Working of Credit Rating Agencies in India:

An Analysis of Investors’ Perception

Bheemanagouda* and J Madegowda**

Since 1987, credit rating has made headway into the Indian capital market. Since their inception, credit
rating agencies have played a significant role in the Indian capital market as have their counterparts
abroad. At the same time, the working of the rating agencies has been criticized by many for not having
been able to accomplish the coveted goal of investor interest protection as they failed in predicting the
fall of big corporate concerns. Rating agencies were also under the scanner during the current global
financial crisis. Against the backdrop of their role and criticism, the paper makes an attempt to elicit
and analyze the opinion of investors on the working of credit rating agencies in India and offers some
suggestions to enable the rating system to be efficient and effective.

Introduction
The economic growth of any country depends, to a greater extent, on a vibrant capital
market as it facilitates the transformation of savings into investment. It may be noted that
the development of capital market depends, among other factors, on the dissemination of
complete information and the existence of knowledgeable investors.
The growth story of the Indian capital market started in the mid-1980s. The Indian
economy has been growing fast since the adoption of the Liberalization Policy in mid-1991.
At present, the Indian economy is integrating with the global economy. In tandem with the
economy, the capital market is also growing fast. Over the years, various tailor-made financial
instruments have been introduced in the capital market to cater to the needs of diverse
investors. The growth of the capital market and increase in the varieties of instruments created
not only opportunities for the investors, but also complexities in the market as, even the
reputation of the issuer-company is no longer a guarantee to the quality of the financial
instrument which it (i.e., the company) issues. Hence, a general caution to the customers, caveat
emptor (buyer beware), is also applicable to investors.
To demystify the complexity of the financial instruments in the capital market, to facilitate
the investors to take informed investment decisions and to enable the issuer-companies/
institutions to mobilize the required funds (at reasonable cost), various agencies like Moody’s
Investor Services, Standard and Poor’s, Fitch Ratings, etc., work in the US markets.
* Faculty Member, Department of Commerce, Kuvempu University, Jnana Sahyadri, Shankaraghatta 577451,
Karnataka, India. E-mail: bg@kuvempu.ac.in
* * Faculty Member, Department of Commerce, Kuvempu University, Jnana Sahyadri, Shankaraghatta 577451,
Karnataka, India. E-mail: madegowda@kuvempu.ac.in

©
92 2010 IUP. All Rights Reserved. The IUP Journal of Behavioral Finance, Vol. VII, Nos. 1 & 2, 2010
Credit Rating Agencies in India
The success stories of credit rating agencies in the US (particularly, in debt capital market)
encouraged a few Indian and foreign financial institutions and banks to establish rating
agencies in India. Credit rating in India is the brain child of CRISIL (Credit Rating and
Information Services of India Limited). CRISIL was incorporated in January 1987 and
commenced its rating activities in January 1988. Its first rating was released in March
1988. ICRA (Investment Information and Credit Rating Agency of India Limited) is the
second rating agency established in India (January 1, 1991) at a time when the country
was all set to embrace the economic liberalization policy. CARE (Credit Analysis and
Research Limited)) is the third credit rating agency to be set up in India (April 1993).
Duff and Phelps Credit Rating India Limited (DCR) is the fourth, but the first private
sector rating agency which commenced its operations in India in 1995. Duff and Phelps,
and Duff and Phelps India Private Limited merged in November 2001 to form a new entity
called, Fitch India Limited, a 100% subsidiary of Fitch IBCA. Brickwork Ratings India
Private Limited is the fifth credit rating agency (second private rating agency) registered
with SEBI in 2007.
Credit rating agencies came into being to evaluate the credit risk of the financial
instruments. The basic philosophy behind assigning a credit rating is to enable the
investors to take proper investment-related decisions to minimize their risk and maximize
their benefits.

Credit Rating
CRISIL1 defines credit rating as an unbiased, objective and independent opinion as to an
issuer’s capacity to meet financial obligations. It is the current opinion as to the relative
safety of timely payment of interest and principal on a particular debt instrument. ICRA2
views credit rating as a simple and easy to understand symbolic indicator of the opinion
of a credit rating agency about the risk involved in a borrowing program of an issuer with
reference to the capability of the issuer to repay the debt as per terms of issue. This is
neither a general purpose evaluation of the company nor a recommendation to buy, hold
or sell a debt instrument. According to CARE,3 credit rating is essentially the opinion of
the rating agency on the relative ability and willingness of the issuer of a debt instrument
to meet the debt service obligations as and when they arise. An analysis of these
definitions/views about rating reveals some of the important aspects of credit rating as
presented below.
• Credit rating is an expert opinion on the credit quality of the financial instrument.
It is an objective and unbiased opinion on the ability and willingness of the
borrower-company to meet its financial obligations as per the predetermined
schedule of payments;
1
CRISIL Rating document (exact source not known).
2
ICRA (1998), Investor Awareness Program (a brochure).
3
CARE (1998), Credit Rating—Answers to Some Questions.

Working of Credit Rating Agencies in India: An Analysis of Investors' Perception 93

 • The ratings are usually expressed in alphabetical or alphanumeric symbols. Hence,
credit rating is a symbolic indicator of the current opinion on the relative capability
of borrower-organization to service the debt obligation in a specified time;
• It is the rating assigned to a specific financial instrument (of a company) but
not to the company as a whole. Therefore, ratings assigned by the rating agency/
agencies to different instruments of the same issuer-company may differ from
one instrument to another; and
• Rating is not a recommendation made by the rating agencies to the investors to
buy, hold or sell securities as it focuses only on the assessment of credit quality
and does not consider the individual risk perception of investor and market price.
The credit rating agencies in India assign ratings not only to debt instruments, but also
award grading to the IPOs (Initial Public Offerings) as SEBI has made it mandatory, based
on the recommendation of SEBI primary market advisory committee to get the IPOs rated
by at least one credit rating agency registered with it. All the issuers in the primary market
who file their draft Red Herring Prospectus (RHP), draft prospectus or offer document on
or after May 01, 2007 must get an IPO grading.4
Rating agencies, therefore, are now playing a stupendous role in assessing the quality
of financial instruments in both, debt and equity markets. The power of the rating agency
becomes obvious from the opinion of Thomas Friedman, a well known columnist for New
York Times. Way back in 1996, he said, “there are two super powers in the world today.
There is the US and there is Moody’s bond rating service. The US can destroy you by
dropping bombs and Moody’s can destroy you by downgrading your bonds; and believe me,
it is not clear sometimes who is more powerful.”5 No more words are more powerful than
the above statement to describe the significance of credit rating which ensures the
efficiency of financial market which in turn leads to growth of the economy.

Need for the Study

Investment is a risk-return balancing game. A large number of investors have invested a
sizeable amount of their savings in expectation of good returns. Over the years, a number
of investors have burnt their fingers (even committed suicide) as a number of companies
(either on account of loss suffered by them or market downturn) yielded negative
returns. A number of entities defaulted in meeting financial obligations of payment of
interest and the repayment of principal amount. Nevertheless, a few investors reaped
the fruits of the market.
To succeed in the market, there is a need for evaluating the fundamentals of issuer
companies, their prospects and associated risks, before investing in their securities.
4
http://www.bullishindian.com/ipo-grading-mandatory-from-today-may-1-2007-as-sebi-gets-tough/176/
5
Interview with Thomas Friedman (1996), The MacNeil/Lehrer News Hour (PBS Television Broadcast, February
13) quoted by Hill Claire (2004), “Regulating the Rating Agencies”, Working Paper, American Law and
Economics Associates Meetings, Paper 1.

94 The IUP Journal of Behavioral Finance, Vol. VII, Nos. 1 & 2, 2010
Managing a risk is a difficult task. It is very difficult to identify and evaluate the risk associated
with investments (instruments). Successful management of risk, to a greater extent, depends
upon the availability of complete and reliable information. Even if the information is available,
it is very difficult to understand and analyze the information to take informed investment
decisions as many a number of (individual) investors do not possess adequate knowledge and
skills to analyze and interpret information. They may not be able to understand the finer
aspects of information. There lies the significance of specialized market intermediaries who can
assist them in understanding the fundamentals of the company and market and read between
the lines. It is believed that credit rating agencies are of great help in this regard. Through the
transition of economic liberalization, the credit rating agencies in India have grown and they
are providing useful services to minimize the risk of loss due to failure of borrower organizations
to meet the financial obligations as per the schedule and to enable the investors to understand
the fundamentals of companies issuing the equity shares.
Inspite of pivotal service by the credit rating agencies, they are kept under watch.
One of the reasons for this is their failure to predict the fall of many corporate borrowers.
The big-guns of the rating industry viz., Moody’s, Standard and Poor’s and Fitch Ratings
failed in predicting the fall of the Washington Public Power Supply System (WPPSS)—a
nuclear power company in the State of Washington (1983); Executive Life (1991); Orange
County of California, Confederation Life (1994); First Capital, Hafnia (1993); HIH
Insurance Co. (2001); Monarch, Mutual Benefit Life (1994); etc. Further, the rating agencies
were also unable to predict Enron debacle (2001) and the fall of WorldCom (2002).
The rating agencies did not provide even a single clue of the Asian crisis (1997),
Russian crisis (1998) and the Brazilian crisis (1999). The East-Asian crisis, aptly called
Asian flu, caused damages to various economies. No sovereign credit rating was
downgraded throughout 1996 or the first half of 1997 for the East-Asian countries.
However, the only exception to this was that Moody downgraded the sovereign rating of
Thailand in April 1997. Recently, the sub-prime crisis shattered the financial markets all
around the world. The victims included well-known financial czars like Bear Sterns,
Countrywide Mortgage, BNP Paribas, Lehman Brothers, etc. The Indian rating agencies
are no exception as they too failed to trace the CRB capital markets fiasco.
In spite of these developments, the rating agencies are enjoying regulatory support and
popularity. Now, these agencies are also playing a pivotal role in the implementation of
Basel-II norms in the banking sector. Since 2007, the rating agencies (with regulatory
support from SEBI) started grading equity issues, hitherto an uncharted arena even by the
international rating agencies.
The above aspects and issues encouraged us to take up this study to analyze/evaluate
the investors’ perception on the working of credit rating agencies in India.

Sample Size and Methodology

This study is mainly based on primary data. To collect the primary data, well-structured
questionnaires were administered (during July-August 2008) personally and through
Working of Credit Rating Agencies in India: An Analysis of Investors' Perception 95
e-mail, snail mail and stockbroking franchisees to 600 randomly selected individual
investors. Good responses were received from the investors particularly from different
parts of Karnataka. However, the responses were only obtained from 362 individual
investors, i.e., a response rate of only 60.33%. The responses collected were processed and
analyzed to draw the meaningful inferences that could help in the improvement of the
quality and usefulness of rating. The study is purely analytical, analyzing the investors’
perception about various aspects of working of credit rating services in India.

Respondent-Investors: A Brief Profile

This is an important part of the study as it provides an idea as to whether the respondents
are competent to comment on the working of credit rating agencies. Hence, a brief profile
of the respondents, from the point of view of education, occupation, annual income, etc.
is presented below.
• About 47.8% of the respondent investors are graduates and the other 38.12% are
postgraduates. Both these segments put together constitute 85.92% of the total
respondents. Besides, 7.18% and 4.14% of the respondents have completed pre-
university and high school education, respectively. The remaining 2.76% of the
respondents comprise of the respondents who have completed primary and middle
school education, diploma or other technical education and illiterates.
• Businessmen usually play an important role in the investment aspect and this
section accounts for 22.93% of the total respondents. Another 25.97% of the
respondents are professionals (chartered accountants, doctors, etc.) who also play
an important role due to their awareness of the capital market and investment
avenues. A good number of respondents, 42.54% are employees who are regularly
investing a part of their savings in the capital market. Agriculturists (17 of them),
who invest in market were also contacted to obtain their opinion on credit rating.
The remaining respondents included retired employees, house-makers (as they
claim), trainees and students. This analysis shows that the sample size represents
an important segment playing a prominent role in the investment field.
• Hundred and thirty nine respondents (38.4%,) earn less than Rs. 200,000 per annum,
followed by 99 (27.35%) and 51 (14.09%) respondents earn an average annual income
of Rs. 200,000-300,000 and Rs. 300,000-400,000, respectively. The respondents are
almost equally distributed at more than 9% each between the income range of
Rs. 400,000-500,000 and more than Rs. 500,000. However, three respondents did not
disclose their income.
• A question was included in the questionnaire about the investment pattern of
respondents. It was observed that 65.75% of respondent investors invested a part
of their savings in corporate shares. The study attributes this pattern of investment
to the boom in equity market (both, primary and secondary market) in terms of
IPOs and market indices during 2005-06 to 2007-08. It must be noted that SEBI

96 The IUP Journal of Behavioral Finance, Vol. VII, Nos. 1 & 2, 2010
 has made IPO (equity) grading mandatory since May 1, 2007. A good number of
respondents have parked their savings in bonds/debentures (28.46%) and corporate
deposits (13.53%) where credit rating plays a predominant role.
• Majority of the respondents (33.70%) have invested their savings for a period of one
to three years followed by 25.41% of the respondents investing for a maximum of
one year. Nearly 19.34% and 21.82% of the respondents have invested their savings
for a period of 3-5 years and for more than five years, respectively.
Besides the above, the following analysis also gives further insight into the profile of
the respondent-investors.

Awareness of Credit Rating Agencies

The details regarding whether the respondent investors are aware of the credit rating
agencies and rating are presented in Table 1 followed by a brief analysis.
It is obvious from Table 1 that 84% of the respondents are aware of credit rating
agencies and credit rating. However, 14.4% of the respondents are unaware of credit rating
agencies and credit rating. The remaining six respondents (1.6%) have not offered any
response to this question but responded well to other related questions. The major
contributory factor in creating awareness among the individual investors would perhaps
be the grading of IPO issues introduced recently during the euphoria in the market when
a large number of retail investors actively involved in the capital market.

Table 1: Awareness About Credit Rating Agencies and Rating

S. No Kind of Response Number of Respondents Percentage

1. Aware 304 84.0

2. Not aware 52 14.4

3. No response 06 01.6

Total 362 100.0

Sources of Information on Credit Rating Agencies and Rating

The details about the source from which the respondent investors obtain information on
credit rating agencies and the ratings collected are shown in Table 2.
It can be observed from the above that the advertisements in newspapers (48.34%) play
an important role in the dissemination of rating information followed by another powerful
modern mode of information e-media (32.6%). About 26.24% of the respondents obtain
information about credit rating agencies and ratings through business dailies and periodicals.
Publications of rating agencies which provide first hand information, are also a major source
of information for 19.61% of respondents. Prospectus and offer documents also provide rating
information and about 16% of the respondents obtain relevant information from these
documents. Other sources of information to the respondents (1.38%) are brokerage firms,

Working of Credit Rating Agencies in India: An Analysis of Investors' Perception 97

investment advisors and consultants. Around 52 respondents constituting 14.36% did not
respond to this question as they were not aware of credit rating agencies and their ratings.
Table 2: Sources of Information About Credit Rating Agencies and Rating

S. No Kind of Response Number of Respondents Percentage

1. Newspaper advertisements 175 48.34
2. Agencies’ publications 71 19.61
3. Business dailies/periodicals 95 26.24
4. Prospectus/offer documents 58 16.02
5. E-media 118 32.60
6. Others 05 01.38
7. No response 52 14.36
Note: As some respondents obtain information on credit rating agencies and ratings from more than one
agency, the total is more than 362 or 100%.

Understanding Credit Rating

As this is a technical subject, a question was asked to the respondents to ascertain whether
they understood the rating. The summary of the responses received from them is
summarized in Table 3.
Table 3: Understanding of Credit Rating

S. No Response Number of Respondents Percentage

1. Understand 226 62.4

2. Do not understand 84 23.2

3. No response 52 14.4

Total 362 100.0

Majority of the respondents (62.4%) opined that they were able to understand the ratings
assigned. About 23.2% expressed their inability to understand. The remaining 14.4% of the
respondents did not offer any response as they were not aware of the ratings. The last two
categories (viz., the respondents who cannot understand the ratings and those who did not
respond) accounted for more than one-third of the total sample size and are, in effect, not
able to understand the technicalities of ratings. Therefore, capital market regulator—SEBI—
and rating agencies should organize investor education programs to demystify the rating
activities—procedure, symbols, the message these symbols convey, etc.

Rating as the Base for Investment Decision

The respondent-investors were asked whether they were using ratings of financial
instruments as the base in their investment decisions. The responses received from them
are presented in Table 4 followed by a brief analysis.

98 The IUP Journal of Behavioral Finance, Vol. VII, Nos. 1 & 2, 2010
 It can be seen from Table 4 that 199 respondents, constituting 55% of the total
respondents are using rating as the base in their investment decisions, whereas 25.7% of the
respondents are not using rating as base in their investments. The remaining 19.3% of the
respondents (including 14.4% the respondent investors who are not aware of rating) did not
respond to this question. This brings to the fore that the rating agencies, despite their
important role in the market, have to take steps to create awareness about the importance
of ratings and using these ratings as the base for investment-related decisions by the
investors. As this survey result shows, there is a long way to be travelled by the rating
agencies to reach common investors.
Table 4: Rating as the Base for Investment Decisions

Rating as the Base for

S. No Number of Respondents Percentage
Investment Decisions
1. Yes, use ratings as the base 199 55.0

2. No, do not use ratings as the base 93 25.7

3. No response 70 19.3

Total 362 100.0

A brief profile of the respondent investors presented above clearly shows that they are
capable of commenting on the working of credit rating agencies in India. Because, majority
of them are educated, they are saving a part of their income and investing in diverse
financial instruments where credit rating is a mandatory requirement.

Working of Credit Rating Agencies in India: An Analysis of Investors’ Perception

In the light of the profile of the respondents, the responses were obtained from the
respondents on various aspects pertaining to the working of credit rating agencies in India
and the same is analyzed and presented below.

Reliability of Ratings
Use of rating information by the investors in their decision-making process depends on the
reliability of rating information. Hence, the respondents were asked to comment on the reliability
of rating information and the responses received from them are tabulated in Table 5.
It can be observed that 41% of the respondent investors opined that the rating
information is reliable. 72 respondents, the second major group accounting for 20% of the
sample size expressed that the rating information is not much reliable. The positive note
to be cherished by the rating agencies is that at least 11% of the respondents felt that the
rating information is very much reliable. On the basis of the opinion expressed by the first
two groups of respondents (constituting 52%), it can be concluded that the rating
information is useful to the individual investors in their investment decisions. However,
the third group of respondents accounting for 20% of the total respondents consider the
rating information as not much reliable. Of course they agree to the reliability of rating

Working of Credit Rating Agencies in India: An Analysis of Investors' Perception 99

 Table 5: Reliability of Rating Information

S. No Degree of Reliability Number of Respondents Percentage

1. Very much reliable 40 11

2. Reliable 150 41

3. Not much reliable 72 20

4. Not at all reliable 11 03

5. Cannot say 89 25

Total 362 100

information with some reservation. As already pointed out, it is necessary for the rating
agencies to work hard to create awareness among investors and to ensure that the rating
information is dependable for the investment-related decisions.

Use of Ratings of Different Agencies by the Investors

The investor respondents were asked about whose (credit rating agency’s) rating is used
by them in their investment-related decisions. To this question, the respondents have
given the following responses. It may be noted here that some of the respondents are using
the ratings of more than one agency.
The contents of Table 6 reveal that CRISIL is the market leader as majority of the
investor respondents (48.34%) use the ratings assigned by it (i.e., CRISIL). ICRA and CARE
occupy the second and third positions respectively in the Indian market as 32% use the
rating assigned by ICRA and nearly 21% use the rating assigned by CARE. Fitch stands in
the fourth place and the last position in the Indian market, as per the opinion expressed
by respondent investors, is occupied by others (i.e., broking firms and consultants). 23% of
the respondents (including 14.4% who are not aware of ratings) did not give their opinion.

Table 6: Use of Ratings Assigned by Different Agencies

S. No Rating Agency Number of Respondents Percentage

1. CRISIL 175 48.34

2. ICRA 116 32.00
3. CARE 075 20.71
4. FITCH 13 03.60
5. Others 02 00.55
6. No Response 83 23.00

Note: As the respondents, at least some, are using the ratings by more than one credit rating agency, the total
is more than 362 or 100%.

100 The IUP Journal of Behavioral Finance, Vol. VII, Nos. 1 & 2, 2010
Influencing Factors of Investment Decisions
Investment decisions are influenced by a number of factors that vary from one investor
to another and also from one situation to another. However, the respondent investors
were given a few influencing factors and asked to tick the factor/s influencing their
investment decisions. The responses received from them are summarized in Table 7.

Table 7: Factors Influencing Investment Decisions

Preference
S.
Factors Total
No I II III IV
1. Own judgement 208 33 21 15 277
(57.46) (9.12) (5.80) (4.14) (76.52)
2. Credit rating/ 46 61 37 28 172
grading (12.71) (16.85) (10.22) (7.73) (47.51)
3. Advise of brokers/ 64 77 33 26 200
consultants (17.68) (21.27) (9.12) (7.18) (55.25)
4. Review of performance 029 2 57 50 164
of issuer-organization (8.01) (7.73) (15.75) (13.81) (45.30)
in print/e-media
5. Others 01 02 03
(0.28) (0.55) – – (0.83)
6. No response 16
– – – –
(4.42)
Note: As the respondents, at least some, were influenced by more than one factor, the total is not equal to 362
or 100%

It is obvious from the above that various factors/parties influence the investment
decisions of investors. However, majority of investors take investment decisions based on
their own judgement followed by the advice of brokers and consultants. Majority of the
respondents stated that, out of a number of parties/factors influencing their decision,
first preference was own judgement (57.46%) followed by the advise of brokers/
consultants, and review of performance of the issuer companies in print/e-media. Credit
rating/grading stands in third position in first preference, second position in second, third
and fourth preferences. This implies the importance of the rating information in
investment decisions.

Performance of Rated Instruments

As the ratings/grades are assigned based on the overall performance of the issuer companies
including financial performance, one can conclude that there is a direct relationship between
the performance and the ratings/grades assigned. Against this background, the respondents
were asked whether the firms whose financial instruments were assessed and rated are
performing better. The responses received from the respondents are presented in Table 8.

Working of Credit Rating Agencies in India: An Analysis of Investors' Perception 101

 The contents of Table 8 are self-explanatory. However, a few figures are analyzed here.
60.8% of the respondents opined to the effect that the rated instruments are performing
better. On the other hand, 19.6% of the respondents felt that the rated instruments are
not performing well. It is also evident from the opinion of respondents that rating agencies
are also performing well in the assessment of potentiality of instruments rated. Still, there
is scope for further improvement in their work as percentage of respondents with negative
opinions is also considerable.
Table 8: Performance of Rated Instruments

S.No Opinion Number of Respondents Percentage

1. Performing better 220 60.8

2. Not performing better 71 19.6
3. No response 71 19.6
Total 362 100.0

Sources of Information About Revision of Rating

The rating agencies have the provision to revise ratings already assigned to financial
(debt) instruments if the post-rating developments necessitate such a revision.
The investors need to have this information to take appropriate decisions. Against this
background, the respondents were asked about the source from which they obtained the
information about changes made in the rating by the rating agencies. Table 9 provides the
details about the sources from which the respondents were obtaining the information
pertaining to revised ratings.

Table 9: Source of Information on Rating Change

S. No Source Number of Respondents Percentage

1. Print media 165 45.58

2. Agencies’ publications 58 16.02
3. E-media 112 30.94
4. Others 32 08.84
5. No response 60 16.57
Note: As the respondents, at least some, obtain relevant information from more than one source, the total is not
equal to 362 or 100%.

Print media such as newspapers, business dailies and periodicals are important sources
of information about the changes made by rating agencies in the ratings for more number
of respondents (165 respondents account for 45.58% of the investor respondents).
E-media is another important source of information about ratings for 30.94% of the respondents.
Information on rating change has also been accessed by 16.02% of respondents through
publications of rating agencies.

102 The IUP Journal of Behavioral Finance, Vol. VII, Nos. 1 & 2, 2010
 As already pointed out, the agencies should view this aspect seriously, as only 16.02%
of the respondents use the agencies’ publications to obtain relevant information about
changes in the rating. Hence, the rating agencies should give serious thought to this and
ensure that their publications are made available at reasonable prices to retail investors.
Of course, the respondents who use e-media for information might have visited websites
of rating agencies. Still, it is necessary to ensure the availability of these publications at
reasonable prices. Of the remaining respondents, 8.84% depend on brokerage firms,
advisors and friends for the information about ratings change. Out of 16.57% of respondents
who did not respond, 14.4% of respondents were not aware of rating.

Rating Change After the Investment

When the respondents were asked whether the rated instrument in which they had invested
had been downgraded subsequently, the respondents responded as illustrated in Table 10.
Table 10: Rating Change After the Investment

S. No Rating Number of Respondents Percentage

1. Downgraded 138 38
2. Not downgraded 94 26
3. Do not know 130 36
Total 362 100

Thirty eight percent of the respondents said that the instruments in which they had
invested were downgraded subsequently. 26% of the respondents stated that the
instruments in which they had invested were not downgraded. Rational investors who are
interested in the safety of their funds along with good returns should continuously
monitor the changes in the market, including the financial instruments concerned. It can
be observed from the table that 36% of the respondents, including 14.4% of investors who
are not aware of rating, do not know about the rating changes of instruments in which
they have invested their funds.

Reaction of the Respondents to Rating Downgrade

With the objective of knowing how the respondents reacted to the rating downgrade, they
were asked to respond to the relevant question. The responses received from them are
tabulated in Table 11.
Table 11: Reaction to Rating Downgrade

S. No Reaction to Rating Downgrade Number of Respondents Percentage

1. Sold 48 34.78
2. Retained 57 41.30
3. No answer 33 23.92
Total 138 100.00

Working of Credit Rating Agencies in India: An Analysis of Investors' Perception 103

 Table 11 depicts the investors’ reaction to the rating downgrade. 41.3% of the respondents
expressed that they retained the instruments even after they were downgraded. Another
34.78% of the respondents said that they sold the instruments on rating downgrade.
The remaining 23.92% of the respondents did not respond to this question. However,
the survey indicates that the investors’ decisions are not solely influenced by ratings.

Reaction of Respondents to Rating Upgrade

Respondents were also asked about how they reacted after the upgrading of the (rated)
financial instruments in which they had invested their funds. The summary of their
responses is presented in Table 12.
It is evident from Table 12 that 44% of the investor respondents have not purchased
the additional units of instruments whose ratings have been upgraded. Only 41% of
respondents stated that they purchased the additional units of instruments based on
rating upgrade. Hence, it is very difficult to conclude the impact of rating upgrade on
the purchase of additional units of instruments as both the responses are very close to
each other. Reaction to ratings changes (upgrade/downgrade) in both tables cannot be
compared because the investors have invested in more than one instrument.
Table 12: Reaction to Rating Upgrade

S. No Reaction to Rating Upgrade Number of Respondents Percentage

1. Purchased 148 41
2. Not purchased 160 44
3. No response 54 15
Total 362 100

Reaction to Rating Upgrade

The respondents who did not own the rated instruments whose ratings have been
upgraded were asked as to how they reacted when the rated instruments were upgraded.
The responses are tabulated in Table 13.
It is clear from Table 13 that majority of the respondents (55%) purchased the rated
instruments whose ratings have been upgraded. 26% of the investors did not purchase the
instruments whose ratings have been upgraded. It can be concluded that the rating upgradation
Table 13: Respondents’ Response to Rating Upgrade

S. No Particulars Number of Respondents Percentage

1. Bought the instruments 198 55

2. Did not buy the instruments 96 26
3. No response 68 19
Total 362 100

104 The IUP Journal of Behavioral Finance, Vol. VII, Nos. 1 & 2, 2010
has some positive impact on the investors, as 55% of the respondents purchased the rated
financial instruments after they were upgraded. This reposes faith in rating activities.

Independency and Objectivity of Working of Rating Agencies

In order to ensure the objective assessment and rating, the credit rating agencies must
work independently and objectively. This is a prerequisite. Hence, the respondents were
asked to comment on these twin aspects pertaining to the style of functioning of agencies.
The responses are tabulated in Table 14.
Table 14 summarizes the opinion of the investor respondents on one of the debated
subjects all over the world viz., style of functioning of rating agencies in terms of
independency and objectivity. Anyhow, the opinion of respondents paints a different picture
by affirming independency and objectivity of the rating agencies in their work. 60% of the
respondents are of the opinion that the rating agencies work independently and objectively.
A little less than one-fourth of the respondents felt that the rating agencies are not working
independently and objectively. The opinion expressed by majority of the respondents should
motivate and enforce the rating agencies to work more independently and objectively so that
it would be adequate and transparent enough to change the opinion of other investors who
are now having a negative opinion about the style of functioning of the rating agencies.
Table 14: Independency and Objectivity of Working of Rating Agencies

S. No Style of Functioning Number of Respondents Percentage

1. Work independently and objectively 217 60

2. Do not work independently and objectively 86 24
3. No response 59 16
Total 362 100
Timely Announcement of Rating Result
This is another significant issue debated all over the world. A few examples like Enron,
WorldCom, CRB capital market, Asian crisis and the recent sub-prime crisis can be quoted
for the failure of rating agencies to predict and ring an early warning bell. In India, except
the CRB capital market fiasco, not much failure was reported. However, the respondents
were asked to respond to the question viz., whether the rating agencies were announcing the
ratings on time. The responses are presented in Table 15.
Table 15: Timely Announcement of Rating

S. No Timing of Rating Announcement Number of Respondents Percentage

1. Announce in/on time 201 56

2. Announcement not in time 103 28
3. No response 58 16
Total 362 100

Working of Credit Rating Agencies in India: An Analysis of Investors' Perception 105

 56% of the investor respondents praise the rating agencies for timely announcement of
rating results whereas 28% of respondents gave a negative reply meaning non-announcement
of rating results on time. The remaining 58 respondents accounting for 16% did not respond
to this question.

Rating of Instrument by More than One Agency

When the respondents were asked about the need for getting a financial instrument
assessed and rated by more than one rating agency, they responded as follows in Table 16.
The data presented in Table 16 sheds light on the need for rating of an instrument by
more than one agency. Investor respondents to the tune of 69% felt that it is necessary
to get an instrument rated by more than one agency. This opinion of investor respondents
contradicts with the SEBI’s recent decision. The SEBI issued an order recently stating that
rating by one rating agency is enough to the issuer company to go to the capital market.
This decision is also welcomed by the industry as it reduces the cost of issue. The majority
of respondents opined that there is a need for rating by more than one agency. 14% of
respondents opined that there was no need for rating by more than one agency. And the
remaining 17% of respondents did not offer their opinion on this aspect.
Table 16: Rating of Instrument by More than One Agency

S. No Need for Rating by More than One Agency Number of Respondents Percentage

1 Necessary 251 69
2 Not necessary 49 14
3 No response 62 17
Total 362 100

Preference for Rating Agencies

The respondents were asked to give their opinion on the rating agency which they consider
more credible/reliable and their responses are presented in Table 17 followed by a brief analysis.
Table 17: Respondents’ Preference for Rating Agencies
Preference
S.
Rating Agencies Total
No I II III IV
1. CRISIL 160 (44.20) 35 (9.67) 22 (6.10) 03 (0.83) 220 (60.8)
2. ICRA 52 (14.36) 89 (24.59) 31 (8.56) 21(5.80) 193 (53.31)
3. CARE 71 (19.61) 35 (9.67) 64 (17.68) 23 (6.35) 193 (53.31)
4. Fitch 03 (0.83) 18 (4.97) 31 (8.56) 94 (25.97) 146 (40.33)
5. No response – – – – 72 (19.89)
Note: Figures in parentheses represent the percentage to total number of respondents. The total may not come
to 362 or 100% as the respondents have given their preference to more than one agency.

106 The IUP Journal of Behavioral Finance, Vol. VII, Nos. 1 & 2, 2010
 Table 17 clearly brings out the fact that CRISIL is the most reliable rating agency as
majority of respondents preferred this agency followed by ICRA, CARE and Fitch in terms
of credibility of rating agencies. Here also, CRISIL emerges as the leader not only in volume
of business, but also in terms of credibility. Totally, 220 respondents accounting for 60.8%
back the credibility of CRISIL as compared to 53.31% each for ICRA and CARE and 40.33%
for Fitch. In the first preference, CRISIL is followed by CARE, ICRA and Fitch. Again,
19.89% of respondents did not express their opinion on the credibility of rating agencies.

Need for Equity Grading

When the respondents were asked about the need for grading the equity shares, their
responses were positive which is evident from Table 18.
The data in Table 18 exhibits the opinion of the investor respondents with respect to
the grading of equity issues. 76% of the respondents felt that there is a need for equity
grading. This sends a strong message to SEBI in substantiation of its decision to make IPO
grading mandatory. 16% of respondents are not in favor of equity grading, whereas the
remaining 8% did not express their opinion on this issue.
Table 18: Need for Equity Grading

S. No Need for Equity Rating Number of Respondents Percentage

1. Necessary 274 76
2. Not necessary 59 16
3. No response 29 08
Total 362 100

Adequacy of Number of Rating Agencies in India

At present, very few rating agencies are functioning in India. Against this background, the
investor respondents were asked about the adequacy of rating agencies in the country.
The responses received from them are summarized in Table 19.
As revealed by data in Table 19, 45% of respondents opined that the existing number
of rating agencies is adequate for India. 39% expressed that the existing number of rating
agencies is not adequate. Going by their opinion, there is a necessity for increasing the
number of rating agencies in India. 16% did not respond.
Table 19: Adequacy of Rating Agencies in India

S. No Adequacy of Number of Rating Agencies Number of Respondents Percentage

1. Adequate 165 45
2. Inadequate 140 39
3. No response 57 16
Total 362 100

Working of Credit Rating Agencies in India: An Analysis of Investors' Perception 107

Suggestions
On the basis of the above analysis, an attempt is made to offer a few suggestions for the
improvement of the functioning of the credit rating system in the country. These
suggestions are offered keeping in mind the purpose for which the rating agencies have
been established and functioning.
• There is a sort of conflict of interest as the issuer organizations provide business
to the rating agencies and make payment for initial rating and surveillance in the
form of fees. The survival of rating agencies depends, to a great extent on the
businesses offered and fees paid by these issuer organizations whose instruments are
rated. Therefore, some suspect that the agencies work for the benefit of the issuer
organizations by grading their instruments on the higher side. Hence, there is a dire
need to demutualize the rating agencies and the issuer companies. For this purpose,
the following alternatives may be considered:
– SEBI has to undertake, in the interest of investors, the task of appointing the
rating agencies to get the instruments rated. It can get the necessary fees from
the issuer company. In this alternative, a great deal of caution is to be exercised
to avoid red tapism and corruptive practices.
– The debenture trustee shall be made responsible to get the instruments rated.
As the debenture trustees are regulated by the SEBI (debenture trustee)
Regulations, 1993, a certain amount of check can be brought to tighten the
noose around the rating processes.
– As of now, SEBI has made the rating/grading for debt instruments and IPOs
mandatory. Hence, a separate independent investor interest protection body/
trust can be constituted on the lines of debenture trustees to look after the
whole process of rating—appointment of rating agencies, getting the instruments
rated/graded, surveillance of rated instruments by the rating agencies, dissemination
of rating information in time, etc.
• There is a mixed response from the investing class as to the rating surveillance by
the rating agencies. Further, there is also criticism against the working of rating
agencies. This criticism centers around the rating agencies of not showing much
interest in the surveillance as compared to the interest they show at the time of
the initial rating. This may be due to lower fees for surveillance when compared to
initial rating fees. The rating agencies have to take up the rating surveillance with
all seriousness to gain the confidence of investors as otherwise the very purpose of
the entire exercise is defeated.
• Accountability should be fixed on the rating agencies at least when the issuer of
the investment-graded instrument defaults. If it is not done, the very purpose of
ratings is defeated. The accountability enables the rating agencies to employ the
rigorous models to come out with the final rating.

108 The IUP Journal of Behavioral Finance, Vol. VII, Nos. 1 & 2, 2010
 • To disseminate the information on rating and rating revision, wide publicity should
be given in e-media and print media. In case of print media, rating information
should be made available in all regional language newspapers. This can be done only
when rating agencies place investors at the centre of rating services.
• The publications of rating agencies should be priced at a reasonable level and
circulated widely to reach investors to enable them to have first hand information
on initial rating and rating change. Otherwise, the very purpose, as already pointed
out is defeated. Hence, the rating agencies should give a serious thought to these
two aspects—reasonable prices and wide circulation.
• Rating agencies, in collaboration with SEBI, should organize investor-education
programs to create awareness among investors and to explain the importance of
ratings in their investment decisions, because, as if the investors do not understand
and make use of the rating service, then the purpose, as already mentioned, is
defeated. Hence, it is necessary to organize investor education programs on rating—
its importance, benefits, etc.—regularly.
• The rating agencies should set-up a retail investor help desk, to assist the investors
to demystify the complex rating.

Conclusion
It can be observed from the responses of the respondent investors that the rating agencies
certainly play an important role in the development of the capital market. However, there
is scope for improvement of performance of the rating agencies. Whatever may be the
mechanism adopted in the process of the rating, the final outcome depends on the
credibility of rating agencies and genuine interest of the regulator to protect the interest
of investors. Therefore, credibility of the system as a whole should be the mantra of the
rating process. It can be concluded that the responses given by the respondent investors
go a long way in improving of the working of credit rating agencies in India. 

Reference # 36J-2010-03/06-06-01

Working of Credit Rating Agencies in India: An Analysis of Investors' Perception 109

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