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Corporate Governance Rating Agencies & Parameters
Corporate Governance Rating Agencies & Parameters
governance and value creation practices and an expectation on its future performance. The
CRISIL GVC Rating is a powerful measure to adequately evaluate how a firm is performing on
its raison d’etre or primary purpose of existence, that is creating value for its owners and various
stakeholders. CRISIL GVC Ratings are based on criteria from which the present condition and
future progress can be accurately measured and analysed. Such a measure ensures that two
equally well-governed companies will not, prima facie, receive identical ratings if one is a
CRISIL evaluates two broad aspects to arrive at GVC Ratings for companies. These comprise:
In this category, CRISIL looks at the company’s track record in creating and distributing
value amongst the various stakeholders in the system. The criteria are so constructed
considered and an indicative list of the parameters used to evaluate respective value
compared to weighted average cost of capital, dividend pay-out ratio and the
like.
ii) Debt Holders: CRISIL looks at relative debt protection measures. These will
v) Suppliers: The factors considered include the relative change in credit terms,
vi) Society: Here, the measures include total direct taxes paid, employment
Under this category, CRISIL looks at the company’s capabilities and processes to
ensure good governance, the checks and balances that it has instituted to prevent
abuse of power, transparency of reporting, and the capabilities and robustness of the
company’s management. The broad factors, which CRISIL uses to analyse the
management.
iv) Board composition and effectiveness including the criteria for selecting
conduct and practices and the quality of its disclosure standards in terms of fairness and
organisation reflect the distribution of rights and responsibilities among its different
stakeholders—and the rules and procedures laid down and followed for making decisions on
corporate affairs. The emphasis of ICRA’s CGR is on substance over form. ICRA assigns CGRs
on a six-point scale of CGR1 through to CGR6. The rating of CGR1 implies that in ICRA’s
current opinion, the rated company has adopted and follows such practices, conventions and
codes as would provide its financial stakeholders the highest assurance on the quality of
a comment on the rated company’s future financial performance, credit rating or stock price.
ICRA’s framework is designed to analyse the following key variables while arriving at the CGR
• Ownership Structure
• Stakeholder Relationship
• Financial Discipline
• Ethical Practices
The following paragraphs highlight the key issues that are analysed for each of the variables.
1. Ownership Structure
A transparent ownership structure where the key shareholders are easily identifiable
and the absence of opaque cross-holdings are positives from ICRA’s CGR perspective.
ICRA believes that for a company to be able to respond swiftly to changes in today’s
dynamic business environment, line managers led by the Chief Executive Officer must
be given enough powers to take decisions in the most appropriate manner. However, it
needs to be ensured that the powers are exercised in accordance with established
procedures and that they are in harmony with the broad policy guidelines and strategic
followed.
ICRA’s CGR process evaluates the Board Structure and Processes in relation to the
following:
• Structural Aspects
▪ The mix of skill sets which the “Independent” Directors bring to the Board
advance
management
by the auditors
▪ Strength and quality of the Internal Audit team
4. Stakeholder Relationship
The emphasis of ICRA’s analysis is on evaluating the extent to which a company goes
beyond what is mandatory under law to serve the rights and interests of its
shareholders. The issues analysed include:
• Competitive position of the company’s product portfolio and trends in the same
• Key drivers of the company’s operating performance, including sustainability of
margins
• The rate and success of product innovations
• Risk factors that could have a bearing on the prospects of each business line
The trends in share price movements around major corporate announcements are
also looked at to evaluate whether price sensitive information is disseminated in a
timely manner to all stakeholders.
6. Financial Discipline
average
• Dividend policy
7. Ethical Practices
blowing.
8. Miscellaneous Practices
stakeholders, ICRA also evaluates the company’s conduct in relation to its other key
Corporate Sector
CARE Ratings’ credit ratings are its opinion on the relative ability and willingness of the issuer
to meet the debt service obligations as and when they arise. Rating determination is a matter
of experienced and holistic judgement, based on the relevant quantitative and qualitative
factors affecting the credit quality of the issuer. CARE Ratings has based its ratings/outlooks
on information obtained from sources believed by it to be accurate and reliable. Within the
corporate sector, CARE Ratings rates debt instruments and bank facilities of manufacturing
CARE Ratings’ credit analysis of an entity begins with the review of the Economy, followed by
the Industry in which the entity operates along with an assessment of the business risk factors
specific to the entity. This is followed by an assessment of the financial risk factors and quality
of management of the entity. For project stage entities/ entities undertaking large projects,
CARE Ratings also analyses project risk for arriving at the entity’s rating. Over-and-above this,
CARE Ratings has defined several sector-specific methodologies to capture nuances of the
respective sectors, which are also factored in the entity’s credit assessment.