I -INTRODUCTION

CHAPTER 1.1

EXECUTIVE SUMMARY

The banking sector in India underwent an unprecedented transformation in the

1990s with the emergence of a large number of private as well as foreign

multinational banks entering the country increasing rapidly the number of banks

in India due to the economic reforms. So the banking activities increased

manifold and affected a large number of areas of operation of banks,

particularly in the field of bank lending. Banks operate on the pattern of

extending credit against security given by its customers associated with the

bank. The facility of extending credit agencies are recognition of the changing

times in which banks have to operate in a changing and ever evolving economic

scenario. Growing needs and realization of higher rate of investments is giving

birth to bank credit in India.

Credit rating agencies play an important role in assessing risk and its location

and distribution in the financial system. By facilitating investment decisions

they can help investors in achieving a balance in the risk return profile and at

the same time assist firms in accessing capital at low cost. CRAs can thus

potentially help to allocate capital efficiently across all sectors of the economy

by pricing risk appropriately. However, in view of the fact that CRAs that rate
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capital market instruments are regulated by SEBI and that entities regulated by

other regulators (IRDA, PFRDA and RBI) predominantly use the ratings, it was

felt necessary to institute a comprehensive review of the registration, regulatory

and supervisory regime for CRAs. The major motivation for the exercise was to

look at inter regulatory coordination so that all interested stake holders have an

institutional mechanism for providing inputs feedback to ensure realization of

the objective behind the regulation of CRAs.

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 CHAPTER 1.2

OBJECTIVES OF CREDIT RATING AGENCIES

1. To provide guidance to investors/creditors in determining a credit risk

associated with a debt instrument/credit obligation.

2. To help investors make an investment option

3. To help merchant banks, brokers, regulatory authorities etc., in

discharging their functions related to debt issues.

4. To protect the interest of investors.

5. Acts as a marketing tool

6. Improves healthy discipline on borrowers

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 CHAPTER 1.3

RESEARCH METHODOLOGY

Secondary Data:

The secondary data has been collected from various reference books and
websites which have been mentioned in the bibliography at the end of the
project

Scope of the Research:

The main objective of the project is to get to know about Credit Rating
Agencies in India and importance from the investor’s point of view.

Credit Rating is an objective assessment of a borrower’s credit quality in terms

of business and financial risks.

Primary Data:

The primary data has been collected through an survey of 100 investors who
check credit rating for investment avenues.

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 CHAPTER 2 - OVERVIEW

2.1 Meaning & Definitions of Credit Rating:

“A rating is an opinion on the future ability and legal obligation of the issuer to
make timely payments of principal and interest on a specific fixed income
security. The rating measures the probability that the issuer will default on the
security over its life, which depending on the instrument may be a matter of
days to 30 years or more. In addition, long term ratings incorporate an
assessment of the expected monetary loss should a default occur." Moody’s

"Credit ratings help investors by providing an easily recognizable, simple tool

that couples a possibly unknown issuer with an informative and meaningful
symbol of credit quality." Standard and Poor’s

Ratings, usually expressed in alphabetical or alphanumeric symbols, are a

simple and easily understood tool enabling the investor to differentiate between
debt instruments based on their underlying credit quality. The credit rating is
thus a symbolic indicator of the current opinion of the relative capability of the
issuer to service its debt obligation in a timely fashion, with specific reference
to the instrument being rated. It is focused on communicating to the investors,
the relative ranking of the default loss probability for a given fixed income
investment, in comparison with other rated instruments.

In fact, the rating is an opinion on the future ability and legal obligation of the
issuer to make timely payments of principal and interest on a specific fixed

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income security. The rating measures the probability that the issuer will default
on the security over its life, which depending on the instrument may be a matter
of days to 30 years or more.

In addition, long-term rating incorporates an assessment of the expected

monetary loss should a default occur. Credit rating helps investors by providing
an easily recognizable, simple tool that couples a possible unknown issuer with
an informative and meaningful symbol of credit quality. Credit rating can be
defined as an expression, through use of symbols, of the opinion about credit
quality of the issuer of security/instrument.

Credit rating does not amount to any recommendation to purchase, sell or hold
that security. It is concerned with an act of assigning values by estimating worth
or reputation of solvency, and honesty to repose trust in a person's ability and
intention to repay.

The ratings assigned are generally regarded in the investment community as an

objective evaluation of the probability that a borrower will default on a given
security issue. Default occurs whenever a security issuer is late in making one
or more payments that it is legally obligated to make. In the case of a bond,
when any interest or principal payment falls due and is not made on time, the
bond is legally in default. While many defaulted bonds ultimately resume the
payment of principal and interest, others never do, and the issuing company
winds up in bankruptcy proceedings. In most instances, holders of bonds issued
by a bankrupt company receive only a part amount on his investments, invested,
once the company's assets are sold at auction. Thus, the investor who holds title
to bankrupt bonds typically loses both principal and interest. It is no wonder,
then, that security ratings are so closely followed by investors. In fact, many
investors accept the ratings assigned by credit agencies as a substitute for their
own investigation of a security's investment quality.

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CHAPTER 2.2

Evolution of Credit Rating Agencies

The origins of credit rating can be traced to the 1840's. Following the financial
crisis of 1837, Louis Tappan established the first mercantile credit agency in
New York in 1841. The agency rated the ability of merchants to pay their
financial obligations. Robert Dun subsequently acquired it and its first rating
guide was published in 1859. John Bradstreet set up another similar agency in
1849, which published a rating book in 1857. These two agencies were merged
together to form Dun and Bradstreet in 1933, which became the owner of
Moody's Investors Service in 1962.

The history of Moody's itself goes back about 100 years. John Moody (1868 -
1958) was a self-taught reformer who had a strong entrepreneurial drive and a
firm belief about the needs of the investment community - as well as
considerable journalistic talent. Relying on his assessment of the market’s
needs, John Moody and Company published Moody’s Manual of Industrial and
Miscellaneous Securities in 1900, the company’s founding year. The manual
provided information and statistics on stocks and bonds of financial institutions,
government agencies, manufacturing, mining, utilities, and food companies.
Within two months, the publication had sold out. By 1903, circulation had
exploded, and Moody’s Manual was known from coast to coast.

When the stock market crashed in 1907, Moody’s company did not have
adequate capital to survive, and he was forced to sell his manual business.
Moody returned to the financial market in 1909 with a new idea.

Instead of simply collecting information on the property, capitalization, and

management of companies, he now offered investors an analysis of security
values. His company would publish a book that analyzed the railroads and their
outstanding securities. It offered concise conclusions about their relative
investment quality.
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Moody had now entered the business of analyzing the stocks and bonds of
America’s railroads, and with this endeavor, he became the first to rate public
market securities. In 1909, Moody’s Analyses of Railroad Investments
described for readers the analytic principles that Moody used to assess a
railroad’s operations, management, and finance. The new manual quickly found
a place in investors’ hands. In 1913, he expanded his base of analyzed
companies, launching his evaluation of industrial companies and utilities. By
that time, the "Moody's ratings" had become a factor in the bond market. On
July 1, 1914, Moody's Investors Service was incorporated. That same year,
Moody began expanding rating coverage to bonds issued by US cities and other
municipalities.

Further expansion of the credit rating industry took place in 1916, when the
Poor's Publishing Company published its first rating followed by the Standard
Statistics Company in 1922, and Fitch Publishing Company in 1924. The
Standard Statistics Company merged in 1941 to form Standard and Poor's,
which was subsequently taken, over by McGraw Hill in 1966. For almost 50
years, since the setting up of Fitch Publishing in 1924, there were no major new
entrants in the field of credit rating and then in the 1970s, a number of credit
rating agencies commenced operations all over the world. These included the
Canadian Bond Rating Service (1972), Thomson Bank watch (1974), Japanese
Bond Rating Institute (1975), McCarthy Crisani and Maffei (1975 acquired by
Duff and Phelps in 1991), Dominican Bond Rating Service (1997), IBCA
Limited (1978), and Duff and Phelps Credit Rating Company (1980). There are
credit rating agencies in operation in many other countries such as Malaysia,
Philippines, Mexico, Indonesia, Pakistan, Cyprus, Korea, Thailand and
Australia.

In India, the Credit Rating and Information Services of India Ltd. (CRISIL) was
set up as the first rating agency in 1987, followed by ICRA Ltd. (formerly
known as Investment Information and Credit Rating Agency of India Limited)
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in 1991, and Credit Analysis and Research Ltd. (CARE) in 1994. The
ownership pattern of all the three agencies is institutional.

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 CHAPTER 2.3

ORIGIN

The first mercantile credit agency was set up in New York in 1841 to rate the
ability of merchants to pay their financial obligations. Later on, it was taken
over by Robert Dun.

Name of the CRA Year of commencement of

Operations
CRISIL 1988
ICRA 1991
CARE 1993
Fitch India 1996
Brickworks 2008

This agency published its first rating guide in 1859. The second agency was
established by John Bradstreet in 1849 which was later merged with first agency
to form Dun & Bradstreet in 1933, which became the owner of Moody’s
Investor’s Service in 1962. The history of Moody’s can be traced back about
100 years ago. In 1900, John Moody laid stone of Moody’s Investors Service
and published his ‘Manual of Railroad Securities’. Early 1920’s saw the
expansion of credit rating industry when the Poor’s Publishing Company
published its first rating guide in 1916. Subsequently Fitch Publishing Company
and Standard Statistics Company were set up in 1924 and 1922 respectively.
Poor and Standard merged together in 1941 to form Standard and Poor’s which
was subsequently taken over by McGraw Hill in 1966. Between 1924 and 1970,
no major new rating agencies were set up. But since 1970’s, a number of credit
rating agencies have been set up all over the world including countries like
Malaysia, Thailand, Korea, Australia, Pakistan and Philippines etc.

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In India, revenues of the three big rating agencies, CRISIL, ICRA and CARE
have shown an upward trend given the increase in the usage of ratings over
time. In India, CRISIL (Credit Rating and Information Services of India Ltd.)
was setup in 1988 as the first rating agency followed by ICRA Ltd. (formerly
known as Investment Information & Credit Rating Agency of India Ltd.) in
1991, and Credit Analysis and Research Ltd. (CARE) in 1993. All the three
agencies have been promoted by the All-India Financial Institutions.

The above table shows us the upward and downward trends for Credit ratings in
India over last 7 years.The rating agencies have established their creditability
through their independence, professionalism, continuous research, consistent
efforts and confidentiality of Information. Duff and Phelps has tied up with two
Indian NBFCs to set up Duff and Phelps Credit Rating India (P) Ltd. in 1999.

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 CHAPTER 3 – CREDIT RATING,PROCESS & FRAMEWORK

RATING DEFINATION- 3.1

High Investment Grades

AAA Debentures rated `AAA' are judged to offer highest safety of
(Triple A) timely payment of interest and principal. Though the
Highest circumstances providing this degree of safety is likely to change,
Safety such changes as can be envisaged are most unlikely to affect
adversely the fundamentally strong position of such issues.
AA Debentures rated 'AA' are judged to offer high safety of timely
(Double A) payment of interest and principal. They differ in safety from
High Safety `AAA' issues only marginally.
Investment Grades
A Debentures rated `A' are judged to offer adequate safety of timely
Adequate payment of interest and principal; however, changes in
Safety circumstances can adversely affect such issues more than those in
the higher rated categories.
BBB Debentures rated `BBB' are judged to offer sufficient safety of
(Triple B) timely payment of interest and principal for the present; however,
Moderate changing circumstances are more likely to lead to a weakened
Safety capacity to pay interest and repay principal than for debentures in
higher rated categories.

Speculative Grades
BB Debentures rated `BB' are judged to carry inadequate safety of
(Double B) timely payment of interest and principal; while they are less
Inadequate susceptible to default than other speculative grade debentures in
Safety the immediate future, the uncertainties that the issuer faces could
lead to inadequate capacity to make timely interest and principal
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 payments
B Debentures rated `B' are judged to have greater susceptibility to
High Risk default; while currently interest and principal payments are met,
adverse business or economic conditions would lead to lack of
ability or willingness to pay interest or principal.
C Debentures rated `C' are judged to have factors present that make
Substantial them vulnerable to default; timely payment of interest and
Risk principal is possible only if favorable circumstances continue.
D Debentures rated `D' are in default and in arrears of interest or
In Default principal payments or are expected to default on maturity. Such
debentures are extremely speculative and returns from these
debentures may be realized only on reorganization or liquidation.
Note: 1) CRISIL may apply "+" (plus) or "-" (minus) signs for
ratings from AA to D to reflect comparative standing
within the category.2) The contents within parenthesis are
a guide to the pronunciation of the rating symbols.3)
Preference share rating symbols are identical to debenture
rating symbols except that the letters "pf" are prefixed to
the debenture rating symbols, e.g. pfAAA ("pf Triple A").

Fixed Deposit Rating Scales

FAAA This rating indicates that degree of safety regarding timely
("F Triple payment of interest and principal is very strong.
A") Highest
Safety
FAA This rating indicates that the degree of safety regarding timely
("F Double payment of interest and principal is strong. However, the relative
A") High degree of safety is not as high as for fixed deposits with "FAAA"
Safety rating.
FA This rating indicates inadequate safety of timely payment of
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 Adequate interest and principal. Such issues are less susceptible to default
Safety than fixed deposits rated below this category, but the
uncertainties that the issuer faces could lead to inadequate
capacity to make timely interest and principal payments.
FB This rating indicates inadequate safety of timely payment of
Inadequate interest and principal. Such issues are less susceptible to default
Safety than fixed deposits rated below this category, but the
uncertainties that the issuer faces could lead to inadequate
capacity to make timely interest and principal payments.
FC This rating indicates that the degree of safety regarding timely
High Risk payment of interest and principal is doubtful. Such issues have
factors at present that make them vulnerable to default; adverse
business or economic conditions would lead to lack of ability or
willingness to pay interest or principal.
FD This rating indicates that the issue is either in default or is
Default expected to be in default upon maturity.
Note: 1) The rating agency may apply "+" (plus) or "-" (minus) signs
for ratings from FAA to FC to indicate the relative position
within the rating category of the company raising fixed deposits.
2) The contents within parenthesis are a guide to the
pronunciation of the rating symbols.

Foreign Structured Obligations (FSO) Rating Scales

The credit rating agency has developed a framework for rating the debt
obligations of Indian corporates supported by credit enhancements extended by
entities based outside the country. The issues considered inter alia include the
credit worthiness of the offshore entity, the nature and structure of the credit
enhancement mechanism to ensure timely payments on rated debt obligations a
regulatory issues as regards the transfer risk. The credit rating would notch up
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the standalone credit ratings of these Indian issuers depending on all these
factors.

CRISIL ratings of Foreign Structured Obligations (FSO) factor the credit

enhancement extended by an entity based outside the country. The ratings
indicate the degree of certainty regarding timely payment of financial
obligations on the instrument. These ratings have been assigned in the current
regulatory framework as regards the transfer risk and any change therein could
impact the ratings.

The credit enhancements could be in the form of guarantees, letters of credit,

asset backing or other suitable structures. Due to the current regulatory controls
on inward remittances, CRISIL would require suitable liquidity mechanisms to
be in place for ensuring timely payment on due dates.

Foreign Structured Obligations ratings are based on the same scale (AAA
through D) as CRISIL ratings for long-term instruments. Foreign Structured
Obligations ratings symbols are defined below:

High Investment Grades

AAA(fso) Highest Safety - This rating indicates highest degree of

(Triple A)* certainty regarding timely payment of financial obligations on
the instrument. Any adverse changes in circumstances are
most unlikely to affect the payments on the instrument.

AA(fso) Highest Safety - This rating indicates high degree of certainty

(Double regarding timely payment of financial obligations on the
A)* instrument. This instrument differs in safety, from "AAA(fso)"
instruments only marginally.

Investment Grades

A(fso) * Adequate Safety -This rating indicates adequate degree of

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 certainty regarding timely payment of financial obligations on
the instrument. Changes in circumstances can adversely affect
such instruments. Changes in circumstances can adversely
affect such instruments more than those in the higher rated
categories.

BBB(fso) Moderate Safety - This rating indicates a moderate degree of

(Triple B) certainty regarding timely payment of financial obligations on
* the instrument. However, changing circumstances are more
likely to lead to a weakened capacity to meet financial
obligations than for instruments in higher rated categories.

Speculative Grades

BB(fso) Inadequate Safety - This rating indicates inadequate degree of

(Double B) certainty regarding timely payment of financial obligation on
* the instrument. Such instruments are less susceptible to default
than instruments rated below this category.

B(fso) High Risk - This rating indicates high risk and greater
susceptibility to default. Any adverse business or economic
conditions would lead to lack of capability or willingness to
meet financial obligations on time.

C(fso) Substantial Risk - This rating indicates that the degree of

certainty regarding timely payment of financial obligations is
doubtful unless circumstances are favorable.

D(fso) Default - This rating indicates that the obligation is in default

or expected to default.

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Credit Rating Scale for Financial Strength Ratings (FSR)

Ratings are broadly divided into two categories - Secure and Vulnerable.
Rating categories from "AAA" to "BBB" are classified as 'secure' ratings
and are used to indicate insurance companies whose financial capacity to
meet policyholder obligations is sound. Rating categories from "BB" to "D"
are classified as vulnerable ratings and are used to indicate insurance
companies whose financial capacity to meet policyholder obligations is
vulnerable to adverse economic and underwriting conditions.

The opinion does not take into account timeliness of payment or the
likelihood of the use of a defense such as fraud to deny claims. For insurance
companies with cross-border or multi-national operations, including those
conducted by branch offices or subsidiaries, ratings do not take into account
any potential that may exist for foreign exchange restrictions to prevent
policy obligations from being met. Financial strength ratings do not refer to
an insurance company's ability to meet non-policy obligations (i.e. debt
contracts).The ratings are not recommendations to purchase or discontinue a
policy, contract or security issued by an insurance company nor are they
guarantees of financial strength.

Secure Ratings

AAA Reflects Highest Financial Strength to meet policyholder obligations.

Though the circumstances providing this strength are likely to
change, such changes as can be envisaged are most unlikely to affect
adversely the fundamentally strong position.

AA Reflects High Financial Strength to meet policyholder obligations.

Though the circumstances providing this degree of strength are likely
to change, such changes as can be envisaged are most unlikely to
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 affect adversely the fundamentally strong position. Companies in this
category differ only marginally from the 'AAA' rated insurance
companies.

A Reflects Adequate Financial Strength to meet policyholder

obligations. However, change in circumstances can adversely affect
such companies more than those in the higher rated categories.

BBB Reflects Moderate Financial Strength to meet policyholder

obligations. However, changing circumstances are more likely to
lead to a weakened capacity to meet policyholder obligations than the
higher rated categories.

Vulnerable Ratings

BB Reflects Inadequate Financial Strength to meet policyholder

obligations. While companies rated in this category are less
susceptible to default than other speculative grade companies in the
immediate future, the uncertainties that they face could lead to
inadequate capacity to meet their policyholder obligations.

B Reflects Greater Susceptibility to default on policyholder obligations.

While current obligations are met, adverse business or economic
conditions would lead to lack of ability or willingness to meet
policyholder obligations.

C Vulnerable to default. Ability to meet policyholder obligations is

possible only if favorable circumstances prevail.

D In default. Current policyholder obligations are in default. Insurance

companies rated "D" are extremely speculative and policyholder
obligations may be realized only on reorganization or liquidation.

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Financial strength ratings from "AA" to "BB" may be modified by use of a plus
(+) or (minus (-) sign to show the relative standing of the insurance /
reinsurance company within the rating categories.

Bond Fund Rating Scales

AAA The fund’s portfolio holdings provide very strong protection against
f losses from credit defaults.

AAf The fund’s portfolio holdings provide strong protection against losses
from credit defaults.

Af The fund’s portfolio holdings provide adequate protection against

losses from credit defaults.

BBBf The fund’s portfolio holdings provide moderate protection against

losses from credit defaults.

BBf The fund’s portfolio holdings provide inadequate protection against

losses from credit defaults.

Cf The fund’s portfolio holdings have factors present which make them
vulnerable to credit defaults.

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 CHAPTER 3.2

FRAMEWORK OF RATING PROCESS

Rating is an interactive process with a prospective approach. It involves series

of steps. The main points are described as below:

(a) Rating Request: Ratings in India are

initiated by a formal request (or mandate)
from the prospective issuer. This mandate
spells out the terms of the rating
assignment. Important issues that are
covered include: binding the credit rating
agency to maintain confidentiality, the right to the issuer to accept or not to
accept the rating and binds the issuer to provide information required by the
credit rating agency for rating and subsequent surveillance.

(b) Rating Team:The team usually comprises two members. The composition of
the team is based on the expertise and skills required for evaluating the business
of the issuer.

(c) Information Requirements: Issuers are provided a list of information

requirements and the broad framework for discussions. These requirements are
derived from the experience of the issuers business and broadly conform to all
the aspects which have a bearing on the rating. These factors have been
discussed in detail under rating framework.

(d) Secondary Information:The credit rating agency also draws on the secondary
sources of information including its own research division. The credit rating
agency also has a panel of industry experts who provide guidance on specific

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issues to the rating team. The secondary sources generally provide data and
trends including policies about the industry.

(e) Management meetings and plant visits:Rating involves assessment of

number of qualitative factors with a view to estimate the future earnings of the
issuer. This requires intensive interactions with the issuer’s management
specifically relating to plans, future outlook,and competitive position and
funding policies.

Plan visits facilitate understanding of the production process, assess the state of
equipment and main facilities, evaluate the quality of technical personnel and
form an opinion on the key variables that influence level, quality and cost of
production. These visits also help in assessing the progress of projects under
implementation.

(f) Preview Meeting:After completing the analysis, the findings are discussed at
length in the internal committee, comprising senior analysts of the credit rating
agency. All the issues having a bearing on the rating are identified. At this
stage, an opinion on the rating is also formed.

(g) Rating Committee Meeting:This is the final authority for assigning ratings.
A brief presentation about the issuers business and the management is made by
the rating team. All the issues identified during discussions in the internal
committee are discussed. The rating committee also considers the
recommendation of the internal committee for the rating. Finally, a rating is
assigned and all the issues which influence the rating are clearly spelt out.

(h) Rating Communication: The assigned rating along with the key issues is
communicated to the issuer’s top management for acceptance. The ratings
which are not accepted are either rejected or reviewed. The rejected ratings are
not disclosed and complete confidentiality is maintained.

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(I) Rating Reviews: If the rating is not acceptable to the issuer, he has a right to
appeal for a review of the rating. These reviews are usually taken up only if the
issuer provides fresh inputs on the issues that were considered for assigning the
rating. Issuer’s response is presented to the Rating Committee. If the inputs are
convincing, the Committee can revise the initial rating decision.

(j) Surveillance:It is obligatory on the part of the credit rating agency to monitor
the accepted ratings over the tenure of the rated instrument. As has been
mentioned earlier, the issuer is bound by the mandate letter to provide
information to the credit rating agency. The ratings are generally reviewed
every year, unless the circumstances of the case warrant an early review. In a
surveillance review the initial rating could be retained or revised (upgrade or
downgrade)

How Does the Ratings Process Work?

The process of Rating starts with the issue of the Rating Request by the issuer/
signing of the Rating agreement. A detailed flow chart is as under:

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Analytical framework used by CRAs

A credit rating is an opinion on the relative credit risk (or default risk)
associated with the instrument being rated, where a failure to pay even one
rupee of the committed debt service payments on the due dates would constitute
a default. For most instruments, the process involves estimating the cash
generation capacity of the issuer through operations (primary cash flows) in
relation to its requirements for servicing debt obligations over the tenure of the
instrument. The analysis is based on information obtained from the issuer, and
on an understanding of the business environment in which the issuer operates; it
is carried out within the framework of the rating agency‘s criteria.

The analytical framework involves the analysis of business risk, technology

risk, operational risk, industry risk, market risk, financial risk and management
risk. Business risk analysis covers industry analysis, operating efficiency,
market position of the company whereas financial risk covers accounting
quality, existing financial position, cash flows and financial flexibility. Under
management risk analysis an assessment is made of the competence and risk
appetite of the management.

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 CHAPTER 3.3

REGULATORY FRAMEWORK FOR CRA’s

1. SEBI REGULATIONS

The Securities and Exchange Board of India (Credit Rating Agencies)

Regulations, 1999 empower SEBI to regulate CRAs operating in India. In fact,
SEBI was one of the first few regulators, globally, to put in place an effective
and comprehensive regulation for CRAs. In contrast, the US market saw CRA
regulations only recently (in 2007), and the European Union is still in the
process of framing its regulations. SEBI‘s CRA regulations have been used as
model by other regulators in the emerging economies. In terms of the SEBI
Regulations, a CRA has been defined 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. The term ―securities‖ has been defined under the
Securities Contract (Regulation) Act, 1956. SEBI has also prescribed a Code of
Conduct to be followed by the rating agencies in the CRA Regulations.
However, SEBI administers the activities of CRAs with respect to their role in
securities market only.

SEBI regulation for CRAs has been designed to ensure the following:

- Credible players enter this business (through stringent entry norms and
eligibility criteria)

- CRAs operate in a manner that enables them to issue objective and fair
opinions (through well-defined general obligations for CRAs)

- There is widespread investor access to ratings (through a clearly articulated

rating dissemination process).

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- The applicant should be registered as a company under the Companies Act,
1956 and possess a minimum network of Rs.5 crore.

The following are some of the General Obligations specified in the CRA
regulations. CRAs are amongst the very few market intermediaries for which
such detailed operating guidelines have been prescribed under the regulations.

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 CHAPTER 3.4

TYPES OF RATINGS

Following are the different kinds of rating:

(1) Bond/debenture rating

Rating the short term and medium term debentures/bonds issued by corporate,
government etc. is called debenture or bond rating.

(2) Equity rating

Rating of equity shares issued by a company is called equity rating. An

evaluation of a stock's expected performance and/or its risk level as judged by a
rating agency such as Standard and Poor's. A stock rating will usually help the
investor to find out fair value for the stock, based on an objective evaluation of
the company. The greater the amount by which the fair value exceeds the
market value, the more highly recommended a buy the stock is. Conversely, if
the market value of the stock exceeds the fair value of the stock, then analysts
recommend that the stock be sold. Most stock rating systems give stocks 1 to 5
stars, with 5 being the best.

(3) Preference share rating

Rating of preference share issued by a company is called preference share

rating.

(4) Commercial paper rating

Commercial papers are instruments used for short-term borrowing. Commercial

papers are issued by manufacturing companies, finance companies, banks and
financial institutions and rating of these instruments is called commercial paper
rating.
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(5) Fixed deposits rating

Fixed deposits programmers are medium term unsecured borrowings. Rating of

such programmes is called as fixed deposits rating.

(6) Borrowers rating

Rating of borrowers is referred as borrower rating.

(7) Individuals rating

Rating of individuals is called as individual's credit rating.

(8) Structured obligation

Structured obligations are also debt obligations and are different from debenture
or bond or fixed deposit programmes and commercial papers. Structured
obligation is generally asset-backed security. Credit rating agencies assessed the
risk associated with the transaction with the main trust on cash flows emerging
from the asset would be sufficient to meet committed payments, to the investors
in worst case scenario.

(9) Sovereign rating

Is a rating of a country, which is being considered whenever a loan is to be

extended, or some major investment is envisaged in a country. It is a grading of
a country's ability to meet its financial obligations. Credit rating agencies
provide these ratings and investors use this to assess the level of risk related
with investing in a country. The rating may also include an evaluation of a
country's political risk. For example, India has been given BBB negative rating
by Standard and poor’s as on April 2012.

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Because it is the doorway into a country's investment atmosphere, the sovereign
rating is the first thing most institutional investors will look at when making a
decision to invest money abroad. This rating gives the investor an immediate
understanding of the level of risk associated with investing in the country. A
country with a sovereign rating will therefore get more attention than one
without. So to attract foreign money, most countries will strive to obtain a
sovereign rating and they will strive even more so to reach investment grade. In
most circumstances, a country's sovereign credit rating of AAA indicates lowest
risk.

(10) Rating of real estate

CRISIL has started assigning rating to the builders and developers with the
objective of helping and guiding prospective real estate buyers. CRISIL
thoroughly scrutinizes the sale deed papers, sanctioned plan; lawyers report
government clearance certificates before assigning rating to the builder or
developer. Past experience of the builder, number of properties built by the
builder, financial strength, and time taken for completion are some of the factors
taken into consideration by the CRISIL before giving a final rating to the real
estate builder developer.

(11) Bank ratings

CRISIL and ICRA both are engaged in rating of banks based on the following
six parameters also called CAMELS.

C - C stands for capital adequacy of banks. A bank needs to maintain at least 10

% capital against risky assets of the bank.
| 28
A - A stands for asset quality. The loan is examined to determine non-
performing assets. An asset/loan is considered non-performing asset where
either interest or principal is unpaid for two quarters or more. Ratios like
NPA to Net Advances, Adequacy of Provision & Debt Service Coverage
Ratio are also calculated to know exact picture of quality of asset of a bank.

M - M stands for management evaluation. Here, the efficiency and effectiveness

of management in framing plans and policies is examined. Ratios like ROI,
Return on Capital Employed (ROCE), and Return on Assets (ROA) are
calculated to comment upon bank’s efficiency to utilize the assets.

L - L indicates liquidity position. Liquid and current ratios are determined to

find out banks ability to meet its short-term claims.

S - S stands for Systems and Control studied to determine their adequacy and
efficiency.

| 29
 CHAPTER 4:

CREDIT RATING AGENCIES IN INDIA

In the Indian context, the scope of credit rating is limited generally to debt,
commercial paper, fixed deposits, mutual funds and of late IPO’s as well.
Therefore, it is the instrument, which is rated, and not the company. In other
words, credit quality is not general evaluation of issuing organization, i.e. if
debt of company XYZ is rated AAA and debt of company ABC is rated BBB,
then it does not mean firm XYZ is better than firm ABC. However, the issuer
company gets strength and credibility with the grade of rating awarded to the
credit instrument it intends to issue to the public to raise funds. Rating, in a way,
reflects the issuer's strength and soundness of operations and management. It
expresses a view on its prospective composite performance and the
organizational behavior based on the study of past results.

Further, the rating will differ for different instruments to be issued by the same
company, within the same time span. For example, credit rating for a debenture
issue will differ from that of a commercial paper or certificate of deposit for the
same company because the nature of obligation is different in each case. Credit
rating has been made mandatory for issuance of the following instruments

(1) As per the regulations of Securities and Exchange Board of India (SEBI)
public issue of debentures and bonds convertible/ redeemable beyond a period
of 18 months need credit rating.

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(2) As per the guidelines of Reserve Bank Of India (RBI), one of the conditions
for issuance of Commercial Paper in India is that the issue must have a rating
not below the P2 grade from CRISIL/A2 grade from ICRA/PR2 from CARE.

(3) As per the guidelines of Reserve Bank of India (RBI), Non

Banking Finance Companies (NBFCs) having net owned funds of more than
Rs.2 core must get their fixed deposit programs rated. The minimum rating
required by the NBFCs to be eligible to raise fixed deposits are FA (-) from
CRISIL/ MA (-) from ICRA/BBB from CARE. Similar regulations have been
introduced by National Housing Bank (NHB) for housing finance companies
also

(4) As per the regulations of the Ministry of Petroleum, the parallel marketers of
Liquefied Petroleum Gas (LPG) and Superior Kerosene Oil (SKO) in India are
also subjected to mandatory rating. The three rating agencies have a common
approach for such rating and the dealers are categorized into four grades
between 1 to 4 indicating good, satisfactory, low risk and high risk

(5) There is a proposal for making the rating of fixed deposit programmes of
limited companies, other than NBFCs also mandatory, by amendment of the
companies Act 1956.

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 CHAPTER 4.1

Credit Rating and Information Services of India Limited (CRISIL)

Credit Rating Information Services Of India Limited (CRISIL) has been

promoted by Industrial Credit and Investment Corporation of India Ltd. (ICICI)
and Unit Trust of India Ltd. (UTI) as a public limited company with its
headquarters at Mumbai. CRISIL, incorporated in 1987, pioneered the concept
of credit rating in India and developed the methodology for rating of debt in the
context of India's financial, monetary and regulatory system. It was the first
rating agency to rate Commercial Paper Programme in 1989, debt instruments
of financial institutions and banks in 1992 and asset-backed securities in 1992.

The main objective of CRISIL has been to rate debt obligation of Indian
companies. Its rating provides a guide to the investors as to the risk of timely
payment of interest and principal on a particular debt instrument. Its rating
creates awareness of the concept of credit rating amongst corporations,
merchant bankers, brokers, regulatory authorities, and helps in creating
environment that facilitates the debt rating.

CRISIL provides rating and risk assessment services to manufacturing

companies, banks, non-banking financial companies, financial institutions,
housing finance companies, municipal bodies and companies in the
infrastructure sector.

CRISIL's comprehensive offerings include ratings for long-term

instruments such as debentures/bonds and preference shares, structured
obligations (including asset-backed securities) and fixed deposits; it also rates
short-term instruments such as commercial paper programmes and short-term
deposits. As part of bank loan ratings, CRISIL also rates credit facilities
extended to borrowers by banks. In addition, it also undertakes credit
| 32
assessments of various entities including state governments. They also assign
financial strength ratings to insurance companies.

CRISIL through the years has continued to innovate and play the role of
a pioneer in the development of the Indian debt market. CRISIL has pioneered
the rating of subsidiaries and joint ventures of multinationals in India and has
rated several multinational entities, both start-up entities as well as players with
a well-established track record in India. Over the years, CRISIL has also
developed several structured ratings for multinational entities based on
Guarantees from the parent as well as Standby Letter of Credit arrangements
from bankers. The rating agency has also developed a methodology for credit
enhancement of corporate borrowing programmes through the use of partial
guarantees. In essence, CRISIL is uniquely placed in its experience in
understanding the extent of credit enhancement arising out of such structures.

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CRISIL'S Ratings Processes In As Given Below:-

(1) Request Of The Company :The rating process beings at the request of a
company desirous of having its issue obligations under proposed instrument
rated by CRISIL.

(2) Assignment To Analytical Team

On receipt of the above request, CRISIL assigns the job to an analytical team
that will be responsible for carrying out the rating assignment.

(3) Obtaining And Processing Of Data

The analytical team, which generally contains two experts, obtains requisite
information from the client company and analyses the same. To obtain
clarification and better understanding of the client's operations, the team meets
and interacts with company's executives.

(4) Findings Presentation

The findings of the team completion of investigation process are presented to

Rating committee (which comprises some directors not connected with any
CRISIL shareholder) which then decides on the rating.

(5) Communication Of Decision

The decision of the Rating committee is communicated to the client company

with remarks that the company, if it so likes, may present some additional
information for reconsideration of rating grade assigned to the instrument. In
case the company has nothing to produce as additional fact, the rating grade is
formally confirmed to the company by CRISIL.

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(6) Monitoring Of Change Of Rating

Once the company has decides to use the rating, CRISIL is obliged to monitor
the rating, over the life of the instrument. Depending upon new information, or
developments concerning the company, CRISIL may change the rating. Any
change, so effected, is made public by CRISIL.

| 35
| 36
 CHAPTER 4.2

Investment Information & Credit rating agency (ICRA):

ICRA Limited (an Associate of Moody's Investors Service) was incorporated in

1991 as an independent and professional company. ICRA is a leading provider
of investment information and credit rating services in India. ICRA’s major
shareholders include Moody's Investors Service and leading Indian financial
institutions and banks. With the growth and globalization of the Indian capital
markets leading to an exponential surge in demand for professional credit risk
analysis, ICRA has been proactive in widening its service offerings, executing
assignments including credit ratings, equity grading’s, specialized performance
grading’s and mandated studies spanning diverse industrial sectors. In addition
to being a leading credit rating agency with expertise in virtually every sector of
the Indian economy, ICRA has broad-based its services for the corporate and
financial sectors, both in India and overseas, and currently offers its services
under the following banners:

Rating Services Information, Grading and Research Services Advisory

Services Economic Research Outsourcing

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ICRA'S Rating Process

The Rating Process Follows:

Rating is an interactive process with a prospective approach. It involves series

of steps. The main points are described as below:

(A) Rating Request

Ratings in India are initiated by a formal request (or mandate) from the
prospective issuer .This mandate spells out the terms of the rating assignment.
Important issues that are covered include, binding the credit rating agency to
maintain confidentiality, the right to the issuer to accept or not to accept the
rating and binds the issuer to provide information required by the credit rating
agency for rating and subsequent surveillance.

(B) Rating Team

The team usually comprises two members. The composition of the team is
based on the expertise and skills required for evaluating the business of the
issuer.

(C) Information Requirements

Issuers are provided a list of information requirements and the broad framework
for discussions. These requirements are derived from the experience of the
issuers business and broadly conform to all the aspects, which have a bearing on
the rating. These factors have been discussed in detail under rating framework.

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(D) Secondary Information

The credit rating agency also draws on the secondary sources of information
including its own research division. The credit rating agency also has a panel of
industry experts who provide guidance on specific issues to the rating team. The
secondary sources generally provide data and trends including policies about the
industry.

(E) Management Meetings &Plant Visits

Rating involves assessment of number of qualitative factors with a view to

estimate the future earnings of the issuer. This requires intensive interactions
with the issuer’s management specifically relating to plans, outlook, and
competitive position and funding policies.

Plan visits facilitate understanding of the production process, assess the state of
equipment and main facilities, evaluate the quality of technical personnel and
form an opinion on the key variables that influence level quality and cost of
production. These visits also help in assessing the progress of projects under
implementation.

(F) Preview Meeting:

After completing the analysis, the findings are discussed at length in the internal
committee, comprising senior analysts of the credit rating agency. All the issues
having a bearing on the rating are identified. At this stage, an opinion on the
rating is also formed.

(G) Rating Committee Meeting

| 39
This is the final authority for assigning ratings. A brief presentation about the
issuers business and the management is made by the rating team. All the
issues identified during discussions in the internal committee are discussed.
The rating committee also considers the recommendation of the internal
committee for the rating. Finally , a rating is assigned and all the issues,
which influence the rating, are clearly spelt out.

(H) Rating Communication

The assigned rating along with the key issues is communicated to the issuer’s
top management for acceptance. The ratings, which are not accepted, are
either rejected or reviewed. The rejected ratings are not disclosed and
complete confidentiality is maintained.

(I) Rating Reviews

If the rating is not acceptable to the issuer, he has a right to appeal for a
review of the rating. These reviews are usually taken up only if the issuer
provides fresh inputs on the issues that were considered for assigning the
rating. Issuer's response is presented to the Rating Committee. If the inputs
are convincing, the Committee can revise the initial rating decision.

(J) Surveillance

It is obligatory on the part of the credit rating agency to monitor the accepted
ratings over the tenure of the rated instrument. As has been mentioned earlier,
the issuer is bound by the mandate letter to provide information to the credit
rating agency. The ratings are generally reviewed every year, unless the
| 40
circumstances of the case warrant an early review. In a surveillance review,
the initial rating could be retained or revised (upgrade or downgrade). The
various factors that are evaluated in assigning the ratings have been explained
under rating framework.

| 41
 CHAPTER 4.3

Credit Analysis & Research Ltd. (CARE):

Credit Analysis & Research Ltd. (CARE), incorporated in April 1993, is a

credit rating, information and advisory services company promoted by
Industrial Development Bank of India (IDBI), Canara Bank, Unit Trust of India
(UTI) and other leading banks and financial services companies. In all CARE
has 14 shareholders.

CARE assigned its first rating in November 1993, and up to March 31, 2006,
had completed 3175 rating assignments for an aggregate value of about Rs 5231
billion. CARE's ratings are recognized by the Government of India and all
regulatory authorities including the Reserve Bank of India (RBI), and the
Securities and Exchange Board of India (SEBI). CARE has been granted
registration by SEBI under the Securities & Exchange Board of India (Credit
Rating Agencies) Regulations, 1999.

The rating coverage has extended beyond industrial companies, to include

public utilities, financial institutions, infrastructure projects, special purpose
vehicles, state governments and municipal bodies. CARE's clients include some
of the largest private sector manufacturing and financial services companies’ as
well financial institutions of India. CARE is well equipped to rate all types of
debt instruments like Commercial Paper, Fixed Deposit, Bonds, Debentures and
Structured Obligations.

CARE's Information and Advisory services group prepares credit reports on

specific requests from banks or business partners, conducts sector studies and
provides advisory services in the areas of financial restructuring, valuation and
credit appraisal systems. CARE was retained by the Disinvestment
Commission, Government of India, for assistance in equity valuation of a
number of state owned companies and for suggesting divestment strategies for
these companies.
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CARE'S Rating Process

The process involves:

(i) Client gives request for rating and submits information and details schedules;

(ii) CARE assigns rating team and team analyses the information;

(iii) The team interacts with the clients, undertakes site visits;

(iv) The client interacts with the Team respond to queries raised and provides
any additional data necessary for the analyses;

(v) The team analyses the data submitted by the Client and put up to Internal
Committee of CARE for previews analyses;

(vi) Rating Committee of CARE awards rating to the Client;

(vii) Client may ask for review of the rating assigned and furnish additional
information for the purpose. Client has the option not to accept the final rating
in which case CARE will not publish the rating or monitor it; and, finally,

(viii) If the rating is accepted by the client, CARE gives it for notification and a
periodic surveillance is undertaken by CARE.
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 CHAPTER 5

ROLES AND OPERATIONS OF CREDIT RATING AGENCIES:

CRISIL, ICRA and CARE:

ICRA (Investment
CRISIL (Credit
Information and CARE (Credit
Rating Information
Credit Rating Analysis and
Services of India
Agency of India Research Ltd.)
Particular Limited)
Ltd.)

Incorporate
1987 1991 1993
d in

Industrial Finance
Corporation of Ind
Industrial Credit and IDBI Jointly with
ia(26%), and UTI,
Investment investment
Promoted LIC, GIC, PNB,
Corporation of India institutions, banks
By Central Bank of
Ltd. (ICICI) and and finance
India, Bank of
Unit Trust of India companies
Baroda, Uco Bank
etc. (74%)

Registered
Mumbai New Delhi Mumbai
Office

Rating 1. Request of the 1. Rating 1. Client

Process company request request and
submission
2. Assignment to 2. Rating team
of
Analytical
3. Information
| 44
 information

2. Analyze

requirement information

4. Secondary 3. Team

information undertakes
site
team 5. Management
meeting and 4. Form
3. Obtaining and
plant visits Internal
processing of
Committee
data 6. Preview
for preview
4. Finding Meeting
analyses
presentation 7. Rating
5. Assign
5. Communicati Committee
Rating
on of decision meeting
6. Review of
6. Monitoring of 8. Rating
rating
change of communicati
assign
rating on

9. Rating
reviews

10.Surveillance

Rating 1. AAA – 1. LAAA : 1. CARE

Symbols Highest Safety Highest AAA :
Safety Highest
2. AA – High
Safety
Safety 2. LAA+, LAA,
Long Term

| 45
 2. CARE
AA : High
LAA- : High Safety
Safety
3. CARE A :
3. LA+, LA, Adequate
3. A – Adequate LA- : Safety
Safety Adequate
4. CARE
Safety
4. BBB – BBB :
Moderate 4. LBBB+, Moderate
Safety LBBB, Safety
LBBB- :
5. BB – 5. CARE
(Rating Moderate
Inadequate BB : High
Symbols for Safety
Safety Risk
Debentures) 5. LBB+, LB,
6. B – High Risk 6. CARE B :
LB- : Risk
7. C – Substantiall
Prone
Substantial y Risk
6. LC+, LC,
Risk 7. CARE C :
LC- :
8. D – Default Extremely
Substantially
High Risk
Risk
8. CARE D :
7. LD :
Likely to
Extremely
be default
speculative
soon

| 46
 1. MAAA :
Highest
Safety 1. CARE 1 :
1. FAAA : Excellent
2. MAA+,
Highest Safety Safe
MAA, MAA-
2. FAA : : High Safety 2. CARE 2 :
Adequate Very Well
3. MA+, MA,
Safety Safe
Medium MA- :

Term 3. FA : Safety Adequate 3. CARE 3 :

(Fixed Safety Adequate
4. FB :
Deposit) Inadequate 4. MB+, MB, Safety

Safety MB- : 4. CARE 4 :

Inadequate Favorable
5. FC : High
Safety Safe
Risk
5. MC+, MC, 5. CARE 5 :
6. FD : Default
MC- : Risk Default
Prone

6. MD : Default

Short Term 1. P1 : Very 1. A1+, A1 : 1. PR1 : High

(Commerci Strong Safety Highest Rate of
al Paper) Safety Return
2. P2 : Strong
Safety 2. A2+, A2 : 2. PR2 :
High Safety Strong
3. P3 : Adequate
Capacity
Safety 3. A3+, A3 :
for
Adequate
4. P4 : Favorable
repayment
Safety
5. P5 : Default
3. PR3 :
4. A4+, A4 :
| 47
 Adequate
capacity for
Re

4. PR4 :
Risk Prone Minimal

5. A5 : Default Degree of
Safety

5. PR5 :
Likely to
be default

| 48
 CHAPTER 6

FUNCTIONS, ADVANTAGES AND LIMTATIONS

CHAPTER 6.1

FUNCTIONS:

Credit rating agencies serves the following functions:

(1) Provides superior Information

It provides superior information on credit risk for three reasons:

(i) It is an independent rating agency, and is likely to provide an unbiased

opinion; unlike brokers, financial intermediaries and underwriters who have a
vested interest in the issue,

(ii) Due to professional and highly trained staff, their ability to assess risk is
better, and finally,

(iii) The rating firm has access to a lot of information, which may not be
publicly available.

(2) Low cost information

A rating firm gathers, analyses, interprets and summarizes complex information

in a simple and readily understood formal manner. It is highly welcome by most
investors who find it prohibitively expensive and simply impossible to do such
credit evaluation of their own.

(3) Basis for a proper risk and return

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If an instrument is rated by a credit rating agency, then such instrument enjoys
higher confidence from investors. Investors have some idea as to what is the
risk that he/she is likely to take, if investment is done in that security.

(4) Healthy discipline on corporate borrowers

Higher credit rating to any credit investment tends to enhance the corporate
image and visibility and hence it induces a healthy discipline on corporate.

(5) Greater credence to financial and other representation

When a credit rating agency rates a security, its own reputation is at stake.

Therefore, it seeks high quality financial and other information. As the issue
complies with the demands of the credit rating agency on a continuing basis, its
financial and other representations acquire greater credibility.

(6) Formation of public policyPublic policy guidelines on what kinds of

securities are eligible for inclusions in different kinds of institutional portfolios
can be developed with greater confidence if debt securities are rated
professionally.

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 CHAPTER 6.2

Advantages of credit rating

For different classes of persons different benefits accrue from the use of rated
instruments. The benefits directly accruing to investors through rated
instruments are:

BENEFITS OF CREDIT RATINGS:

(A) Benefits of ratings to the investors

Investors are benefited in many ways if the corporate security in which they
intend to invest their saving has been rated. Some of the benefits are:

(1) Safeguards against bankruptcy

Credit rating of an instrument done by a credit rating agency gives an idea to the
investors about the degree of financial strength of the issuing company, which
enables him to decide about the investment. A highly rated instrument of a
company gives an assurance to the investors of the safety of that instrument and
a minimum risk of bankruptcy.

(2) Recognition of risk

Credit rating provides investors with rating symbols that carry information in
easily recognizable manner for the benefit of investors to perceive the risk
involved in the investment. It becomes easier for the investors by looking at the
symbol to understand the worth of the issuing company. The rating symbol
gives them the idea about the risk involved or the expected advantages from the
investment.

(3) Credibility of issuer

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Rating gives a clue about the credibility of the issuing company. The rating
agency is quite independent of the issuer company and has no business
connections or any relationship with it or its Board of Directors, etc. Absence of
business links between the rater and the rated firms establish ground for
credibility and attract investors.

(4) Easy understandability of investment proposal

An investor needs no analytical knowledge on his part and can understand the
rating symbol. The investor can take quick decisions about the investment to be
made in any particular rated security of a company.

(5) Saving of resources

Investors rely upon credit rating. This relieves investors from botheration of
knowing about the fundamentals of a company, its actual strength, financial
standing, management details, etc. The quality of credit rating done by
professional experts of the credit rating agency repose confidence in him to rely
upon the rating for taking investment decisions.

(6) Independence of investment decisions

For making investment decisions, investors have to seek advice of financial

intermediaries, the stockbrokers, merchant bankers, the portfolio managers etc.
about the good investment proposal. For rated instruments, investors need not
depend upon the advice of these financial intermediaries as the rating symbol
assigned to a particular instrument suggests the credit worthiness of the
instrument and indicates the degree of risk involved in it.

(7) Choice of investments

Several alternative credit rating instruments are available at a particular point of

time for investing in the capital market and the investors can make choice
depending upon their own risk profile and diversification plan.

(8) Other advantages

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The investor can quickly understand the credit instrument and weigh the ratings
with advantages from instruments; and make quick decisions to invest or sell or
buy securities to take advantages of market conditions; or, perceiving of default
risk by the company.

(B) Benefits of rating to the company

Company which had its credit instrument or security rated by a credit rating
agency is benefited in many ways as summarized below:

(1) Lower cost of borrowing

A company with highly rated instrument has the opportunity to reduce the cost
of borrowing from the public by quoting lesser interest on fixed deposits or
debentures or bonds as the investors with low risk preference would come
forward to invest in safe securities though yielding marginally lower rate of
return.

(2) Wider audience for borrowing

A company with a highly rated instrument can approach the investors

extensively for the resource mobilization using the press media. Investors in
different strata of the society could be attracted by higher rated instrument, as
the investors understand the degree of certainty about timely payment of interest
and principal on a debt instrument with better rating.

(3) Rating as marketing tool

Companies with rated instruments improve their own image and avail of the
rating as a marketing tool to create better image in dealing with its customers

| 53
feel confident in the utility products manufactured by the companies carrying
higher rating for their credit instruments.

(4) Reduction of cost in public issues

A company with higher rated instrument is able to attract the investors and with
least efforts can raise funds. Thus, the rated company can economize and
minimize cost of public issues by controlling expenses on media coverage,
conferences and other publicity stunts and gimmicks. Rating facilitates best
pricing and timing of issues.

(5) Motivation for growth

Rating provides motivation to the company for growth as the promoters feel
confident in their own efforts and are encouraged to undertake expansion of
their operations or new projects. With better image created though higher credit
rating the company can mobilize funds from public and instructions or banks
from self-assessment of its own status, which is subject to self-discipline and
self-improvement, it can perceive and avoid sickness.

(6) Unknown issuer

Credit rating provides recognition to a relatively unknown issuer while entering

into the market through wider investor base who rely on rating grade rather than
on 'name recognition'.

(C) Benefits to brokers and financial intermediaries

Rating is a useful tool for merchant bankers and other capital market
intermediaries in the process of planning, pricing, underwriting and placement
of issues. The intermediaries, like brokers and dealers in securities, could use
rating as an input for their monitoring of risk exposures. The merchant bankers

| 54
are also using credit ratings for pre-packing of issues by way of securitization/
structured obligations. Highly rated instruments put the brokers at an advantage
to make less effort in studying the company's credit position to convince their
clients to select an investment proposal. This enables brokers and other financial
intermediaries to save time, energy, costs and manpower in convincing their
clients about investment in any particular instrument.

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 CHAPTER 6.3

Limitations of credit rating

A Credit Rating is an assessment carried out from the limited standpoint of

credit risk evaluation. A Credit Rating from rating agency therefore constitutes
a current Opinion on the credit quality of a specific issue of debt, in terms of the
issuer’s ability and willingness to meet principal and interest payments on rated
debt instruments in a timely manner. Credit Ratings are arrived at based on
information obtained in the rating process. In addition to management meetings
and information provided by rated entities, the rated entity’s audited accounts,
regulatory filings, and information provided by trustees form an important
source of information. CRISIL does not verify and validate all the information
that it uses for its ratings. However, reasonable due diligence is carried out on
all information used to the extent feasible to ensure that a meaningful and
accurate rating exercise is done (for instance, financial accounts are extensively
‘adjusted’ to ensure that they present a relevant picture of the financial position
of an entity from a debt servicing perspective, to the extent feasible).

(1) Biased rating and misrepresentations

In the absence of quality rating, credit rating is a curse for the capital market
industry, carrying out detailed analysis of the company, should have no links
with the company or the persons interested in the company so that their reports
impartial and judicious recommendations for rating committee. The companies
having lower grade rating do not advertise or use the rating while raising funds
from the public. In such cases, the investor cannot get information about the
riskiness of instrument and hence is at loss.

| 56
(2) Static study

Rating is done on the present and the past historic data of the company and this
is only a static study. Prediction of the company's health through rating is
momentary and anything can happen after assignment of rating symbols to the
company. Dependence for future results on the rating, therefore defeats the very
purpose of risk inductiveness of rating. Many changes take place in economic
environment, political situation, government policy framework, which directly
affects the working of a company.

(3) Concealment of material information

Rating company might conceal material information from the investigating

team of the credit rating company. In such cases, quality of rating suffers and
renders the rating unreliable.

(4) Rating is no guarantee for soundness of company

Rating is done for a particular instrument to assess the credit risk but it should
not be construed as a certificate for the matching quality of the company or its
management. Independent views should be formed by the public using the
rating symbol.
(5) Human bias

Findings of the investigation team, at times, may suffer with human bias for
unavoidable personal weakness of the staff and might affect the rating.

(6) Reflection of temporary adverse conditions

| 57
Time factor affects rating. Sometimes, misleading conclusions are derived. For
example, company in a particular industry might be temporarily in adverse
condition but it is given a low rating. This adversely affects the company's
interest

(7) Down grade

Once a company has been rated and if it is not able to maintain its working
results and performance, credit rating agencies would review the grade and
down grade the rating resulting into impairing the image of the company.

(8) Difference in rating of two agencies

Rating done by the two different credit rating agencies for the same instrument
of the same issuer company in many cases would not be identical. Such
differences are likely to occur because of value judgment differences on
qualitative aspects of the analysis in two different agencies.

(9) Conservative Rating

Default by an investment-grade firm is seen as the most costly error for the
agency. In order to preserve their reputation by avoiding the failure of any
investment-grade firm, rating agencies downgrade even "good" firms in
response to higher global risk. The downgrades may look self-fulfilling, but in
fact, investors rationally ignore them, as they actually convey no information
about the relative quality of firms.

| 58
 CHAPTER 7

WHY IS CREDIT RATINGS IMPORTANT?

Importance of Credit Rating

Credit ratings establish a link between risk and return. They thus provide a
yardstick against which to measure the risk inherent in any instrument. An
investor uses the ratings to assess the risk level and compares the offered rate of
return with his expected rate of return (for the particular level of risk) to
optimize his risk-return trade-off. The risk perception of a common investor, in
the absence of a credit rating system, largely depends on his familiarity with the
names of the promoters or the collaborators. It is
not feasible for the corporate issuer of a debt
instrument to offer every prospective investor the
opportunity to undertake a detailed risk evaluation.
It is very uncommon for different classes of
investors to arrive at some uniform conclusion as to the relative quality of the
instrument. Moreover they do not possess the requisite skills of credit
evaluation. Thus, the need for credit rating in today’s world cannot be
overemphasized. It is of great assistance to the investors in making investment
decisions. It also helps the issuers of the debt instruments to price their issues
correctly and to reach out to new investors. Regulators like Reserve Bank of
India (RBI) and Securities and Exchange Board of India (SEBI) use credit
rating to determine eligibility criteria for some instruments. For example, the
RBI has stipulated a minimum credit rating by an approved agency for issue of
commercial paper. In general, credit rating is expected to improve quality
consciousness in the market and establish over a period of time, a more
meaningful relationship between the quality of debt and the yield from it. Credit
Rating is also a valuable input in establishing business relationships of various

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types. However, credit rating by a rating agency is not a recommendation to
purchase or sale of a security. Investors usually follow security ratings while
making investments. Ratings are considered to be an objective evaluation of the
probability that a borrower will default on a given security issue, by the
investors. Whenever a security issuer makes late payment, a default occurs. In
case of bonds, non-payment of either principal or interest or both may cause
liquidation of a company. In most of the cases, holders of bonds issued by a
bankrupt company receive only a portion of the amount invested by them. Thus,
credit rating is a professional opinion given after studying all available
information at a particular point of time. Such opinions may prove wrong in the
context of subsequent events. Further, there is no private contract between an
investor and a rating agency and the investor is free to accept or reject the
opinion of the agency. Thus, a rating agency cannot be held responsible for any
losses suffered by the investor taking investment decision on the basis of its
rating. Thus, credit rating is an investor service and a rating agency is expected
to maintain the highest possible level of analytical competence and integrity. In
the long run, the credibility of rating agency has to be built, brick by brick, on
the quality of its services provided, continuous research undertaken and
consistent efforts made. The increasing levels of default resulting from easy
availability of finance, has led to the growing importance of the credit rating.

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 Lehman Brothers – Case Study – I

The History of Lehman Brothers

Lehman Brothers had humble origins, tracing its roots back to a small general
store that was founded by German immigrant Henry Lehman in Montgomery,
Alabama, in 1844. In 1850, Henry Lehman and his brothers, Emanuel and
Mayer, founded Lehman Brothers.

While the firm prospered over the following decades as the U.S. economy grew
into an international powerhouse, Lehman had to contend with plenty of
challenges over the years. Lehman survived them all – the railroad bankruptcies
of the 1800s, the Great Depression of the 1930s, two world wars, a capital
shortage when it was spun off by American Express in 1994, and the Long
Term Capital Management collapse and Russian debt default of 1998. However,
despite its ability to survive past disasters, the collapse of the U.S. housing
market ultimately brought Lehman Brothers to its knees, as its headlong rush
into the subprime mortgage market proved to be a disastrous step.

Below table gives and overview of its stated annual income data from FY2003
to 6 months FY 2008.

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 The below table shows the break up of the revenue from its 3 main core
business of Capital Markets, Investment Banking and Investment Management.

The Prime Culprit

In 2003 and 2004, with the U.S. housing boom (read, bubble) well under way,
Lehman acquired five mortgage lenders, including subprime lender BNC
Mortgage and Aurora Loan Services, which specialized in Alt-A loans (made to
borrowers without full documentation). Lehman's acquisitions at first seemed
prescient; record revenues from Lehman's real estate businesses enabled
revenues in the capital markets unit to surge 56% from 2004 to 2006, a faster
rate of growth than other businesses in investment banking or asset
management. The firm securitized $146 billion of mortgages in 2006, a 10%
increase from 2005. Lehman reported record profits every year from 2005 to
2007. In 2007, the firm reported net income of a record $4.2 billion on revenue
of $19.3 billion.

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Lehman's Colossal Miscalculation

In February 2007, the stock reached a record $86.18, giving Lehman a market
capitalization of close to $60 billion. However, by the first quarter of 2007,
cracks in the U.S. housing market were already becoming apparent as defaults
on subprime mortgages rose to a seven-year high. On March 14, 2007, a day
after the stock had its biggest one-day drop in five years on concerns that rising
defaults would affect Lehman's profitability, the firm reported record revenues
and profit for its fiscal first quarter. In the post-earnings conference call,
Lehman's chief financial officer (CFO) said that the risks posed by rising home
delinquencies were well contained and would have little impact on the firm's
earnings. He also said that he did not foresee problems in the subprime market
spreading to the rest of the housing market or hurting the U.S. economy.

Reasons of Failure

 Boom & burst in the housing market

 Speculation
 High risk mortgage loans &lending/burrowing practices
 Securitizing practices
 Inaccurate credit ratings
 Govt. policies

The Beginning of the End

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As the credit crisis erupted in August 2007 with the failure of two Bear Stearns
hedge funds, Lehman's stock fell sharply. During that month, the company
eliminated 2,500 mortgage-related jobs and shut down its BNC unit. In addition,
it also closed offices of Alt-A lender Aurora in three states. Even as the
correction in the U.S. housing market gained momentum, Lehman continued to
be a major player in the mortgage market. In 2007, Lehman underwrote more
mortgage-backed securities than any other firm, accumulating an $85-billion
portfolio, or four times its shareholders' equity. In the fourth quarter of 2007,
Lehman's stock rebounded, as global equity markets reached new highs and
prices for fixed-income assets staged a temporary rebound. However, the firm
did not take the opportunity to trim its massive mortgage portfolio, which in
retrospect, would turn out to be its last chance.

Hurtling Toward Failure

Lehman's high degree of leverage - the ratio of total assets to shareholders

equity - was 31 in 2007, and its huge portfolio of mortgage securities made it
increasingly vulnerable to deteriorating market conditions. On March 17, 2008,
following the near-collapse of Bear Stearns - the second-largest underwriter of
mortgage-backed securities - Lehman shares fell as much as 48% on concern it
would be the next Wall Street firm to fail. Confidence in the company returned
to some extent in April, after it raised $4 billion through an issue of preferred
stock that was convertible into Lehman shares at a 32% premium to its price at
the time. However, the stock resumed its decline as hedge fund managers began
questioning the valuation of Lehman's mortgage portfolio.

On June 9, Lehman announced a second-quarter loss of $2.8 billion, its first loss
since being spun off by American Express, and reported that it had raised
another $6 billion from investors. The firm also said that it had boosted its
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liquidity pool to an estimated $45 billion, decreased gross assets by $147
billion, reduced its exposure to residential and commercial mortgages by 20%,
and cut down leverage from a factor of 32 to about 25.

Too Little, Too Late

However, these measures were perceived as being too little, too late. Over the
summer, Lehman's management made unsuccessful overtures to a number of
potential partners. The stock plunged 77% in the first week of September 2008,
amid plummeting equity markets worldwide, as investors questioned CEO
Richard Fuld's plan to keep the firm independent by selling part of its asset
management unit and spinning off commercial real estate assets. Hopes that the
Korea Development Bank would take a stake in Lehman were dashed on
September 9, as the state-owned South Korean bank put talks on hold.

The news was a deathblow to Lehman, leading to a 45% plunge in the stock and
a 66% spike in credit-default swaps on the company's debt. The company's
hedge fund clients began pulling out, while its short-term creditors cut credit
lines. On September 10, Lehman pre-announced dismal fiscal third-quarter
results that underscored the fragility of its financial position. The firm reported
a loss of $3.9 billion, including a write-down of $5.6 billion, and also
announced a sweeping strategic restructuring of its businesses. The same day,
Moody's Investor Service announced that it was reviewing Lehman's credit
ratings, and also said that Lehman would have to sell a majority stake to a
strategic partner in order to avoid a rating downgrade. These developments led
to a 42% plunge in the stock on September 11.

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With only $1 billion left in cash by the end of that week, Lehman was quickly
running out of time. Last-ditch efforts over the weekend of September 13
between Lehman, Barclays PLC and Bank of America, aimed at facilitating a
takeover of Lehman, were unsuccessful. On Monday September 15, Lehman
declared bankruptcy, resulting in the stock plunging 93% from its previous
close on September 12.

Conclusion

Lehman's collapse roiled global financial markets for weeks, given the size of
the company and its status as a major player in the U.S. and internationally.
Many questioned the U.S. government's decision to let Lehman fail, as
compared to its tacit support for Bear Stearns (which was acquired by
JPMorgan Chase) in March 2008. Lehman's bankruptcy led to more than $46
billion of its market value being wiped out. Its collapse also served as the
catalyst for the purchase of Merrill Lynch by Bank of America in an emergency
deal that was also announced on September 15.

Lehman Brothers was given a Credit Rating of AA by all top 3 credit rating
companies just 2 days before the Lehman collapse in Sept 2008. This shows that
inspite of all the detailed evaluation done by credit rating agencies, the ratings
do not reflect the real status of the company and can defraud investor of billions
of dollars.

Lehman Brothers case study shows that the ratings given by credit rating
companies is not full proof and are subjective at times given without doing
proper due diligence.

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 CASE II

AAA RATING FOR ICICI BANK LTD.

The rating agency has reaffirmed the ‘AAA’

[Triple A] rating assigned to the various
outstanding debt instruments of ICICI Bank
Ltd (IBL). Instruments carrying this rating
are considered to be of the best quality,
carrying negligible investment risk. Debt
service payments are protected by stable cash
flows with good margins. While the
underlying assumptions may change, such changes as can be visualized are
most unlikely to impair the strong position of such instrument. CARE has also
reaffirmed the ‘PR1+’ [PR One Plus] rating assigned to the Rs.30 bn. Certificate
of Deposit program of IBL and Short term Deposit program aggregating
Rs.76.58 bn. This rating indicates superior capacity for repayment of short-term
promissory obligations. The rating factors in IBL’s strong market position, its
proactive management, the measures taken by it to diversify and reduce its loan
portfolio risk as also to adapt to the changing external environment, its resource
raising strengths, strong technology infrastructure, its significant retail reach
and satisfactory capital adequacy. IBL’s importance in the Indian banking
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sector as also the significant ownership by institutional investors are also factors
that have a favorable impact on rating. However, legacy of weak assets
inherited from erstwhile ICICI remains a concern and improving asset quality
amidst a difficult economic scenario will remain
a challenge for the banks’ management. IBL was
promoted in 1994, jointly by ICICI (75% equity
stake) and SCICI Ltd. (25%). In March 2000, In
March 2001, IBL acquired Bank of Madura
(BoM), a south based old private sector bank, in
an all-stock deal to improve its retail reach. As on March 31, 2002, IBL
operated through 500 outlets and over 1000 ATMs. On March 30, 2002, ICICI
Ltd and two of its wholly owned retail finance subsidiaries, viz., ICICI Personal
Financial Services Limited and ICICI Capital Services Limited were merged
with IBL in an all-stock deal. The merger created India’s first universal bank
and the second largest commercial bank in the country in terms of assets, after
State Bank of India. The merged entity would combine the advantage of low
cost of funds of IBL with the extensive corporate relationships and large retail
lending network of erstwhile ICICI. The merged entity would be able to offer
the entire range of financial products and services to its customers. IBL’s asset
base as on March 31, 2002 was Rs.1041 bn including the large asset base taken
over from erstwhile ICICI. The asset base declined marginally to Rs.996.8 bn as
on September 30, 2002. During the six months ended September 2002, IBL
generated a total income of Rs.56.75 bn and earned a profit of Rs.5.90 bn,
before tax and extraordinary items. The bank also earned Rs.11.91 bn on the
sale of ICICI’s stake in IBL (held by a trust) and has made additional
accelerated provision of Rs.16.86 bn against the legacy portfolio. IBL’s capital
adequacy also improved marginally to 12.32% (including Tier I 8.05%) as on
September 30, 2002. The legacy of stressed assets inherited from ICICI
continues to be a cause of concern. However, the additional provisioning made

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at the time of merger as also the recent legal changes in the foreclosure laws are
expected to help IBL in tackling this problem. IBL’s success in managing this
weak assets portfolio without making large sacrifices that would affect its
profitability and solvency would be a key rating sensitivity. Most of IBL’s
incremental lending is to the retail sector, across all product categories like auto
loans, home loans, personal loans, commercial vehicle finance etc. IBL’s ability
to maintain high asset quality while targeting high growth in the retail portfolio,
in a very competitive environment is another key rating sensitivity.

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Conclusion

Bank /Financial Institutional rating, in common with most financial analysis, is

fertile ground for the growth of jungles of clichés and thickets of impenetrable
jargon. Banks being rated almost invariably claim to address the issues, to
focus on niche markets or franchises, to target their strategic objectives and to
empower their executives with aggressive management structures. Readers of
rating reports are invited to compare scenarios, to juggle with parameters,
synergies and symbioses, to contemplate future(sic) prospects. The rating does
not address the risk of loss due to risks other than credit risk, unless such risk is
specifically mentioned. It is not engaged in the offer or sale of any security. A
report providing a rating is neither a prospectus nor a substitute for the
information assembled, verified, and presented to investors by the issuer and
its agents in connection with the sale of the securities. It does not provide
investment advice of any sort. Ratings are not a recommendation to buy, sell,
or hold any security. Ratings do not comment on the adequacy of market price,
the suitability of any security for a particular investor, or the tax-exempt
nature or taxability of payments made in respect to any security

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 CHAPTER 8

DATA ANALYSIS

PART -1

GENDER

Gender

5%

47%
48%
Female Male

Other

8.1.1

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INTERPRETATION :- The above data shows that out of sample size of 121
peope 57 are female ,58 are male and 6 are other

Do you know what is credit rating?

Do you know what is credit rating?

48%
53%

Yes No

8.1.2

INTERPRETATION: - The above data gives us an information about the

awareness of credit rating among the general public.

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 Do you invest in financial market ?

Do you invest in financial market ?

51% 49%

yes no

8.1.3

INTERPRETATION:- The above data shows the percentage of people

investing in financial market i.e 49% less due to lack of awareness .

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 Which of the company’s rating do you rely on?

Which of the company's rating do you rely on?

16%

25%
60%
CRISIL
ICRA
CARE
4th Qtr

8.1.4

INTERPRETATION:- The above data represents the investors trust on the

ratings of the various agencies on basis of which they take their investment
decisions.

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 Do you refer credit rating before investing ?

Do you refer credit rating before investing?

23%

50%

27%
YES NO

MAYBE

8.1.5

INTERPRETATION:- The above data is the answer to whether the investors

refer the credit ratings of companies before investing .

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 Do you think credit ratings are reliable ?

Do you think credit ratings are reliable ?

35%

57%

8%
Yes No

Maybe

8.1.6

INTERPRETATION:- The above data represents the view of the investors in

finding the credit ratings a reliable source before making any investment
decision.

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Does the concept of credit rating have a positive impact on the
market ?

Does the concept of credit rating have a posi-

tive impact on the market ?

38%
44%

Yes No
18%

Maybe

8.1.7

INTERPRETATION:- The above data represents that the general public

believes the concept of credit rating having a positive impact on the market with
44% majority .

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Do credit rating agencies have a major role to play during financial
crisis?

Do credit rating agencies have a major role to

play during financial crisis ?

37%
48%

YES
14%
NO

MAYBE

8.1.8

INTERPRETATION:- The above data shows that 48% of the people believe
that the credit agencies have a major contribution in controlling the financial
crisis .

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In what way has credit rating benefited in taking financial market
decisions ?

In what way has credit rating benefited in tak-

ing financial market decisions?

Good research
29% 30% Unbiased rating
histroical data
safety against fraud con-
panies

16%
25%

8.1.9

INTERPRETATION:- The above data represents as on what basis credit

rating helps the investors to take financial market decisions where 30% i.e Good
research being the major reason .

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Do you think credit rating agencies help in taking better investment
decisions?

Do you think credit rating agencies help in tak-

ing better investment decisions ?

34%

50%

Yes No
16%

Maybe

8.1.10

INTERPRETATION:- The above data gives an idea of whether credit rating

agencies provide any help to an investor in taking better investment decisions to
which the majority i.e 50% of the sample size agrees.

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Is the existence of credit rating agencies essential in the capital
market ?

Is the existence of credit rating agencies essen-

tial in the capital market ?

26%

58%
16%

Yes No

Maybe

8.1.11

INTERPRETATION:- The above data provides that the awareness and

importance of credit rating agencies has emerged among the people ,as the
majority of 58% finds their existence essential.

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Would you trust / invest in a company with good credit rating?

Would you trust / invest in a company with

good credit rating ?

32%

57%

11%
Yes No

Maybe

8.1.12

INTERPRETATION:- The above data shows that companies with good credit
rating would be trusted by investors as shown above 57% of the investors would
invest in a company with good credit rating.

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 PART -2

Qualitative analysis of CARE (Questionnaire)

1. How does a Credit Rating Agency differ from a credit bureau?

Ans. A credit rating agency provides an opinion relating to future debt

repayments by borrowers. A credit bureau provides information on past debt
repayments by borrowers.

2. What is the difference between credit rating and equity research?

Ans.Credit ratings are assigned to debt instruments, while equity research
relates to equity shares. A credit rating is focused on the risk of non-payment,
the primary variable in debt instruments. Equity research is focused on growth
possibilities, for that is what drives equity valuations.

3. How does a credit rating differ from an audit report?

Ans.A credit rating agency relies on a variety of information sources, including
published annual reports. An audit process is designed to detect fraud or
misrepresentation of information, whereas the credit rating process is not.

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4.Does a credit rating assure returns?
Ans. A credit rating is not an assurance of repayment of the rated instrument.
Rather, it is an opinion on the relative degree of risk associated with such
repayment. This opinion represents a probabilistic estimate of the likelihood of
default.

5.If the issuer pays for the rating, how does a credit rating agency
maintain its independence?
Ans. Although the issuer pays for the rating, the investor uses it. Like any other
product or service, the 'value' of the rating depends entirely on the perceptions
of the investor. Investor perceptions are based on the credibility of the past
ratings assigned by each rating agency.

6. Who regulates the rating agencies?

Ans.The capital market regulator regulates rating agencies in most regions. In
India, the capital markets regulator, the Securities and Exchange Board of India
(SEBI), regulates the rating agencies in the country.

7.How do investors benefit from a credit rating?

Ans. Credit ratings help investors facilitate comparative assessment of
investment options, complement the investors' own credit analysis, and allow
asset monitoring.

8.Why do credit ratings change?

Ans. Credit ratings are assigned based on certain expectations and
assumptions about variables that impact the issuer's performance. However,
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these variables can change, causing the rated entities' performance to deviate
materially from expectations. This is reflected in their changed credit ratings.

9.Can we say that credit rating is an assumption based approach of rating?

Ans. Credit rating is based on a procedure and the data that is collected through
various sources. These sources might be true or might be false. It is even based
on the data which is provided by the company. This data might be false and
inflated by the company and in such case there are possibilities of the rating to
have some flows. We can say it’s a process driven by assumptions.

10.What is the future of credit rating industry in India?

Ans. Credit Rating Agencies in India have a very good platform for growth.
Even SEBI norms favour to the growth of such agencies. Rating agencies have a
very favourable platform for growth with SEBI norms favouring it and investors
now being keen on knowing the rating of an instrument. Due to Globalization
even the Indian companies have felt the need for credit rating. It even helps the
companies to acquire money for their business activities. Even banks in India
now view the ratings given to a company and based on them the prove loans
and various other offers.

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 Qualitative Analysis of D&B (Questionnaire)

1. What is Dun`s Number?

Ans.The DUNS number is a nine-digit number, issued by D&B, assigned to

each business location in the D&B database, having a unique, separate, and
distinct operation for the purpose of identifying them. The DUNS number is
random, and the digits have no apparent significance. Until approximately
December 2006, the DUNS number contained a mod-10 check digit to support
error detection. Discontinuing the check digit increased the inventory of
available DUNS numbers by 800 million. There is no charge to obtain a DUNS
number. When obtaining a DUNS number online, the wait is usually between 3-
5 working days; when requesting a DUNS number by phone, it is issued
immediately.

2. What are the advantages of Dun`s Number?

Ans.The Dun`s Number is a unique identity for each company rated by D & B.
This number has many advantages. For example: If a person practicing his
business activities from India & holding an account in the Dena Bank wants to
Deal with a person in South Africa, the person in South Africa would not be
knowing any such bank or any such company so how should he trust a person in
India. In such a situation if the Indian Company is holding a Dun`s Number he
will send the Dun`s Number to the person in South Africa and with the help of
the Duns Number the person in South Africa can view all the details about the
person he is going to deal with and can decide whether he should deal with the
person is he reliable or not.

3. Is Dun`s Number the future of Credit Rating?

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 Ans.The Dun`s Number is a very innovative and newly introduced method in
credit rating which takes the industry to another level it is something more than
just credit rating. Many other credit rating agencies are trying to enact this
method of work. The future of credit rating has many more innovations to come
the duns number is one of them.

4. Should government enact more policies that favour the growth of credit
rating?

Ans.The Government of India and SEBI have initiated many policies which
favor the growth of Credit Rating in India such as it is compulsory for public
listed companies to acquire ratings for debt instruments and various other
financial instruments. The Agencies already have lot of opportunities for growth
in the current market scenario.

5. Is the growth of Credit Rating agencies in India at par with the Global
growth of the rating industry?
Ans.Comparatively the growth of global market is more but India is
striving to achieve the growth in credit rating business. With more
number of companies in the Indian market, there is much more
opportunity for growth and few years down the line it may be at par with
the global market.

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 CHAPTER 9

1) CONCLUSION

 As said , credit rating is an opinion expressed by an independent professional

organization, after making a detailed study of all relevant factors. Such an
opinion is of great assistance to investors in making investment decisions. It
also helps the issuers of debt instruments to price their issues correctly and to
reach out to investors and win their confidence.

 Credit Rating is the need of the time since investors should be equipped with
easy methods to make their investment decisions. If ratings are assigned in a
proper, systematic, transparent way, then it will be a boon for investors and
will go a long way in making the investment world a safe place.

 They are vital for development of capital markets and the promotion of
transparency and a credit culture. Investors increasingly use published
ratings in making investment decisions. They are demanding more timely
and accurate ratings. They also expect the Credit Rating Agencies to
evolve a common criterion without undermining
rating agencies' independence and mobility.

 The study has successfully identified the expectations of the Investors and
their awareness of Credit Rating Methodology. Further, it has evolved
simple
method for rating the instruments of Banking, Financial and Non-Banking
Finance Companies

 The study primarily found out that Investors expect transparency in the
Rating Methodology and criteria adopted by Credit Rating Agencies.
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 Moreover, simplification of rating symbols and Investor education is a step
in the right direction.

 At present, the role played by the Credit Rating Agencies cannot be

undermined
but the Investors should make themselves conscious about the Credit Rating
and Methodology and take wise investment decisions.

 An investment grade rating can put a security, company or country on the

global radar, attracting foreign money and boosting a nation's economy.
Indeed, for emerging market economies, the credit rating is key to showing
their worthiness of money from foreign investors.

 Credit rating helps the market regulators in promoting stability and

efficiency in the securities market. Ratings make markets more efficient and
transparent.

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 2) SUGGESTIONS

 A credit rating agency should ensure that it has and devotes sufficient
resources to carry out high‐quality credit assessments of all obligations
and issuers it rates.

 When deciding whether to rate or continue rating an obligation or issuer, it

should assess whether it is able to devote sufficient personnel with
sufficient skill sets to make a proper rating assessment, and whether its
personnel likely will have access to sufficient information needed in order
to make such an assessment.

 A credit rating agency should adopt reasonable measures so that the

information it uses in assigning a rating is of sufficient quality to support a
credible rating.

 A frequently quoted saying,

"When I am right, No one remembers,
when I am wrong, No one forgets"

shall be applicable to the Credit Rating Agencies because they are not at
all
given the vital place in the economic development of the country and
everybody
is finding fault with the system itself.

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 The frequency of rating the reviews and transparency of rating
methodology and criteria will definitely develop confidence in minds of
Investors about the
Credit Rating Agencies.

 Credit rating agencies should be responsive, not standoffish. Agency

professionals need to actively engage clients. They should know that their
clients’ time is valuable, and their work is sensitive to markets. That
means agencies need to be accessible and approachable, even in matters
as simple as returning phone calls on a timely basis.

 Credit rating agencies need to be transparent. They need to understand

that operating in a black box in an ivory tower is not helpful. Too often it
leads to unwelcome surprises to a banker or issuer late in the ratings
process or to an investor trying to manage a portfolio. Being transparent
about how ratings agencies think and operate helps clients do their job
better.

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 Chapter 10

APPENDIX

PAG
Chart Name Chart No
Sr No E NO
1
Gender 8.1.1 59

2 Do you know what is

8.1.2 60
credit rating?
3 Do you invest in
8.1.3 61
financial market ?
4 Which of the
company’s rating do 8.1.4 62
you rely on?
5 Do you refer credit
rating before investing 8.1.5 63
?
6 Do you think credit
8.1.6 64
ratings are reliable ?
7 Does the concept of
credit rating have a
8.1.7 65
positive impact on the
market ?
8 Do credit rating
agencies have a major
8.1.8 66
role to play during
financial crisis?
9 In what way has credit 8.1.9 67
rating benefited in

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 taking financial market
decisions ?
10 Do you think credit
rating agencies help in
8.1.10 68
taking better
investment decisions?
11 Is the existence of
credit rating agencies 69
8.1.11
essential in the capital
market ?
12 Would you trust /
invest in a company
8.1.12 70
with good credit
rating?

BIBLIOGRAPHY
| 93
www.careindia.com
www.D&B.com
www.sebi.gov.in
www.moneycontrol.com
www.icraindia.com
www.rbi.org.in
www.economictimes.com
https://www.investopedia.com/articles/economics/09/lehman-brothers-
collapse.asp
http://kalyan-city.blogspot.com/2011/10/benefits-of-credit-rating-to-
investors.html
http://www.yourarticlelibrary.com/economics/6-important-functions-of-
the-credit-rating-serve/1441
http://www.yourarticlelibrary.com/economics/7-important-benefits-of-
credit-rating-to-a-company/1447
http://www.yourarticlelibrary.com/economics/8-main-disadvantages-of-
credit-rating/1449
www.crisil.com

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