of is dependent family mem+ers and the employer
including their long or short position in the said security, "hile rendering such
ad%ice.S
*%$ A credit rating agency shall maintain an appropriate le%el of #no"ledge and
competence and a+ide +y the pro%isions of the Act, regulations and circulars,
145 | P a g e
"hich may +e applica+le and rele%ant to the acti%ities carried on +y the credit
rating agency. The credit rating agency shall also comply "ith a"ard of the
:m+udsman passed under the Securities and 93change Board of India
0:m+udsman2 7egulations, &''=.
*G$ A credit rating agency shall ensure that there is no misuse of any pri%ileged
information including prior #no"ledge of rating decisions or changes.
*H$ 0a2 A credit rating agency or any of his employees shall not render, directly or
indirectly any in%estment ad%ice a+out any security in the pu+licly accessi+le
media.
0b2 A credit rating agency shall not offer fee)+ased ser%ices to the rated entities,
+eyond credit ratings and research.
*&$ A credit rating agency shall ensure that any change in registration statusKany
penal action ta#en +y +oard or any material change in financials "hich may
ad%ersely affect the interests of clientsKin%estors is promptly informed to the clients
and any +usiness remaining outstanding is transferred to another registered person
in accordance "ith any instructions of the affected clientsKin%estors.
*($ A credit rating agency shall maintain an armGs length relationship +et"een its
credit rating acti%ity and any other acti%ity.
*)$ A credit rating agency shall de%elop its o"n internal code of conduct for
go%erning its internal operations and laying do"n its standards of appropriate
146 | P a g e
conduct for its employees and officers in the carrying out of their duties "ithin the
credit rating agency and as a part of the industry. Such a code may e3tend to the
maintenance of professional e3cellence and standards, integrity, confidentiality,
o+jecti%ity, a%oidance of conflict of interests, disclosure of shareholdings and
interests, etc. Such a code shall also pro%ide for procedures and guidelines in
relation to the esta+lishment and conduct of rating committees and duties of the
officers and employees ser%ing on such committees.
;'$ A credit rating agency shall pro%ide ade4uate freedom and po"ers to its
compliance officer for the effecti%e discharge of his duties.
;*$ A credit rating agency shall ensure that the senior management, particularly
decision ma#ers ha%e access to all rele%ant information a+out the +usiness on a
timely +asis.
;;$ A credit rating agency shall ensure that good corporate policies and corporate
go%ernance are in place.
;<$ A credit rating agency shall not, generally and particularly in respect of issue of
securities rated +y it, +e party to or instrumental forU
0a2 creation of false mar#etP
0b2 price rigging or manipulationP or
147 | P a g e
0c2 dissemination of any unpu+lished price sensiti%e information in respect
of securities "hich are listed and proposed to +e listed in any stoc#
e3change, unless re4uired, as part of rationale for the rating accorded.
IPO GRADINGDRATING
,hen the Securities and 93change Board of India 0S9BI2 decided to scrap
discretionary allotment for 4ualified institutional +uyers 0DIBs2 and s"itch to the
more transparent proportionate allotment system, it +ecame the first regulator to
stand up to the po"erful in%estment +an#ing community any"here in the "orld.
:nce the decision "as ta#en, it "as e%ident that the e3aggerated outrage and
predictions that large institutional in%estors "ould shun I!:s "ere completely
+aseless.
148 | P a g e
That decision recogni.ed the specific needs of the Indian capital mar#et and "as
the result of pressure from in%estor groups. The path to mandatory grading of I!:s
has +een roc#y, "ith enormous opposition from companies, in%estment +an#ers,
fund managers, mar#et e3perts and S9BI +oard mem+ers. ,e learn that the final
decision came a+out in the face of strong opposition +y certain +oard mem+ers
0apparently not full)time2 and that too only, "ith a t"ist in the tail, "hich dilutes
the original proposal.
The alleged opposition of the regulatorGs +oard mem+ers raises an interesting
4uestion. All +oard)le%el discussions must, indeed, remain confidential in order to
ensure free and fran# e3pression, +ut "hat is the fiduciary responsi+ility of +oard
mem+ers of a "atchdog organi.ation, "ho ha%e no #no"ledge, training or
e3pertise a+out capital mar#ets, "hen they choose to oppose recommendations of
the !rimary Mar#et Ad%isory 5ommittee that are endorsed +y the regulatorY It is
also important to remem+er that in%estor groups ha%e +een pressing for I!:
grading for se%eral yearsP first "ith the In%estor 9ducation and !rotection -und
0attached to the ministry of company affairs2, "hich de%eloped cold feet and
dropped e%en its plans for a pilot project and later "ith the capital mar#et regulator.
149 | P a g e
:%er the years, those opposed to I!: grading ha%e constructed se%eral elegant
arguments to ru++ish its utility, +ut from an in%estor standpoint, the logic is simple.
The disclosure)+ased model adopted +y the regulator, leads to a +ul#y, jargon)filled
prospectus that can neither +e read nor understood +y the a%erage in%estorP
conse4uently, a simple, one)page e%aluation of disclosures +y an e3pert agency,
"hich also helpfully condenses its findings into a single numerical grade on a scale
of fi%e, is clearly a +lessing. The offer price of the I!: "ill remain an important
factor in the final in%estment decisionUafter all, e%en the +est companies can +e
+ad in%estments at the "rong price. But that is a reasona+le decision to lea%e to the
in%estor.
In"0.d21"i.n
I!: grading is the grade assigned +y a 5redit 7ating Agency registered "ith
S9BI, to the initial pu+lic offering 0I!:2 of e4uity shares or any other
security "hich may +e con%erted into or e3changed "ith e4uity shares at a
later date. The grade represents a relati%e assessment of the fundamentals of
that issue in relation to the other listed e4uity securities in India. Such
grading is generally assigned on a fi%e)point point scale "ith a higher score
indicating stronger fundamentals and %ice %ersa as +elo".
150 | P a g e
I!: grade *8 Poor fundamentals
I!: grade ;8 elow!average fundamentals
I!: grade <8 "verage fundamentals
I!: grade %8 "bove!average fundamentals
I!: grade G8 Strong fundamentals
I!: grading has +een introduced as an endea%or to ma#e additional
information a%aila+le for the in%estors in order to facilitate their assessment
of e4uity issues offered through an I!:.
I!: grading can +e done either +efore filing the draft offer documents "ith
S9BI or thereafter. Ho"e%er, the !rospectusK7ed Herring !rospectus, as the
case may +e, must contain the gradeKs gi%en to the I!: +y all 57As
approached +y the company for grading such I!:.
151 | P a g e
The company desirous of ma#ing the I!: is re4uired to +ear the e3penses
incurred for grading such I!:.
I!: grading is not optional. A company "hich has filed the draft offer
document for its I!: "ith S9BI, on or after *
st
May, &'';, is re4uired to
o+tain a grade for the I!: from at least one 57A.
I!: gradeKs cannot +e rejected. Irrespecti%e of "hether the issuer finds the
grade gi%en +y the rating agency accepta+le or not, the grade has to +e
disclosed as re4uired under the 1I! 6uidelines. Ho"e%er the issuer has the
option of opting for another grading +y a different agency. In such an e%ent
all grades o+tained for the I!: "ill ha%e to +e disclosed in the offer
documents, ad%ertisements etc.
152 | P a g e
I!: grading is intended to run parallel to the filing of offer document "ith
S9BI and the conse4uent issuance of o+ser%ations. Since issuance of
o+ser%ation +y S9BI and the grading process, function independently, I!:
grading is not e3pected to delay the issue process.
The I!: grading process is e3pected to ta#e into account the prospects of the
industry in "hich the company operates, the competiti%e strengths of the
company that "ould allo" it to address the ris#s inherent in the +usiness0es2
and capitalise on the opportunities a%aila+le, as "ell as the companyGs
financial position.
,hile the actual factors considered for grading may not +e identical or
limited to the follo"ing, the areas listed +elo" are generally loo#ed into +y
the rating agencies, "hile arri%ing at an I!: grade
Business !rospects and 5ompetiti%e !osition
i. Industry !rospects
ii. 5ompany !rospects
153 | P a g e
-inancial !osition
Management Duality
5orporate 6o%ernance !ractices
5ompliance and Bitigation History
Ne" !rojectsU7is#s and !rospects
It may +e noted that the a+o%e is only indicati%e of some of the factors
considered in the I!: grading process and may %ary on a case to case +asis.
.I!: grading is done "ithout ta#ing into account the price at "hich the
security is offered in the I!:. Since I!: grading does not consider the issue
price, the in%estor needs to ma#e an independent judgment regarding the
price at "hich to +id forKsu+scri+e to the shares offered through the I!:.
154 | P a g e
I!: 6rading is intended to pro%ide the in%estor "ith an informed and
o+jecti%e opinion e3pressed +y a professional rating agency after analy.ing
factors li#e +usiness and financial prospects, management 4uality and
corporate go%ernance practices etc. Ho"e%er, irrespecti%e of the grade
o+tained +y the issuer, the in%estor needs to ma#e hisKher o"n independent
decision regarding in%esting in any issue after studying the contents of the
prospectus including ris# factors carefully.
As on date the follo"ing four credit rating agencies are registered "ith
S9BI.
a# 5redit Analysis H 7esearch Btd 05A792
b# I57A Bimited
c# 57ISIB
d# -IT5H 7atings
155 | P a g e
BOND RATING
B.nd Ra"in Ba0ia9ili"3 and Me":.d.l.38
9%idence from the Indian Bond Mar#et
5redit rating is an indicator of the current opinion on the capa+ility of capital to
ser%ice its de+t o+ligations in a timely fashion. It is a useful source of information
for in%estors, companies, +an#s and other financial intermediaries. ,hile the
%arious +ond rating areas ha%e +een e3tensi%ely e%aluated for mature mar#ets,
similar e%idence for emerging mar#ets such as India is limited. In particular, the
issues relating to +ond rating %aria+ility o%er time and the consistency of +ond
rating methodology ha%e +een ignored.
156 | P a g e
In an attempt to fill this lacuna, Sanjay Sehgal and Mamta Arora conduct a t"o)
part study. In the first part, "hich deals "ith +ond rating %aria+ility o%er time, the
time)series %aria+ility of +ond ratings has +een analysed. The issue is also
addressed sector)"ise and industry)"ise. A separate analysis has +een carried out
for the t"o leading +ond rating agencies ) 57ISIB and I57A. The second part
relates to consistency in +ond rating methodology adopted +y rating agencies.
The results indicate that +ond ratings are +ecoming e3tremely %aria+le o%er time
and the majority of these rating changes are on the do"nside, "ith price ris#
implications for in%estors. ,hile +ond rating %aria+ility is high for +oth the
manufacturing and the financial sectors, the figures are relati%ely higher for the
latter. 7ating changes also seem to ha%e an industry pattern "ith a greater
concentration in industries more affected +y economic slo"do"n and glo+al
competition. The findings for consistency of +ond rating methodology are also not
encouraging. ,hile the #ey financial ratios do not %ary for companies +elonging to
the same rating class, they also do not %ary across companies +elonging to different
rating classes. This points at pro+a+le "ea#nesses in rating methodology as the
important financial factors fail to discriminate across rating classes. !erhaps the
su+jecti%e judgments of rating analysts taint the relationship +et"een +ond ratings
157 | P a g e
and #ey financial factors. Inconsistency in +ond rating methodology may partly
e3plain the increasing +ond rating %aria+ility o%er time.
In"0.d21"i.n
In in%estment, the 9.nd 10edi" 0a"in assesses the credit "orthiness of a
corporationNs de+t issues. It is analogous to credit ratings for indi%iduals and
countries. The credit rating is a financial indicator to potential in%estors of de+t
securities such as +onds. These are assigned +y credit rating agencies such as
MoodyNs, Standard H !oorNs, and -itch to ha%e letter designations 0such as AAA,
B, 552 "hich represent the 4uality of a +ond. Bond ratings +elo" BBBKBaa are
called jun# +onds
158 | P a g e
M..d3>- S?P Fi"1:
L.n
Te0!
S:.0"
Te0!
L.n
Te0!
S:.0"
Te0!
L.n
Te0!
S:.0"
Te0!

Aaa !)* AAA A)*Q AAA A*Q !rime
Aa* AAQ AAQ High grade
Aa& AA AA
Aa= AA) AA)
A* AQ A)* AQ A* $pper medium
grade
A& A A
A= !)& A) A)& A) A&
Baa* BBBQ BBBQ Bo"er medium
grade
Baa& !)= BBB A)= BBB A=
Baa= BBB) BBB)
Ba* Not BBQ B BBQ B Non In%estment
159 | P a g e
!rime grade
speculati%e
Ba& BB BB
Ba= BB) BB)
B* BQ BQ Highly
Speculati%e
B& B B
B= B) B)
5aa* 555Q 5 555 5 Su+stantial ris#s
5aa& 555 93tremely
speculati%e
5aa= 555) In default "ith
little
prospect for
reco%ery
5a 55
K 1 K 111 K In default
K 11
K 1
160 | P a g e
Credit Rating Tiers

MoodyNs assigns +ond credit ratings of Aaa, Aa, A, Baa, Ba, B, 5aa, 5a, 5, "ith
,7 and N7 as "ithdra"n and not rated.
R*S
Standard H !oorNs and -itch assign
+ond credit ratings of AAA, AA, A, BBB, BB, B, 555, 55, 5, 1.
As of :cto+er *E, &''?, there "ere @ companies rated AAA +y SH!8
R&S
Automatic 1ata !rocessing 0N<S98A1!2
/ohnson H /ohnson 0N<S98/N/2
Microsoft 0NAS1AD8MS-T2
933onMo+il 0N<S98A:M2
MoodyNs, SH! and -itch "ill all also assign intermediate ratings at le%els +et"een
AA and 555 0e.g., BBBQ, BBB and BBB)2, and may also choose to offer guidance
0termed a Ocredit "atchO2 as to "hether it is li#ely to +e upgraded 0positi%e2,
do"ngraded 0negati%e2 or uncertain 0neutral2.
161 | P a g e
M..d3>- S"anda0d
? P..0>-
C0edi" @.0":ine--
Aaa AAA Triple A ] 5redit ris# almost .ero
Aa* AAQ Safe in%estment, lo" ris# of failure
Aa& AA O
Aa= AA) O
A* AQ Safe in%estment, unless unforeseen e%ents should occur in
the economy at large or in that particular field of +usiness
A& A O
A= A) O
Baa* BBBQ Medium safe in%estment. :ccurs often "hen economy has
deteriorated. !ro+lems may arise
Baa& BBB O
Baa= BBB) O
162 | P a g e
Ba* BBQ Speculati%e in%estment. :ccurs often in deteriorated
circumstances, usually pro+lematic to predict future
de%elopment
Ba& BB O
Ba= BB) O
B* BQ Speculati%e in%estment. )1eteriorating situation e3pected
B& B O
B= B) O
5aa 555 High li#elihood of +an#ruptcy or other +usiness interruption
5a 55 O
5 5 O
1 Ban#ruptcy or lasting ina+ility to ma#e payments most
li#ely
,7 7ating "ithdra"n
R*S
N7 Not rated
R*S
163 | P a g e
Criticism
$ntil the early *?;'s, +ond credit ratings agencies "ere paid for their "or# +y
in%estors "ho "anted impartial information on the credit "orthiness of securities
issuers and their particular offerings. Starting in the early *?;'s, the OBig ThreeO
ratings agencies 0SH!, MoodyNs, and -itch2 +egan to recei%e payment for their
"or# +y the securities issuers for "hom they issue those ratings, "hich has led to
charges that these ratings agencies can no longer al"ays +e impartial "hen issuing
ratings for those securities issuers. Securities issuers ha%e +een accused of
OshoppingO for the +est ratings from these three ratings agencies, in order to attract
in%estors, until at least one of the agencies deli%ers fa%ora+le ratings. This
arrangement has +een cited as one of the primary causes of the su+prime mortgage
crisis 0"hich +egan in &'';2, "hen some securities, particularly mortgage +ac#ed
securities 0MBSs2 and collaterali.ed de+t o+ligations 051:s2 rated highly +y the
credit ratings agencies, and thus hea%ily in%ested in +y many organi.ations and
indi%iduals, "ere rapidly and %astly de%alued due to defaults, and fear of defaults,
on some of the indi%idual components of those securities, such as home loans and
credit card accounts.
164 | P a g e

M&nici'a# (onds
Municipal +onds, instruments issued +y local, state, or federal go%ernments in the
$nited States, ha%e a separate namingKclassification system "hich mirrors the tiers
for corporate de+t.

Defa&#t Rates
The historical default rate for municipal +onds is lo"er than that of corporate
+onds. The Municipal Bond -airness Act 0H7 E='(2
R=S
, introduced Septem+er ?,
&''(, included the follo"ing ta+le gi%ing +ond default rates up to &''; for
municipal %ersus corporate +onds +y rating and rating agency.
165 | P a g e
C2!2la"i,e Hi-".0i1 De/a2l" Ra"e- (in pe01en"#
))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))
MoodyNs SH!
7ating categories )))))))))))))))))))))))))))))))))))))))
Muni 5orp Muni 5orp
))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))
AaaKAAA......................... '.'' '.>& '.'' '.E'
AaKAA........................... '.'E '.>& '.'' *.>'
AKA............................. '.'= *.&? '.&= &.?*
BaaKBBB......................... '.*= @.E@ '.=& *'.&?
BaKBB........................... &.E> *?.*& *.;@ &?.?=
BKB............................. **.(E @=.=@ (.@( >=.;&
5aa)5K555)5..................... *E.>( E?.*( @@.(* E?.*?
In%estment 6rade................ '.'; &.'? '.&' @.*@
Non)In%est 6rade................ @.&? =*.=; ;.=; @&.=>
All............................. '.*' ?.;' '.&? *&.?(
))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))
166 | P a g e
CRISIL SME RATINGSE

Ba1F0.2nd
7ecent years ha%e seen rapid gro"th in the Small and Medium 9nterprises 0SM92
sector, and an enhanced appreciation of this sectorNs critical role in dri%ing
economic gro"th. Ho"e%er, authentic and independent credit research in this
sector has so far +een minimal. ,ith many pri%ate and pu+lic sector +an#s
directing resources and focus to"ards SM9 lending, the need has arisen for
independent credit opinions. 57ISIB offers its rating ser%ices to SM9s to meet this
need. SM9 ratings are offered on an e3clusi%e rating scale, distinct from regular
ratings offered to large corporations, +an#s and go%ernment entities.
5redit e%aluation in the SM9 sector needs a speciali.ed approach, as the issues and
dri%ers of credit 4uality are different from those applica+le for large companies.
The "eightages assigned to %arious parameters of e%aluation therefore need to +e
different. There has to +e a good understanding of the particular cluster or area
"here the SM9 is operating.
167 | P a g e
,hen Balchand Nathalal 6andhi "as approached +y 5risil three years ago to get a
credit rating e3ercise done for his companies, BN 5hemicals and Modera
5hemicals, he "as s#eptical +ut decided to go ahead any"ay. The e3periment
"or#ed. ,hile 6andhiGs +usinesses already had a good relationship "ith Saras"at
Ban# for years, the rating helped them get an additional '.>T interest rate
reduction on their +an# +orro"ings. ,e "ere also noticed +y other companies and
ne" en4uiries +egan to flo" in,J says 6andhi, "hose firmsU"ith a com+ined
turno%er of 7s @' croreUma#e chemicals that are used in te3tile processing, and
soap, paper and paint manufacture.
No", as 6andhi loo#s to e3pand his +usiness, heGs already +eing approached +y
other +an#s to fund his e3pansion plans. This could +e due to the rating "e got
from 5risil o%er the past three years,J he says. 5ulti%ating healthy relationships
"ith +an#s may ha%e helped small companies tide o%er credit access issues to an
e3tent.
Ho"e%er, +an#sG reluctance to lend to MSM9s often stems from lac# of
information, and the fact that e%aluating ris# in such firms is often a difficult and
time consuming process. 5redit rating could +e the solution. A rating report
168 | P a g e
pro%ided +y an independent agency li#e 5risil, I57A or 5A79 offers deep insights
into a companyGs operations.
It can re%eal the credit"orthiness of the company in relation to its peers in the
sector, and an assessment of its strengths and "ea#nesses +ased on its financial
condition. Anyone "ho sees the report is instantly appraised of the health of the
company,J says <ogesh 1i3it, head)SM9 7atings at 5risil. Barge corporates ha%e
+een getting themsel%es rated for many years no", +ut in the "orld of small
+usiness this is a relati%ely recent and emerging trend.
-our years ago, the National Small Industries 5orporation 0NSI52 launched a
programme "here a micro or small enterprise 0"ith a ma3imum in%estment of 7s >
crore in plant and machinery2 "ould recei%e a ;>T su+sidy on rating fees 0around
7s >','''2 charged +y any of the si3 empanelled rating agenciesF5risil, I57A,
1HB , SM97A, -itch and 5A79. This has had a positi%e effect "ith around >,'''
units getting rated last year, and NSI5 e3pects that at least another ;,''' "ill
follo" suit this year.
169 | P a g e
$nder the ne" Basel II norms that came into effect from April * this year, rating is
mandatory for +usinesses "ith in%estments o%er 7s *' crore. -or those firms that
are +elo" the 7s *')crore le%el, rating is also +eneficial, especially "hen it comes
to dealing "ith customers. -or a small +usiness, a rating +y a recogni.ed agency
helps it command +etter terms "ith its +uyers,J says H! Kumar, chairman and
managing director of NSI5.
A ro+ust rating process includes a %isit to the factories and "arehouses to
authenticate information pro%ided +y the company, %erifying if the insurance of
assets is in order and also ta#ing feed+ac# from suppliers, customers and +an#ers
of the firm, among other aspects.
The NSI5 rating scale ta#es into account t"o factorsUperformance capa+ility and
financial strength. -or e3ample, a company "ith moderate performance capa+ility
and high financial strength "ill +e rated S9=A, "hile one "ith "ea# performance
capa+ility and moderate financial strength "ill +e rated S9@B.
:n the +asis of rating reports, +an#s are a+le to ta#e faster decisions on project
loans as "ell as on rene"ing and increasing credit limits for those clients. 9%ery
170 | P a g e
+an# has its o"n internal guidelines on lending +ut 1i3it says ratings are useful
since information a+out small companies is not readily a%aila+le. It is an
independent thirdparty assessment of the o%erall condition of the SM9,J he says.
In that sense, ratings +ring credi+ility and a +etter image to a sector thatGs
fragmented and often opa4ue a+out the financial health of its companies. 7atings
can +e re%ealed to %endors and customers "ithout furnishing all financial data,J
says 7ajesh 1u+ey, e3ecuti%e director, I57A :nline.
Ta#e the case of Inmarco Industries, "hich ma#es high)tech industrial sealing
products. The 7s &>)crore 0turno%er2 firm has +een getting rated +y 5risil e%ery
year for the past four years and has managed to o+tain the highest le%el of S9*A
each time. ,e ha%e +een a+le to esta+lish /Cs and partnerships "ith the help of
the rating,J says 5hetan 1oshi, e3ecuti%e director, Inmarco, adding that itGs a
cali+ration tool for his +usiness that could come handy "hen he decides to go for
an I!: later. It helps us in self)analysis as "e e3pand.J Many companies ha%e
+een le%eraging ratings to enhance their +rand image and ac4uire ne" clients.
-or instance, 6andhi says his firmsG rating is displayed prominently on the
company stationery and "e+site. It gi%es us an identity in ne" mar#ets and "ith
171 | P a g e
ne" customers,J he says. Moreo%er some supply tender notices insist the applying
companies +e rated. 7ating is also +ringing a shift in thin#ing among SM9s in
terms of self)regulation . 7ated companies today understand that good corporate
go%ernance, transparency and a sound accounting policy are all important in this
changing "orld,J says 1i3it.
That doesnGt mean ratings ha%e +ecome fully accepted among small companies and
their +an#ers. There ha%e +een cases reported "here +an#s ha%e not honoured
ratings done +y e3ternal agencies, and ha%e relied only on their o"n due diligence.
7ajee% Kar"al, 59:, Milagro" Business and Kno"ledge Solutions, a small
+usiness ad%isory firm says, Ban#s should accept it. :nly if they gi%e loans on the
+asis of the rating "ill it ha%e any meaning.J At Meerut)+ased Kanohar 9lectricals,
managing director 1inesh Singhal contends that mandatory rating due to Basel II
adds to his cost and pro%ides no additional %alue. These rating agencies are not
fully e4uipped to rate according to Basel II.
They prepare reports after just loo#ing at the +alance sheets,J he says. ,hile the
ma3imum +enefit to a company getting rated is an interest reduction of '.>T, the
cost of rating "or#s out to +e higher than the sa%ings, he says. There are other
172 | P a g e
limitations to the ratings system as "ell, says Anil Bhard"aj, secretary general of
the -ederation of Indian Micro and Small H Medium 9nterprises 0-ISM92. Most
+an#s ha%e a tacit understanding "ith one or t"o rating agencies and they do not
accept ratings +y other agencies. Therefore, a serious re)loo# is re4uired in the
models and the mandatory nature of ratings. Secondly, the field must +e opened up
to more credit rating players to +ring in greater competition and customer ser%ice
orientation,J he says.
FINDINGS
7atings are not a guarantee against loss.
5redit ratings are assigned to companies through 5redit rating agency.
The rating gi%en +y the agency is %ery important for8
$nvestor
$ssuer
173 | P a g e
%inancial $ntermediaries
usiness Counter!parties
&egulators
These days people refer to = different credit ratings agencies in order to
ma#e correct decision of in%estment.
Issuer can Appeal to the credit rating agency if they "ould not satisfy "ith
the ratings
C.n,e0"in a Bad C0edi" Ra"in in". G..d C0edi" Ra"in
9%en if past mista#es ha%e +rought your company to the despair and the credit
rating is %ery poor, you al"ays ha%e the chances to impro%e. Ho"e%er, to re+uild
the credit rating, your financial management team should ha%e all the rele%ant
information "ith it.
There are se%eral computer soft"are programs a%aila+le in the mar#et that help a
lot in this regard. Ba" also permits to con%ert the +ad credit rating in to good credit
rating and repairing the damage done +y poor credit rating. According to latest
174 | P a g e
regulations, credit +ureaus ha%e to "ipe out negati%e remar#s from your
organi.ationsN credit report after a certain period of time. <ou can argue "ith them
regarding any information that you feel o+jectiona+le. They ha%e to delete it if they
cannot %erify such information.
Kn.@ ":e 1.!!.n !3":- 0ela"ed ". 3.20 10edi" 0ep.0"
Today the consumers ha%e +een really informed and %ast majority of them are also
a"are a+out the credit report system or e%en their o"n credit scores. Ho"e%er it is
astonishing to #no" that the there are some myths that people +elie%e in
connection to their credit reports. Some of the common ones are mentioned +elo"8
5hec#ing your credit report hurts your credit score
:ften it has +een +elie%ed that chec#ing your o"n credit report and credit score
"ill put a negati%e impact on your credit score. Ho"e%er the fact is that a soft
in4uiry does not go against your score. :n the other hand, if anyone else li#e a
lender or credit card company is chec#ing your credit report, then this is
considered as a hard in4uiry and normally it ta#e off a+out > credit points from
your score. Moreo%er one should #no" that multiple in4uiries in a *@ days period
175 | P a g e
are just treated as just one in4uiry in the credit score rating system. Also the system
ignores all in4uiries made "ithin =' days +efore the day "hen the credit score is
computed. Therefore if you "ant to minimi.e the damage on your credit score
through credit in4uiries then try shopping for a loan "ithin *@ days period.
5losing old accounts and canceling credit cards impro%es your credit report score
This is a %ery common myth +ecause sometimes e%en your lenders tell you to close
your old and inacti%e accounts in order to impro%e your credit scores. But closing
old accounts and canceling credit cards may actually ha%e an opposite effect "ith
the current credit score rating system. It may lea%e a negati%e impact as it "ill
ma#e your credit history appear shorter and there+y lo"er your credit score.
5redit counseling causes harm to your score
Attending a de+t management program "ill not cause any harm to credit score. The
current -I5: credit score rating system ta#e no notice of any reference to credit
counseling that may +e mentioned in your file. The researchers ha%e found that
people "ho ha%e opted for credit counseling ha%e not defaulted on their de+ts and
therefore it is not ta#en into consideration "hile ta+ulating credit score. Ho"e%er
176 | P a g e
late payments can hurt your credit report and credit counseling can hurt your
a+ility to a%ail a loan +ecause you pro+a+ly ha%e had trou+le paying creditors.
All credit reports are the same
Most people +elie%e that credit reports from all the three credit rating agencies is
same +ut it is not so. These days, most creditors across the country do report their
information to all three major agencies F 94uifa3, 93perian, Trans$nion F and as
they are separate firms, the method and the pace in "hich they update records may
not necessarily +e the same. So ma#e sure you get your credit reports from all three
major credit reporting +ureaus +efore you apply for a +ig loan.
177 | P a g e
SOME MORE CUESTIONS
5:i1: C.!panie- A0e A//e1"ed 93 Ra"in-I
9%ery company or country that has a rating "ill +e affected in its +orro"ing costs,
at least in pu+lic mar#ets. A higher ran#ing means lo"er interest rates for the
+orro"er and %ice %ersa. The price of credit is set not only +y relati%e credit ratings
+ut also +y the general supply of money and the specifics of an indi%idual
+orro"ing. A lo")rated +orro"er, for e3ample, can sometimes +orro" more
cheaply +y securing the +ond "ith a claim on specific assets, or +y paying a third)
party to insure the +ond. 5on%ersely, a highly)rated +orro"er may choose a
structure that attracts a lo"er rating +ecause of special characteristics of the issue,
including its standing in the +orro"erNs capital structure or the jurisdiction in "hich
it is issued.
H.@ d. I I!p0.,e ":e C0edi" Ra"in ./ M3 O0aniJa"i.nI
178 | P a g e
To impro%e the credit rating of any corporation you need to increase the credit
score. If the persons "ho are managing your financial matters are cautious enough
to pay all the +ills on time, they are doing the +est thing to achie%e higher credit
rating. :n the contrary, if they ma#e payments late, not only it ad%ersely affects
your companyNs credit rating +ut also the added interest ma#es your organi.ation
inde+ted for a longer period for time. Ho"e%er, if they are finding it difficult to pay
according to present schedule, as# them to sit "ith the creditors and reschedule
payment dates.
,hate%er efforts you ma#e to increase the credit rating of your +usiness
organi.ation "ill not go in the %ain. ,hene%er you need e3tra money in the future,
you "ill +e a+le to get it. -urthermore, you "ill get the money at lo"er interest
rates as compared to those organi.ations that ha%e a +ad credit rating. Similarly,
getting mortgage loans or car loans also +ecome easier to the companies "ith good
credit rating.
I- Se0,i1e "a8 pa3a9le .n In/.0!a"i.n and Ad,i-.03 -e0,i1e- 0ende0ed 93
C0edi" Ra"in Aen1ie-I
179 | P a g e
No, the information and ad%isory ser%ices, if any, rendered +y credit rating
agencies "ould not attract ser%ice ta3 for the reason that ta3a+le ser%ices in respect
of credit rating agency means ser%ice pro%ided to a client only in relation to credit
rating of any financial o+ligation, instrument or security. Ser%ices of research and
information such as analysis of industries in specific sectors of financial and
+usiness aspects of a company, other customised ser%ices on say +usiness houses
and capital mar#ets, inde3ing ser%ices and information ser%ices such as
pri%atisation policy for infrastructure projects, macro studies of infra)structure
sector, implication of go%ernment policy in respect of any sector, financial
modelling, +id e%aluation, po"er purchase agreement, restructuring of state
electricity +oards, etc are not ser%ices Nin relation toN the credit rating of any
financial o+ligation, instrument or security and are hence outside the am+it of
ser%ice.
I- ":e Se0,i1e "a8 pa3a9le .n !.ne3 0e1ei,ed 93 C0edi" 0a"in Aen13 /.0 ":e
p20p.-e ./ C0edi" Ra"in a--in!en"+ 92" 0e"20ned ". ":e 1lien" d2e ". an3
0ea-.n -29-eK2en"l3I
No. The amount recei%ed in ad%ance for the ser%ice of rating to +e pro%ided to the
client, is only an ad%ance and the ser%ices can +e deemed to ha%e +een pro%ided
180 | P a g e
only "hen the rating e3ercise has +een completed and "hen such rating has +een
assigned. In case rating is not done, for any reason and the entire amount is
returned +ac# to the client,. it cannot +e said that ser%ices ha%e +een rendered and
hence ser%ice ta3 is not attracted.
5:a" @.2ld 9e ":e 0ele,an" da"e /.0 de"e0!inin ":e lia9ili"3 /.0 pa3!en" ./
Se0,i1e Ta8I
The rele%ant date for determining the ser%ice ta3 lia+ility "ould +e the date "hen
rating has +een assigned to a particular instrument. In the case of ongoing projects,
"here rating has +een assigned after the notified date i.e. *Eth :cto+er, *??(, the
ser%ice ta3 "ould +e paya+le.
181 | P a g e
CONCLUSION
The credit mar#et turmoil that +egan in the $.S. in the summer of &''; has +een
amplified in recent months +y dramatic slo"ing of +roader economic acti%ity.
,hat +egan as a significant, +ut relati%ely isolated, deterioration in the
performance of su+)prime housing loans has led to a "a%e of negati%e e%ents that
ha%e re%er+erated across a highly)le%eraged, interconnected and, at times, opa4ue
glo+al financial system. More importantly, a credit crisis has transformed into a
much "ider and deeper crisis of confidence in the glo+al mar#ets. 5redit rating
agencies ha%e an opportunity to help restore confidence in mar#ets +y restoring
confidence in our industry.
Many necessary actions can and ha%e +een underta#en at the indi%idual firm and
industry le%el and "e are committed to continuing along that path. Nonetheless, a
fe" #ey actions and reforms as I ha%e descri+ed a+o%e re4uire help from the
+roader mar#et and o%ersight authorities. -or &''?, the description of credit is
identical to the "ay for"ardJ for credit mar#ets8 confidence. The re+uilding
process "ill +e far more protracted than the e%ents that necessitated it F "hich is
all the more reason to get on "ith the tas# "ith energy, tenacity and coordination.
182 | P a g e
CUESTIONARIES
Dues. * Area of "or#
0a2 A+ohar
0+2 -a.il#a
0c2 /alala+ad
0d2 6uruharshai
0e2 Zira
0f2 -ero.pur
Dues. & Area of +usiness
0a2 -ood processing
0+2 5hemical H allied products
0c2 5otton gin. H!ressing
0d2 7ice Sheller
0e2 And others
Dues. = 1o you #no" a+out credit ratingY
0a2 <es
0+2 No
Dues.@ If, yes than to, "hich you ha%e heard a+outY
0a2 5risil
0+2 Icra
0c2 5are
0d2 -itch
0e2 :nicra
0f2 Smera
Dues. > Ha%e you got your company rated +y any rating agencyY
0a2 <es
0+2 No
183 | P a g e
Dues .E To, "ith "hich +an# your credit limit isY
0a2 SBI
0+2 :B5
0c2 !NB
0d2 SB:!
0e2 5BI
0f2 And others
Dues.; Ho" much "ould +e your credit limit "ith the +an#sY 0In rupees2
0a2 Bess than *' la#h
0+2 *' to =' la#h
0c2 =' to >' la#h
0d2 >' to ;> la#h
0e2 ;> to * crore and a+o%e
Dues.( Ho" much "ould +e appro3imate annual sales turno%erY 0In rupees2
0a2 Bess @' la#h
0+2 @' la#h to ;' la#h
0c2 ;' la#h to* crore
0d2 * crore to & crore
0e2 & crore and a+o%e
Dues.? Ho" much of your products are actually e3portedY 0In percentage2
0a2 No e3ports
0+2 $p to >T
0c2 Bet"een >T ) *'T
0d2 *'T and o%er
Dues.*' 1o you intend to e3pand the o%erall capacity in the futureY
If yes, to "hat e3tent of present o%erall capacity do you plan to increaseY 0In
percentage2
184 | P a g e
0a2 ')>T
0+2 >)*'T
0c2 *')='T
0d2 A+o%e ='T
Dues.** 1o you a%ail loans for managing +usinessY -acilities including non)fund
+ased.
If yes, purpose of funds
0a2 ,or#ing 5apital
0+2 93pansion
0c2 1i%ersification
0d2 Machinery Maintenance
0e2 Machinery !urchase
Dues.*& Ho" much interest do you pay against your loan from +an#sY 0In
percentage2
0a2 Belo" ?T
0+2 ?)**T
0c2 **)*@T
0d2 A+o%e *@T
Dues.*= Has your company ac4uired any certification for adopting 4uality
standardsY 0Multiple :ption possi+le2
0a2 IS: ?'''
0+2 IS: *@'''
0c2 Any other 0Specify2
0d2 No Ha%ing
Dues.*@ 1o you use ser%ices of professional e3pertY
0a2 <es
0+2 No
185 | P a g e
Dues.*>Ho" is prospect of the industry in near future for the small H medium
unitsY
0a2 93cellent
0+2 Moderate
0c2 Bad
0d2 6ood
0e2 Not good

BIBLIOGRAPHY
"""."e#ipedia.com
""".smera.in
186 | P a g e
""".nsic.com
""".crisil.com
""".icra.in
""".se+i.com
187 | P a g e

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