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STUDY OF COMPETITION AMONG CREDIT RATING AGENCIES IN INDIA

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 Journal of Accounting and
Volume 31, No. 1
October 2016-March 2017

STUDY OF COMPETITION AMONG CREDIT RATING

AGENCIES IN INDIA

B. Charumathi and T. Mangaiyarkarasi

Abstract

India has a very advanced G-sec market, but its corporate bond market is relatively under
developed. Size of the corporate debt market is infinitesimal compared to the world debt market.
There are seven registered credit rating agencies (CRAs) in India which rate debt securities out
of which three rating agencies i.e. CRISIL, CARE and ICRA hold 80% of the market share. Debt
market in India has increased over years. Number of rating and grading services offered by the
rating agencies have also expanded considerably. This will eventually lead to more competition
among rating agencies in India. It would be beneficial to measure competition among rating
agencies and market concentration. This paper measures competition and market concentration
using Herfindahl-Hirschman Index (HHI) and HHI inverse. It is a quantitative measure of
industry concentration that accounts for both the number of firms in the industry and each firm’s
market share. This measure takes into rating revenues of credit rating agencies and number of
outstanding securities in each category. This study used secondary data and the required data
are taken from the regulatory disclosures made by the CRAs. The period of the study include five
years from 2011-12 to 2015-16. Based on rating revenue, this study found that market is highly
concentrated and the majority of the market share is held by three CRAs namely CRISIL, CARE
and ICRA. Based on number of outstanding securities in each category of securities, it is found
that market is a) highly concentrated in government securities and financial institutions; and b)
moderately concentrated in corporate securities and structured obligations. It is also found that
the market concentration has been increasing/decreasing over the years for categories such as
corporate/FIs/SO/Govt. It is believed that a lack of competition, in part the result of regulatory
barriers, along with mandated usage by many financial market participants has resulted in a
dysfunctional credit ratings industry in India.

Keywords: Debt Market, CRAs, HHI, HHI inverse, competition.

JEL classification: D43, K22, L13 and G24.

Prof. B. Charumathi, Professor & Research Supervisor, Department of Management Studies, School of
Management, Pondicherry University, (A Central University of Government of India), Puducherry.
T. Mangaiyarkarasi, Ph. D. Research Scholar (PT-External), Department of Management Studies, School of
Management, Pondicherry University, Puducherry.
Journal of Accounting and

1. INTRODUCTION
Securities and Exchange Board of India (SEBI) defines "credit rating agency" as a body
corporate which is engaged in, or proposes to be engaged in, the business of rating of securities
offered by way of public or rights issue and "rating" means an opinion regarding securities,
expressed in the form of standard symbols or in any other standardised manner, assigned by a
credit rating agency and used by the issuer of such securities. A credit rating agency (CRA) is a
commercial concern engaged in the business of credit rating of any debt obligation or of any
project or program requiring finance in the form of debt or otherwise.
It was generally understood CRAs thrive on reputational capital and if they indulge in
unfair practices they will not be able to do business of ratings. But argument of reputational
capital is a myth, and it has been proved in several studies, rating agencies have given inflated
ratings- defined as purposeful under-estimation of default risk on rated debts and low-quality
ratings resulting from flawed measures of underlying risk. CRAs were indirectly constrained by
their reputation among investors and pressure of reputation as a controlling power exists only to
a limited degree due to a lack of competition. The self-disciplining role of reputation cannot
always be relied upon, even under normal market conditions and, moreover, that It would need
very long periods to verify statistically that rating standards have been compromised, and it
therefore remains unclear how agencies that cheated would be punished by the market.
Government regulatory use of credit ratings inflated the market demand for credit ratings, despite
the decreasing informational value of credit ratings. Regulators believed that the financial
markets would have been better served if the credit rating industry had been more competitive.
But certain other studies have indicated that increased competition within the present regulatory
framework actually reduces methodological efficacy. In a regulatory regime in which the
existing firms enjoy captive and inflated demand—which in turn helps bolster a lucrative issuer-
pays business model—adding an additional rating agency actually may not improve the quality
of ratings.

There are three major credit rating agencies operating internationally- Fitch, Standard and
Poor‘s, Moody‘s Investor Services: between them they share the bulk of the $5 billion rating
business globally relegating other 60 plus local/regional players into just competitive fringes.
Competition is stiffer in India since there are more CRAs for a financial market that is smaller
than USA in value, and hence dilutes oligopolistic power. Corporate debt market and the credit
rating industry have been ever increasing over years. Though there are various regulatory
barriers to entry, new credit rating agencies are entering into the market. Latest entry being
SMERA and Infomerics in the year 2011 and 2015 respectively. The other rating agency
Onicra’s registration pending with the lead regulator SEBI.

It is generally believed by the stakeholders that increased competition in the rating

market and increased number of ratings per instrument would be beneficial for the users of
ratings so that they will be able to rely on more than one rating for the same instrument. It is
important for all the stakeholders involved to know about the competition and effect of
competition in the credit rating industry. This paper attempts to study about the credit rating
agencies operating in India and its competition. The credit rating industry concentration is found
out using Herfindahl-Hirschman Index (HHI) and HHI inverse. This would help the stakeholders
Study of Competition among Credit Rating Agencies in

to understand about the competition and industry structure of the credit rating agencies
prevailing in India.

2. LITERATURE REVIEW

There are various research studies and report related to competition among rating
agencies. Becker, B., Milbourn, T. (2008) show that competition between the rating agencies
after the entry of Fitch to the market controlled previously by the duopoly of Moody’s and S&P
led to more issuer-friendly and less informative credit rating in the bond market. However, there
is little empirical evidence on the extent of rating shopping in the structured finance market.
Becker, B., Milbourn, T. (2011) in the journal how did increased competition affect credit
ratings? States that the credit rating industry has historically been dominated by just two
agencies, Moody’s and Standard & Poor’s, leading to long-standing legislative and regulatory
calls for increased competition. The material entry of a third rating agency (Fitch) to the
competitive landscape offers a unique experiment to empirically examine how increased
competition affects the credit ratings market.

Dittrich (2007) analysis the credit rating economics and states that large credit rating
agencies have cost advantages, reputation over small agencies and face higher demand. Factors
such as official recognition and the structure of demand limit the strategic options of rating
agencies. As a result, the competition within the rating industry can best be described as a
collusive oligopoly. Doherty, Kartasheva and Phillips (2008) analyzes why a rating agency pools
different credit risks in one credit grade, and how information disclosure depends on the value of
information to the market. It empirically tests the qualitative predictions of the model. Standard
and Poor’s entry to the insurance market that was previously covered by a monopoly agency,
A.M. Best, is used as a natural experiment to study the impact of competition on the information
content of ratings.

Ekins and Calabria (2012) in their study and analysis on regulation, Market Structure,
and Role of the Credit Rating Agencies present evidence that suggests the Securities and
Exchange Commission’s designation of NRSROs inadvertently created a de facto oligopoly,
which primarily propped up three firms: Moody’s, S&P, and Fitch. Although CRAs were
indirectly constrained by their reputation among investors, the lack of competition allowed for
greater market complacency. Regulators should work to eliminate regulatory reliance on credit
ratings for financial safety and soundness. These regulatory reforms will, in turn, reduce CRA
oligopolistic power and the artificial demand for their ratings. Securities Exchange Commission
(SEC) in its Annual report on NRSRO (2015) analyses NRSRO statistics for competition,
industry concentration, revenue growth and market share developments. It also discusses barriers
to entry, transparency, disclosure requirements, and conflicts of interest for all the NRSRO in the
credit rating industry.

ESMA (2015) states that the Article 8d of the CRA Regulation requires the European
Securities and Markets Authority (ESMA) to publish a list of registered CRAs and the types of
credit ratings they issue together with a calculation of CRAs’ market shares each year. The
market shares are calculated using CRAs’ revenues from credit rating activities and ancillary
Journal of Accounting and

services at group level. ESMA (2015) in its technical advice provide its views on the functioning
of the credit rating industry and the impact of specific provisions of the CRA Regulation
regarding conflicts of interest, competition and structured finance instruments (SFIs). European
Commission (2014) in a study on the state of the credit rating market focused on enhancing
competition in the credit rating market, while addressing conflicts of interest and enhancing
disclosure on structured finance instruments. Potential measures that could improve competition
such as a harmonised credit rating scale across CRAs, developing a track record score, making
amendments to the ECB’s selection of approved CRAs, and issuers appointing CRAs by
competitive tender were identified.

Hirth(2013) in the theoretical framework analyzes the interaction of credit rating agencies
on a market to find how honest rating behavior can be achieved. A market with solely honest
rating agencies can be achieved in the hypothetical case of perfect competition. Alternatively, it
can be implemented by regulatory measures such as abolishing the current “issuer pays” model
or by a centralized monitoring of ratings quality. Skreta and Veldkamp (2009) in their
equilibrium model state that when assets are simple, agencies ratings are similar and the
incentive to ratings shop is low. An increase in the complexity of recently-issued securities
create a systematic bias in disclosed ratings, despite the fact that each ratings agency produces an
unbiased estimate of the asset's true quality. It is also illustrated how more competition in ratings
markets could make the distortions in ratings even more severe.

NISM(2009) in its Assessment of Long Term Performance of Credit Rating Agencies in

India attempts to assess the performance of CRAs, particularly in the light of the significant
events in the global financial system and the criticism being faced by CRAs in USA. The hearing
conducted by OECD (2010) discusses the role of CRAs in the financial crisis and the need of
reform in the credit rating market. Existing regulation in USA and Europe post financial crisis
have been discussed. There is convergence in regulation of CRAs by ESMA and SEC. The
credit rating market is a natural oligopoly, with three Credit Rating Agencies (CRAs) accounting
for more than 90% of the market. Various regulatory reforms and initiatives taken up by the
regulators are essentially of US parentage.

3. OBJECTIVES OF THE STUDY

The objectives of the study are:
1) To study about the credit rating agencies operating in India and the rating and grading
services they provide.
2) To find the market share of all the rating agencies operating in India based on revenue
and number of outstanding securities rated.
3) To find the market share of Indian rating agencies for each rating category and to find
the market concentration (Herfindahl-Hirschman Index) for each rating category.
4. RESEARCH METHODOLOGY

This study is based on both primary and secondary data. Rating and grading service
offered by rating agencies is got from the rating agencies website. Data is based only on rating
Study of Competition among Credit Rating Agencies in

agencies disclosure on rating symbol, rating instruments and grading services. Each rating
agencies have named certain rating and grading services differently. For example it is called
claims paying ability rating by CRISIL and insurance rating by CARE. It is named as issuer
rating by CARE, ICRA and Brickworkrating, and corporate rating by CRISIL.

The history of outstanding securities is available in the regulatory disclosure of the rating
agencies website. The raw data was cleaned, edited and converted into common format in order
to perform analysis on the transformed data. Herfindahl-Hirschman Index (HHI) and HHI
inverse are calculated for credit rating industry in India for the year 2016. Herfindahl-Hirschman
Index (HHI) and HHI inverse are widely used by the policy makers to find market concentration
in a particular industry. HHI is the measure of industry concentration that reflects both the
number of firms in the industry and each firm’s market share.

In this paper HHI is calculated by summing the squares of market shares of each credit
rating agencies competing in the market. The HHI accounts for the number of rating agencies in
a market, as well as concentration, by incorporating the relative size (that is, market share) of all
rating agencies in a market. It is calculated by squaring the market shares of all rating agencies in
a market and then summing the squares, as follows:
HHI = ∑ (MSi) 2
where MSi represents the market share of rating agency i and there are n credit rating
agencies in the market. The HHI gives proportionately greater weight to the rating agencies with
larger market shares. Based on their experience, the markets are classified into three types:

 Unconcentrated Markets: HHI below 1500

 Moderately Concentrated Markets: HHI between 1500 and 2500
 Highly Concentrated Markets: HHI above 2500

This inverse HHI is a number that can be interpreted as the number of firms in the industry
assuming that all firms are the same size. Taking the inverse of the HHI yields the number of
“effective competitors,” or the number of equal-sized firms that would produce an equivalent
HHI score. In other words, an industry with an HHI Inverse of 3.0 has a concentration that is
equal to an industry where the entire market is evenly divided among three firms. The HHI
Inverse is calculated by dividing 10,000 (i.e., the highest possible HHI) by the HHI. A highly
concentrated market will have a low HHI Inverse, whereas an un-concentrated market will have
a high HHI Inverse. A market with an HHI Inverse of less than 4.0 is considered to be highly
concentrated; a market with an HHI Inverse between 4.0 and 6.67 is considered to be moderately
concentrated; and a market with an HHI Inverse above 6.67 is considered to be un-concentrated.

The Herfindahl-Hirschman index (HHI) a commonly accepted measure of market

concentration, and can range from close to zero to 10,000. It is calculated for the rating
operations and individual rating category for the rating agencies in India. Calculating these
market shares from CRA’s transparency reports is not a trivial exercise. There are significant
differences in reporting across the CRAs (including definitions of revenue, disaggregating
revenues across product types, and reporting time periods) as well as data gaps makes comparing
the results across CRAs somewhat challenging.
Journal of Accounting and

5. RATING AGENCIES IN INDIA

The Securities and Exchange Board of India (Credit Rating Agencies) Regulations, 1999
empower SEBI to regulate CRAs operating in India. All the credit agencies need to be registered
with SEBI in order to operate in India. There are seven Credit Rating Agencies registered with
SEBI, viz. CRISIL, ICRA, CARE, Fitch and Brickworks. Table 1 shows credit rating agencies
registered and operating in India along with the year of registration and major shareholding as of
year 2016. CRISIL has been the oldest, having been in operation since 1987 followed by ICRA
(1991), CARE (1994), Duff & Phelps, subsequently taken over by FitchIndia (1999) and
renamed as IndiaRatings (2000). The fifth rating agency registered with SEBI was Brickworks
(2008). SMERA, operational from September 2005, exclusively set up for MSMEs has been
registered with SEBI in 2011 to rate securities of medium and large corporates. Informerics is the
seventh rating agency registered with SEBI in 2015 to conduct the business of rating.

Table - 1
Credit rating agencies (India), year of registration and Major shareholders
Rating agencies Year of Registration Major Shareholders (2016)
CRISIL 1987 S&P 67%
ICRA Limited 1991 Moody’s 50%
Credit Analysis & Research Ltd. 1993 MFs, FIIs & Banks 73%
India Ratings & Research 2000 Fitch 100%
Brickworkratings 2007 Private 90%
SMERA Ratings Limited 2011 SIDBI, D&B 68%
Infomerics valuation and rating pvt ltd. 2015 Private 70%
Source: Regulatory disclosures from the Rating agencies website.
Note: Compiled by the authors.

World credit rating market is dominated by three rating agencies S&P, Moody’s and
Fitch based in USA. It represents largely oligopolistic market dominating 80% of world’s market
share. These rating agencies hold major market share in Indian credit rating industry as shown on
Table 1. With S&P 67% stake in CRISIL, Moody’s 50% in ICRA and Fitch 100% stake in
IndiaRatings. CRISIL, ICRA and Fitch accounts for 70% of the credit rating market in India.
CARE is the rating agency held by Indian banks, Mutual Funds, Financial Institutions and
Foreign Institutional investors. Brickworkratings and infomerics are privately held rating
agency. SMERA major shareholder include SIDBI and Dun & Bradstreet.
The services offered by rating agencies include Rating services, Grading services,
Research services, and Advisory services. Rating services include rating Debt instruments (long
term, medium term and short term), Structured finance instruments, Mutual fund schemes, Fixed
deposits, Insurance, Public finance SMEs and MSEs issued by manufacturing companies, non-
banking financial companies, municipal bodies, financial institutions, banks, governments, etc. It
also rates securitization programs and structured obligations. The debt instruments rated by
CRAs include term loans, corporate debts, commercial papers, certificate of deposits, working
capital demand loans, cash credit facilities, letters of credit, bank guarantees municipal bonds,
Study of Competition among Credit Rating Agencies in

government bonds, preferred stock and collateralized securities, such as mortgage-backed

securities and collateralized debt obligations

Grading services include grading Real estate, Institution, Solar, LPG/SKO, Shipyard,
Equity etc. It is also involved in performance grading of real estate developers, LPG parallel
marketers, health care institutions, educational institutions, maritime institutions and ITI. Rating
and grading services has also been done for stock brokers, corporate governance, corporate
social responsibility and fund management. IPO grading has been introduced in year 2006 and
has been made mandatory by SEBI for all the IPO issues. Table 2 shows the rating and grading
services offered by the five rating agencies in India as of year 2016. There are seven rating
agencies out of which five rating agencies which holds more than 90% of the market share in
Indian credit rating industry have been considered in the Table 2. √ indicates that the particular
rating or grading service is offered by the rating agency. Х indicates that the particular rating or
grading service is not offered by the rating agency.

Table -2
Rating and Grading services offered by rating agencies in India (2016)

Rating / Grading Services CRISIL CARE ICRA IndiaRatings Brickworkrating

Debt instruments √
√ √ √ √
Bank Loan ratings
√ √ √ √ √

Structured finance instruments √ √ √ √ √

Mutual fund schemes √ √ √ √ √

Initial Public Offer √ √ √ √ √

Issuer Rating √ √ √ Х √

Fixed deposits √ √ √ √ √

SME √ √ √ √ √

MSE √ √ √ √ √

Recovery Rating √ √ √ √ Х

Microfinance Institutions √ √ √ Х √
√
Claims Paying Ability √ √ Х √
Journal of Accounting and

Corporate Governance Rating √ √ √ Х √

Real estate Grading √ √ √ Х √

Public Finance rating √ √ √ √ √

Collective Investment Scheme Х √ √ Х Х

Maritime Institute grading √ √ √ Х Х

Solar grading √ √ √ √ √

Shipyard grading Х √ √ Х Х

LPG/SKO Х √ Х Х Х

Education Institution grading √ √ √ Х √

ITI √ √ √ Х √

Brokerage house grading √ Х √ Х Х

Equity grade Х √ √ √ Х
Source: Rating and Grading services from rating agencies website.
Note: Compiled by the authors.

It can be found from the Table – 2 that all the rating agencies are registered with SEBI
rate debt instruments, bank loan rating, structured finance instruments, mutual fund schemes,
SME, MSE and fixed deposit. Rating agencies differ in providing grading services. CRISIL,
ICRA and CARE provide most of the grading services like real estate, solar, institute and ITI as
seen in the Table -2. CRISIL doesn’t provide rating and grading service for collective investment
scheme, shipyard, LPG/SKO and equity. CARE doesn’t provide brokerage house grading. ICRA
doesn’t provide LPG/SKO grading. IndiaRatings and Brickworkratings provide some of the
grading services. IndiaRatings provide recoveryrating, public finance rating and equity grading.
Brickworkrating provide rating and grading services for microfinance institutions, Insurance,
corporate governance, real estate, public finance, solar, institution and ITI.

Table – 3
Rating revenue, Market share, HHI and HHI inverse for CRAs in India (2016)
Rating agencies Rating Revenue 2016 Market Share
(in Rs.crore) 2016
CRISIL 434.12 41.10
Credit Analysis & Research Ltd. 262.19 24.82
ICRA Limited 197.46 18.69
India Ratings & Research 88.52 8.38
Brickworkratings 51.43 4.87
 Study of Competition among Credit Rating Agencies in

SMERA Ratings Limited 22.37 2.12

Infomerics valuation and rating pvt ltd. 0.198 0.02
HHI 2748.52
HHI inverse 3.64
Source: regulatory disclosure, Rating agencies website.
Note: Compiled by the authors.
6. HERFINDAHL-HIRSCHMAN INDEX FOR CRA INDUSTRY IN INDIA
The CRISIL, ICRA, CARE and IndiaRatings are the major rating agencies operating in
India accounting for 90% of the market share. Brickwork came into operation in 2008 and holds
5% of the market share in the rating operations as of 2016. Table 3 shares information regarding
market share, HHI and HHI inverse for the credit rating agencies in India in the year 2016.
An HHI greater than 1000 indicates a moderately concentrated market, and an HHI
greater than 1800 is considered a highly concentrated market; HHI for the year 2016 in the credit
rating industry, India is 2748 which suggests that it is a highly concentrated market. HHI inverse
of 3.64 suggests that many equally sized firms. Table – 4 shows number of outstanding securities
rated by five rating agencies in India for the year 2015. Number of outstanding securities rated
have been catagorised into corporate, Financial Institutions, Structured Obligations, and
Government securities. Outstanding securities indicates debt instruments in long term, medium
term and short term. It can be found from the Table – 4 that the number of outstanding securities
in corporate debt segment dominates all the other segments. As per number of outstanding
securities CRISIL occupies the top most position followed by ICRA, Brickworkrating, CARE,
and IndiaRatings. HHI for the rating agencies according to the number of securities rated is 2221
which indicates it is a moderately concentrated market.

Table – 4
Number of outstanding securities rated by CRAs (2015) and HHI

S.No Credit Corporate Financial SO Government Total

Rating Institutions and Co-
Agencies operative
Soceities
1 CRISIL 3309 11 228 16 3564
2 CARE 1373 100 119 30 1622
3 ICRA 1978 94 148 20 2240
4 IndRa 1314 29 131 10 1484
5 Brickwork 2051 28 78 4 2161
Total 10025 262 704 80 11071
HHI 2221.05
Source: Regulatory disclosure, Rating agencies website.
Note: Compiled by the authors.

Fig – 1 shows market share of credit rating agencies operating in India w.r.t number of
outstanding securities rated. It can be found that CRISIL accupies first postion followed by
Journal of Accounting and

ICRA and Brickworkratings. This is followed by CARE and IndiaRatings. It can be found that
w.r.t rating revenue and number of outstanding securities CRISIL is the market leader with 41 %
of the market share. CARE rating stands in the second position next to CRISIL with 25% of the
market share but w.r.t number of outstanding securities rated CARE stands in fourth position.
ICRA stands in the third position w.r.t rating revenue and second rating has 5% market share, but
occupies third position w.r.t number of outstanding securities rated. HHI is calculated for the
number of outstanding securities rated by the credit rating agencies in India and is 2221 which
suggests it is a highly concentrated market.

Source: History of outstanding securities,regulatory disclosure requirements,rating agencies website.

Note : Compiled by the authors

7. HHI OF OUTSTANDING SECURITIES FOR EACH CATEGORY IN YEAR 2015

In accordance with disclosure required by the SEBI, each Credit Rating Agency in India
annually reports the History of credit ratings outstanding for which it is registered. This
information, which is summarized in Table - 4 can be useful in determining the breadth of a
rating agencies coverage with respect to issuers and obligors within a particular rating class. Fig
2 through 5 depict the percentages of credit ratings in each rating category that were attributable
to each CRA that is registered in such category, in each case, based on information disclosed in
their website under regulatory disclosure requirements.

Fig – 2 shows the break up of market share of each credit rating agencies operating in
India in the rating category corporate. It can be seen that CRISIL has 33% of the market share.
ICRA and Brickwork share has 20 % of the market share. CARE and IndiaRatings has around
 Study of Competition among Credit Rating Agencies in

13% market share. HHI index for the corporate rating category for the year 2015 is 1879 which
indicates it is a moderately concentrated market. Fig – 3 shows the break up of market share of
each credit rating agencies in the rating category financial institutions for the year 2015. It can be
seen that CARE and ICRA shares maximum market share in this rating category. Brickworks
and IndiaRatings shares 11% market share each in this rating category. CRISIL has 4% market
share. HHI for the financial Institutions rating category for the year 2015 is 2906. This indicates
heavily concentrated market.

Source: History of outstanding securities,regulatory disclosure requirements,rating agencies

website. Note : Compiled by the authors
Fig – 4 shows the break up of market share of each credit rating agencies operating in
India in the rating category structured obligations. CRISIL has maximum market share. ICRA,
IndRa and CARE has 21%, 19% and 17% market share. Brickwork has 11% market share. HHI
for the structured obligations category for the year 2015 is 2145 which indicates moderately
concentrated category. Fig – 5 shows the break up of market share of each credit rating agencies
operating in India in the rating category government and co-operative soceities. CARE shows the
maximum market share of 37%. ICRA and CRISIL had 25% and 20% market share.IndiaRating
has 12.5% and brickwork has 5% market share. HHI for the governement and co-operative
 Journal of Accounting and

soceities category for the year 2015 is 2598 which indicates highly concentrated market.

Source: History of outstanding securities,regulatory disclosure requirements,rating agencies

website. Note : Compiled by the authors.

Fig - 6 depicts the percentages of outstanding credit ratings attributable to each rating
category, based on information reported by the credit rating agencies in their regulatory
disclosure requirements as of year 2015. As illustrated by Fig - 6, as of 2015, a disproportionate

BREAKDOWN OF OUTSTANDING RATINGS BY RATING CATEGORY

Source: History of outstanding securities,regulatory disclosure requirements,rating agencies website.

Study of Competition among Credit Rating Agencies in

Note : Compiled by the authors.

number of the aggregate credit ratings reported to be outstanding were in the corporate securities
category, which may be attributable to the large number of corporate debt instrument issuers and
their multiple debt offerings in long term and short term. The corporate securities category
accounted for 90% of the total number of credit ratings reported across all categories and, as
shown on Fig - 6, is moderately concentrated rating category with HHI of 1879. Fig – 6
illustrates that there is more competition in the corporate rating category.As discussed above, the
number of outstanding ratings reported by the NRSROs provides insights into the state of
competition in each rating class and in the aggregate, but assessing the state of competition based
on this data has some limitations.

Further, the outstanding ratings reported by the rating agency are based on their own
determinations of the applicable categories and number of ratings, which are not necessarily
consistent among all the Rating agencies. Table 5 shows the Market share at each rating category
level for the Indian CRAs operating in India. It also shows HHI and HHI inverse for each rating
category level for which the rating agencies have been registered to give rating with the
regulator. It can be found that HHI for corporate, structured obligations, government and co-
operative societies indicate it is a moderately concentrated market, whereas HHI for the financial
institution indicates it is a highly concentrated market. The inverse of the HHI (“HHI Inverse”)
can be used to represent the number of firms with equal market share necessary to replicate the

Table - 5
Market share of Indian CRAs , HHI, HHI inverse
at each rating category level
S.No Credit Market Share
Rating Corporate Financial SO Govt. and
Agencies Institutions Co-op
Soceities
1 CRISIL 32.19 4.20 32.39 20
2 CARE 14.65 38.17 16.90 37.5
3 ICRA 20.23 35.88 21.02 25
4 IndRa 13.40 11.07 18.61 12.5
5 Brickworks 19.52 10.69 11.08 5
HHI 1879 2906 2145 2598
HHI inverse 5.3 3.4 4.7 3.8
Source: Regulatory disclosure, Rating agencies website.
Note: Compiled by the authors.

degree of concentration in a particular industry. Seven credit rating agencies in India are
registered to rate all the rating category found in Table – 5. Therefore, the highest possible HHI
Inverse (in a perfectly competitive market where all firms have an equal share of business)
would be 7.0. Financial institutions, Government and co-operative societies HHI inverse
indicates a highly concentrated market. Corporate and structured obligation indicate a highl y
concentrated market.
Journal of Accounting and

8. CONCLUSION

Indian rating industry is influenced by the three big international rating agencies S&P,
Moody’s and Fitch which has major shareholding in CRISIL, ICRA and IndiaRatings
respectively. CARE is rating agency with Indian Banks & Financial Institutions as a major
shareholders. Similarly Brickworkrating, SMERA and Infomerics are rating agency promoted in
India. Length and breadth of rating and grading services is increasing and so is the competition
among the rating agencies in India.
HHI for the rating agencies in India as per the number of outstanding ratings rated is
2221 which indicates it is moderately concentrated. HHI at the individual product level ranges
from moderately concentrated to heavily concentrated and reflects oligopolistic nature of the
industry. HHI of all rating agencies operating in US is 3,495 which is highly concentrated.
Market share calculations and HHI scores of European Union also show that the CRA market in
European Union is highly concentrated, both overall and at the individual product category level.

These indicates that though the credit rating industry in India is still oligopolistic, it is not
heavily concentrated as in many developed markets. HHI of all the credit rating agencies found
in this paper throws light on the nature of competition and its industry concentration. HHI is also
at overall as well as individual rating category and it helps the stakeholders to understand the
nature of competition at the rating category level. Competition and its effect on the credit rating
industry need to be studied in order to enable the smooth functioning of capital markets.
Understanding the nature of competition by the regulators and other stakeholders would help in
formulating various policies which would improve ratings timelines and quality.

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