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CHAPTER – 1
CONCEPTUAL FRAMEWORK
1.1 Introduction The report of the project on “Impact of Activities of CRAs on the investment
decision” mainly focused on the following areas:
1.1.1 BackgroundCredit Rating Agencies first emerged in 1940’s following the financial crisis of
1937 in New York. 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.
It was subsequently acquired by Robert Kun and its first rating guide was published in
1859.Another similar agency was set up by John Bradstreet 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. In 1900 Joyn Moody founded
Moody’s Investors Service, and in 1909 published his Manual of Railroad Securities’.
This was followed by the rating of utility and industrial bonds in 1914, and the rating of
bonds issued by U.S. cities and other municipalities in the early 1920s.
Further expansion of the credit rating industry took place in 1919, 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
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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), 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, Philippins,
Mexico, Indonesia, Pakistan, Cyprus, Korea, Thailand and Australia.
In India, the concept of Credit rating came up when Credit rating and information
Services of India Ltd. (CRISIL) was set up as the first rating agency in 1987, As the
scope of credit rating widened ICRA (formerly known as Investment Information and
Credit Rating Agency of India Limited) was set up in 1991, and Credit Analysis and
Research Ltd. (CARE) was set up in 1994. The ownership pattern of all the three
agencies is institutional. The first private sector credit rating institution was Duff and
Phelps credit rating India Pvt. Ltd. Formed in 1995(After merger with DCR it’s known as
Fitch India Ltd. John Knowles Fitch founded the Fitch Publishing Company in 1913.
Fitch published financial statistics for use in the investment industry via "The Fitch Stock
and Bond Manual" and "The Fitch Bond Book." In 1924, Fitch introduced the AAA
through D rating system that has become the basis for ratings throughout the industry.1
1.1.2 Credit Rating Agencies (CRAs) Credit rating is a simple and easy to understand symbolic indicator of the opinion
of a credit rating agency about the risk involved in a borrowing programme of an issuer
with reference to the capability of the issuer to repay the debt as per terms of the issue.
This is neither a general purpose evaluation of the company nor a recommendation to
buy, hold or sell a debt instrument.
Credit rating is an opinion expressed by an independent professional organization,
after making a detailed study of all relevant factors. Such an opinion will be of great
assistance to investors in making investment decisions. It also helps the issuers of debt
1VK Bhalla (2001), Investment Management, S. Chand and Co. Ltd., New Delhi, 8th edition, p 132-133
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instrument to price their issue correctly and to reach out to new investors. Regulators like
Reserve Bank of India (RBI) and Securities & Exchange Board of India (SEBI) often use
credit rating to determine eligibility criteria for some instruments. 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
types.2
Credit rating, however is neither a general purpose evaluation of a corporate
entity nor an overall assessment of the credit risk likely to be involved in all the
debts/financial instruments contracted/to be contracted by such issuers. A rating is
specific to a debt/financial instrument and is intended to grade different and specific
instruments in terms of the credit risk associated with the particular instruments.
Although it is an opinion expressed by an independent professional organization, on the
basis of a detailed study of all the relevant factors, the rating does not amount to any
recommendation to buy, hold or sell an instrument as it does not take into consideration
factors such as market prices, personal risk preferences of an investor and such other
considerations, which may influence an investment decision.
As a fee based financial advisory service, credit rating is, obviously, extremely
useful to investors, corporate (borrowers), banks, and financial institutions. For the
investors, it is an indicator expressing the underlying credit quality of an (debt) issue
program. The investor is fully informed about the company as any effect of changes in
business/economic conditions on the company is evaluated and published regularly by
the rating agencies. The corporate borrower can raise funds at a cheaper rate, with a good
rating. It minimizes the role of ‘name recognition’ and lesser-known companies can also
approach the market on the basis of their rating. Fund ratings are useful to the banks and
other financial institutions when they decide on lending and investment strategies.
2 Chopra Monika and Gupta NK(2008), “Introduction” Ch. Credit Rating quoted from book Financial
markets Institutions and Services, Ane Books India, New Delhi, p 237
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A prospective investor who is going to invest his earned money in securities
(more specific debt securities) would naturally like an assessment of risk associated with
the securities enabling him for the proper evaluation of risk-return trade-off. But, factors
such as lack of time, lack of knowledge of security evaluation, lack of reliability etc.
could leave any investor looking for an agency, which would provide an unbiased
judgment of risk associated with the security.
Thus, the assessment of risk associated with particular security/financial
instrument regarding timely repayments of interest and principal is termed as
credit rating.
A rating is specific to a debt/instrument. Thus, a rating is a general-purpose
evaluation neither of the company or issuer, nor an overall assessment of the credit risk
likely to be involved in all the debts contracted or to be contracted by such issues.
Although it is an opinion expressed by an independent credit rating agency, on the
basis of a detailed study of all the relevant factors, the rating does not make any
recommendations to buy, hold or sell an instrument as it does not take into consideration
another factors such as market prices, personal risk preferences of an investor and such
other considerations, which may influence an investment decision.3
Definitions: -
According to the Moody’s, “A rating 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 of the expected monetary loss, should a
default occur.”
3 Desai Vasant(1997), “CREDIT RATING: AN INTRODUCTION”, The Indian Financial System,
Himalaya Publication House Delhi, p375-378
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According to the Standard & poor’s, “it helps investors by providing an easily
recognizable, simple tool that couples a possibly unknown issuer with an informative and
meaningful symbol of credit quality.”
According to the CRISIL, “Credit Rating is an unbiased, objective and
independent opinion as to an issuer’s capacity to meet financial obligations.”
According to the ICRA, “Credit Rating is a simple and easy to understand
symbolic indicator of the opinion of the credit rating agency about the risk involved in a
borrowing programme of an issuer with reference to the capability of the issuer to repay
the debt as per terms of issue. This is neither a general purpose evaluation of a company
nor a recommendation to hold, buy or sell a debt instrument.”
1.1.3 The Determinants of Rating
The default-risk assessment and quality rating assigned to an issue are primarily
determined by three factors:
i) The issuer’s ability to pay.
ii) The strength of the security owner’s claim on the issue, and
iii) The economic significance of the industry and market place of the issuer.
Ratio analysis is used to analyze the present and future earning power of the
issuing corporation and to get the insight into the strengths and weaknesses of the firm.
Bond rating agencies have suggested guidelines about what value each ratio should have
within a particular quality rating. Different ratios are favored by rating agencies. For any
given set of ratios, different values are appropriate for each industry. Moreover, the
values of every firms ratios vary in a cyclical fashion through the ups and downs of the
business cycle.
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To assess the strength of security owner’s claim, the protective in the indenture
(legal instruments specifying bond owner’s rights), designed to ensure the safety of bond
holder’s investment, are considered in detail.
The factors considered in regard to the economic significance and size of issuer
includes: nature of industry in which issuer is operating (specifically issues like position
in the economy, life cycle of the industry, labour situation, supply factors, volatility,
major vulnerabilities, etc.), and the competition faced by the issuer (market share,
technological leadership, production efficiency, financial structure etc.).4
1.1.4 Regulatory Framework for CRA’s
1.1.4.1SEBI guidelines for Credit Rating Agencies
General Obligations of Credit Rating Agencies
Code of Conduct
Every credit rating agency shall abide by the Code of Conduct contained in the
Third Schedule.
Agreement with the client
Every credit rating agency shall enter into a written agreement with each client
whose securities it proposes to rate, and every such agreement shall include the following
provisions, namely:-
(a) The rights and liabilities of each party in respect of the rating of securities shall be
defined;
(b) The fee to be charged by the credit rating agency shall be specified;
4Mehta VK and Prasad Narayan(2008), “Credit rating Agencies in India”,
www.egyankosh.ac.in/bitstream/123456789/25902/1/Unit13.pdf
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(c) The client shall agree to a periodic review of the rating by the credit rating agency
during the tenure of the rated instrument;
(d) The client shall agree to co-operate with the credit rating agency in order to enable the
latter to arrive at, and maintain, a true and accurate rating of the clients securities and
shall in particular provide to the latter, true, adequate and timely information for the
purpose.
(e) The credit rating agency shall disclose to the client the rating assigned to the securities
of the latter through regular methods of dissemination, irrespective of whether the rating
is or is not accepted by the client;
(f) The client shall agree to disclose, in the offer document;-
(i) The rating assigned to the client’s listed securities by any credit rating agency during
the last three years and
(ii) Any rating given in respect of the client’s securities by any other credit rating agency,
which has not been accepted by the client.
(g) The client shall agree to obtain a rating from at least two different rating agencies for
any issue of debt securities whose size is equal to or exceeds, rupees one hundred crores.
Monitoring of ratings
3. (1) Every credit rating agency shall, during the lifetime of securities rated by it
continuously monitor the rating of such securities.
(2) Every credit rating agency shall disseminate information regarding newly assigned
ratings, and changes in earlier rating promptly through press releases and websites, and,
in the case of securities issued by listed companies, such information shall also be
provided simultaneously to the concerned regional stock exchange and to all the stock
exchanges where the said securities are listed.
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Procedure for review of rating
4. (1) Every credit rating agency shall carry out periodic reviews of all published
ratings during the lifetime of the securities.
(2) If the client does not co-operate with the credit rating agency so as to enable the credit
rating agency to comply with its obligations under regulation 15 of this regulation, the
credit rating agency shall carry out the review on the basis of the best available
information. Provided that if owing to such lack of co-operation, a rating has been based
on the best available information, the credit rating agency shall disclose to the investors
the fact that the rating is so based.
(3) A credit rating agency shall not withdraw a rating so long as the obligations under the
security rated by it are outstanding, except where the company whose security is rated is
wound up or merged or amalgamated with another company.
Internal procedures to be framed
5. Every credit rating agency shall frame appropriate procedures and systems for
monitoring the trading of securities by its employees in the securities of its clients, in
order to prevent contravention of –
(a) The Securities and Exchange Board of India (Insider Trading) Regulations, 1992;
(b) The Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair
Trade Practices relating to the Securities Market) Regulations, 1995; and
(c) Other laws relevant to trading of securities.
Disclosure of Rating Definitions and Rationale
6. (1) every credit rating agency –
(a) Shall make public the definitions of the concerned rating, along with the symbol and,
(b) Shall also state that the ratings do not constitute recommendations to buy, hold or sell
any Securities.
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(2) Every credit rating agency shall make available to the general public information
relating to the rationale of the ratings, which shall cover an analysis of the various factors
justifying a favourable assessment, as well as factors constituting a risk.
Submission of information to the Board
7. (1) where any information is called for by the Board from a credit rating agency for the
purposes of these regulations, including any report relating to its activities, the credit
rating agency shall furnish such information to the Board –
(a) Within a period specified by the Board or
(b) If no such period is specified, then within a reasonable time.
(2) Every credit rating agency shall, at the close of each accounting period, furnish to the
Board copies of its balance sheet and profit and loss account.
Compliance with circulars etc., issued by the Board
8. Every credit rating agency shall comply with such guidelines, directives, circulars and
instructions as may be issued by the Board from time to time, on the subject of credit
rating.
8A. Appointment of Compliance Officer
(1) Every credit rating agency shall appoint a compliance officer who shall be responsible
for monitoring the compliance of the Act, rules and regulations, notifications, guidelines,
instructions etc issued by the Board or the Central Government.
(2) The compliance officer shall immediately and independently report to the Board any
noncompliance observed by him.
Maintenance of Books of Accounts records, etc.
9. Every credit rating agency shall keep and maintain, for a minimum period of five
years, the following books of accounts, records and documents, namely:
(a) Copy of its balance sheet, as on the end of each accounting period;
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(b) A copy of its profit and loss account for each accounting period;
(c) A copy of the auditor’s report on its accounts for each accounting period.
(d) A copy of the agreement entered into, with each client;
(e) Information supplied by each of the clients;
(f) Correspondence with each client;
(g) Ratings assigned to various securities including up-gradation and down gradation (if
any) of the ratings so assigned.
(h) Rating notes considered by the rating committee;
(i) Record of decisions of the rating committee;
(i) Letter assigning rating;
(k) Particulars of fees charged for rating and such other records as the Board may specify
from time to time.
(2) Every credit rating agency shall intimate to the Board the place where the books of
account, records and documents required to be maintained under these regulations are
being maintained.
Steps on auditor’s report
10. Every credit rating agency shall, within two months from the date of the auditor’s
report, take steps to rectify the deficiencies if any, made out in the auditor’s report,
insofar as they relate to the activity of rating of securities.
Confidentiality
11. Every credit rating agency shall treat, as confidential, information supplied to it by
the client and no credit rating agency shall disclose the same to any other person, except
where such disclosure is required or permitted by under or any law for the time being in
force.
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Rating process
12. (1) Every credit rating agency shall –
(a) Specify the rating process;
(b) File a copy of the same with the Board for record; and file with the Board any
modifications or additions made therein from time to time.
(2) Every credit rating agency shall, in all cases, follow a proper rating process.
(3) Every credit rating agency shall have professional rating committees, comprising
members who are adequately qualified and knowledgeable to assign a rating.
(4) All rating decisions, including the decisions regarding changes in rating, shall be
taken by the rating committee.
(5) Every credit rating agency shall be staffed by analysts qualified to carry out a rating
assignment.
(6) Every credit rating agency shall inform the Board about new rating instruments or
symbols introduced by it.
(7) Every credit rating agency, shall, while rating a security, exercise due diligence in
order to ensure that the rating given by the credit rating agency is fair and appropriate.
(8) A credit rating agency shall not rate securities issued by it.
(9) Rating definition, as well as the structure for a particular rating product, shall not be
changed by a credit rating agency, without prior information to the Board.
(10) A credit rating agency shall disclose to the concerned stock exchange through press
release and websites for general investors, the rating assigned to the securities of a client,
after periodic review, including changes in rating, if any.
Code of conduct for Credit Rating Agencies
(1) A credit rating agency in the conduct of its business shall observe high standards of
integrity and fairness in all its dealings with its clients.
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(2) A credit rating agency shall fulfill its obligations in an ethical manner.
(3) A credit rating agency shall render at all times high standards of service, exercise due
diligence, ensure proper care and exercise independent professional judgement. It shall
wherever necessary, disclose to the clients, possible sources of conflict of duties and
interests, while providing unbiased services.
(4) The credit rating agency shall avoid any conflict of interest of any member of its
rating committee participating in the rating analysis. Any potential conflict of interest
shall be disclosed to the client.
(5) A credit rating agency shall not indulge in unfair competition nor shall they wean
away client of any other rating agency on assurance of higher rating.
(6) A credit rating agency shall not make any exaggerated statement, whether oral or
written, to the client either about its qualification or its capability to render certain
services or its achievements in regard to services rendered to other clients.
(7) A credit rating agency shall always endeavor to ensure that all professional dealings
are affected in a prompt and efficient manner.
(8) A credit rating agency shall not divulge to other clients, press or any other party any
confidential information about its client, which has come to its knowledge, without
making disclosure to the concerned person of the rated company / client.
(9) A credit rating agency shall not make untrue statement or suppress any material fact
in any documents, reports, papers or information furnished to the Board or to public or to
stock exchange.
(10) A credit rating agency shall not generally and particularly in respect of issue of
securities rated by it be party to -
(a) Creation of false market;
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(b) passing of price sensitive information to brokers, members of the stock exchanges,
other players in the capital market or to any other person or take any other action which is
unethical or unfair to the investors.
(11) A credit rating agency shall maintain an arm’s length relationship between its credit
rating activity and any other activity.
(12) A credit rating agency shall abide by the provisions of the Act, regulations and
circulars which may be applicable and relevant to the activities carried on by the credit
rating agency.
[Inserted on 25-9-2001 (11 A) (a) A credit rating agency or any of his employees shall
not render, directly or indirectly any investment advice about any security in the publicly
accessible media, whether real – time or non- real time, unless a disclosure of his interest
including long or short position in the said security has been made, while rendering such
advice.5
1.1.5 Types of Credit Rating
There are various types of credit rating. The most common forms of credit ratings are:
Long Term Instrument Rating.
Equity Rating.
Short Term Instrument Rating.
Customers/Borrowers Rating.
Sovereign Rating.
Individual Rating.
Compulsory Rating.
5 www.icraindia.com/services/inves/sebi.htm, “SEBI Guidelines for Rating Agency”
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Credit Ratings
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1.
2.
Figure 1.1: These common forms of credit ratings are shown in the following diagram:6
1. Long Terms Instruments Rating :
Long-term instrument rating refers to the rating of bonds, debentures and another
long-term debt securities issued by a government or quasi-governmental body.
2. Equity Rating :
Equity rating refers to the rating of equity issued in the capital market. The
concept of equity rating is still not adopted by the rating agencies in India.
3. Short term Instrument Rating :
In this kind of rating we include the rating of commercial papers, short-term
public deposits etc.
4. Customer or Borrower Ratings:
Customer/Borrowers rating require the assessment credit worthiness of the
customers to whom the credit sale is being made or grant of loan is under consideration.
5. Sovereign Rating:
6 Bhalla VK(2001), Investment Management S. Chand and Co. Ltd., New Delhi, 8th edition, p137.
14
Customer Rating Borrowers RatingFinancial Instruments Rating
Long Term Instrument
Rating
Short Term Instrument Rating
Sovereign Rating
Equity Rating
Individuals Rating Compulsory Rating
Page 15
Sovereign rating refers to evaluation of credit worthiness of a country in which
investment by a foreign body (foreign Govt. or corporate body) is envisaged or to which
a loan is to be given. This kind of rating is generally done by the international rating
agencies. The international rating agency standard and poor has improved its outlook on
India foreign currency rating to positive from stable but retained the sovereign rating at
junk grade due to high public debt and serious fiscal inflexibility.
S&P said the revision reflects “India’s improving external liquidity and better
prospects for the government’s debt burden to stabilize”.
S&P had last revised India’s foreign currency outlook from negative to stable in
December 2003 on account of improved external finance.7
6. Individuals Rating:
Rating of individuals is called as individual’s credit rating.
7. Compulsory Rating:
The rating at which the government bound the obligation is called the compulsory
rating like commercial papers etc.
Following on the rating change, criticism of ratings per se has been in some
evidence. One, that sovereign ratings have not been a good predictor of currency crisis,
basically a reference to Asian difficulties in 1997-98. The principal problem of the
“Asian miracle” was regulatory weakness, with large gaps in what the central banks knew
about the external liabilities of their domestic banks, and rating agencies were affected by
the same information lapses. Second, till this crisis, mainstream economic theory, had
oversimplified the process by which capital flows occur. The received wisdom in the
mid-nineties had little space for the singularity of large currency crises and contagion.8
7 Chaudhary Sumitra(2003), Sovereign Rating , “Fiscal Stress And Rating Views”, Financial Express
8 Editor’s views Compulsory Rating Titled outlook a notch up The economic times India Mumbai bureau
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1.1.6 Importance of Credit Rating
In today’s changing scenario where corporates are increasingly dependent on the
public credit rating, which provides an unbiased judgment to the general public has
emerged as a critical element in the functioning of Indian financial market.
A rating published by a rating agency provides superior information to various
groups, which is not publicity available. Credit rating provides several benefits to
different sections of people that are summarized as follow:
1. Benefits to the Investors:
- Provides cost-effective and reliable information.
- Investor can evaluate risk-return trade off on the basis of rating.
- Provides investor with an insight of risk involved in an investment.
2. Benefits to the company:
- A company with high credit rating can mobilize large amount of funds.
- High credit rating indicates less associated with security. So, the company with
high credit rating can lower its cost of borrowing.
- High credit rating helps companies to build its image among customers, lenders
and creditors.
3. Benefits to brokers and financial intermediaries:
- Brokers can convince clients to put money in investments with high credit
rating.
-Financial intermediaries such as banks can be assured of their investing in a
company.8
1.1.7 Approaches of Credit Rating Agencies
Rating related products and activities
CRAs in India rate a large number of financial products:
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1. Bonds/ debentures- [the main product].
2. Commercial paper.
3. Structured finance products.
4. Bank loans.
5. Fixed deposits and bank certificate of deposits.
6. Mutual fund debt schemes.
7. Initial Public Offers (IPOs).
CRAs also undertake customized credit research of a number of borrowers in a
credit portfolio, for the use of the lender. CRAs use their understanding of companies
business and operations and their expertise in building frameworks for relative
evaluation, which are then applied to arrive at performance grading. For example,
developer gradings are carried out to assess the ability of the developers to execute
projects on a timely basis and promised quality while maritime institute gradings are
carried out to assess quality of education imparted to the students vis a vis DGS
(Directorate General of Shipping) objectives.
Non-rating related activities
CRAs often undertake a variety of non rating related activities. These include
the following:
1. Economy and Company Research :
Some Indian CRAs have set up research arms to complement their rating
activities. These arms carry out research on the economy, industries and specific
companies, and make the same available to external subscribers for a fee. In addition,
they disseminate opinions on the performance of the economy or specific industries,
available through releases to the media. The research would also be used internally by the
rating agencies for arriving at their rating opinions. SEBI permits CRAs to carry out this
activity subject to relevant firewalls.
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2. Risk consulting :
There is considerable demand for tools and products that will allow banks to
compute their capital adequacy ratios under the revised guidelines. The risk consulting
groups of credit rating agencies would leverage the agencies understanding of credit risk
to develop and provide the tools and data that banks would require. The products in this
area include tools for internal ratings, operational risk evaluation, and overall capital
calculation.
3. Funds research :
Some CRAs have diversified from mutual fund ratings into mutual fund research.
The services that are available under this head include fund rankings, performance
attribution tools (to help users understand the reasons for funds performance), desktop
tools, and fixed income research.
4. Advisory services :
CRAs offer various kinds of advisory services, usually through dedicated
advisory arms. Most of this is in the nature of developing policy frameworks, bid process
management, public private partnership consulting, and creating an enabling environment
for business in India and globally.
5. Knowledge Process Outsourcing :
Some Indian CRAs (CRISIL and ICRA) have KPO arms that leverage their
analytical skills and other process and manpower capabilities. These arms provide
services to the CRAs affiliates in developed markets, and also to other clients outside
India.9
1.1.8 Credit Rating Agencies in IndiaIn India, the credit rating agencies are governed by the SEBI Regulations, 1999
and the SEBI (Amendment) Regulations, 2003. Accordingly, anybody corporate that is
engaged in or proposes to be engaged in the business of rating of securities has to obtain
a certificate of registration from the SEBI and comply with the provisions of the Act.
9 Ministry of Finance Capital market division, p17-18
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Further, according to the SEBI (Disclosure and Investor Protection) Guidelines,
2000, a company offering convertible/non-convertible debt instruments through an offer
document must comply with the requirements of credit rating. The provisions are as
follows:
No public or rights issue of debt instruments including convertible instruments in
respect of their maturity or conversion period shall be made unless credit rating
agency has been obtained and disclosed in the offer document.
For a public/rights issue of debt security greater than or to Rs 1 billion, two
ratings from two different credit rating agencies shall be obtained.
In cases where credit rating is obtained from more than one credit rating agency,
all the credit rating/s, including the unaccepted credit ratings, shall be disclosed.
All the credit ratings obtained during the three years preceding the public or rights
issue of debt instrument (including convertible instruments) for any listed security
of the issuer company shall be disclosed in the offer document.
The progressive liberalization of economic policies, which led to the
establishment of new projects and corporate sectors increasing dependence on
primary market for raising funds, highlighted the need for setting up a credit
rating agency in India.
During this period primary as well as secondary market witnessed a phenomenal
growth. So in order to provide unbiased assessment of the credit worthiness of
companies issuing debt instrument. The first credit rating agency (CRISIL) was
established in1987 and it started its operations in 1888.
In response to the ever-increasing role of credit rating, two more agencies were
not up in 1990 (ICRA) and 1993 (CARE) respectively.10
Today, following are the credit rating agencies functioning in India:
1. Credit Rating Information Service of India Ltd. (CRISIL)
2. Investment Information and Credit Rating Agency. (ICRA)
10 Bhalla VK(2001), Investment Management S. Chand and Co. Ltd., New Delhi, 8th edition, p 133-134
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3. Credit Analysis and Research Ltd. (CARE)
4. Duff and Phelps Credit rating Pvt. Ltd.
5. Brickwork Ratings.
1.1.8.1 Credit Rating and Information services of India
Limited (CRISIL)
The Credit Rating Information Service of India Ltd. (CRISIL) was established in
1987 jointly by the ICICI Ltd and the UTI. Other shareholders include the Asian
Development Bank Life Insurance Corporation of India, HDFC Ltd., General Insurance
Corporation of India and several foreign and India banks. CRISIL is India’s premier
credit rating agency and ranks amongst the top five in the world.
It commenced its operation in January 1998. In 1996 CRISIL forged a strategic
business alliance with Standard and Poor with purpose to drive benefits such as
international experience revamping of operating systems, introduction of value added
methodologies in new areas and assist the client-companies in raising funds across the
country. CRISIL’s core competencies are in the areas of risk identification, classification
and assessment.
Credit Rating and Information Services of India Ltd (CRISIL) is one of the
country's top research, rating, risk and Policy Advisory Company Known for its
analytical rigor and credibility, CRISIL aims to enable the market function in a better
way. It also helps its customers and clients with managing their financial risks and
business properly. Major shares of the company are held by Standard & Poor, a division
of the McGraw-Hill Companies. Standard & Poor is, indeed, the world's first company to
provide financial market intelligence.
On 14th August 2008 in Mumbai, CRISIL ascribed ratings to several bank
services such as cash credit, term loan, bill discounting and bank guarantee of Global
Coal and Mining Private Limited (GCMPL) as 'A/Stable/P2+'. It expects that company
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would maintain healthy credits on the basis of sound cash accruals. Besides, on the same
day, CRISIL also allotted a rating of 'AAA(so)' to the receiver's payout in business
dealing with Cholamandalam DBS Finance Ltd.
CRISIL was set up with a basic purpose to rate debt obligations, which would
guide investors as to the risk of timely payment of interest and principle. At present,
functions performed by CRISIL fall under three board categories:-
1. Credit Rating Services.
2. Advisory Services.
3. Research and Information Services.
4. CRISIL.com Ltd.
5. Credibility First (CF).
6. Global Data Services.
7. CRISIL Training Services.
8. CRIS.
1. Credit Rating Services : -
The principle function of CRISIL is to rate mandated debt obligations of Indian
Companies, chit funds, real estate developers, non-banking finance companies, and
Indian States and so on. It is the core business of CRISIL while new business has begun
to make a moderate contribution, which is about 80% to the revenue. Being a pioneer in
credit rating business in India, the rating agency ranks amongst the top five in the world.
A CRISIL rating reflects CRISIL's current opinion on the relative likelihood of
timely payment of interest and principal on the rated obligation. It is an unbiased,
objective, and independent opinion as to the issuer's capacity to meet its financial
obligations.
So far, CRISIL has rated 30,000 debt instruments, covering the entire debt
market. The debt obligations rated by CRISIL include:
Non-convertible debentures/bonds/preference shares.
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Commercial papers/certificates of deposits/short-term debt.
Fixed deposits.
Loans.
Structured debt.
CRISIL Ratings' clientele includes all the industry majors - 23 of the BSE Sensex
constituent companies and 39 of the NSE Nifty constituent companies, accounting for 80
per cent of the equity market capitalization, are CRISIL's clients.
Following functions has been included in the rating services by CRISIL:
-Rating the debt obligations
-Rating of structural obligations `
-Rating of real estate developers projects
-bond fund rating
-Rating of collective investment schemes.
2. CRISIL Advisory Service : -
CRISIL Advisory Services for consultancy services to various state Government,
Disinvestments Commission on disinvestments plan for public sector enterprise, major
port authorities, and state Electricity Boards and so on. Other clients availing of advisory
services from CRISIL are the Public sector enterprises, banks and financial institutions
and instigating risk. It also formulates and executes strategies for that.
CRISIL Infrastructure Advisory: It provides policy, regulatory and transaction
level advice to governments and leading organizations across sectors.
Investment and Risk Management Services: CRISIL Risk Solutions offers
integrated risk management solutions and advice to Banks and Corporate by leveraging
the experience and skills of CRISIL in the areas of credit and market risk.
3. CRISIL Research and Information Services : -
CRISIL Research and Information Services include value-added research
activities and customized studies in following areas:
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-Indian Capital Market.
-Indian Industries, and
-Indian Corporate Sector.
Following are the services, which are included in CRISIL:
A. CRISIL Sector Wise.
B. CRISIL View.
C. International Information Vending.
D. CRISIL Index Services.11
4. CRISIL.com Ltd. :-
The internet’s ability to inform, educate, interact and customize is unlimited.
CRISIL has recognized this medium as opportunity to widen and deepen its customer
reach in its existing and new segments, create value added content and deliver it to new
market segments. CRISIL has transferred its internet business to CRISIL.com a wholly
owned subsidiary in order to give it the required focus. CRISIL.com leverages CRISIL’s
existing competencies, resources and credibility and positions itself as an important
resource center for authentic information and a valuable decision support system. It
works for increased penetration, exclusive and superior content and increased market
exposure.
The CPR rankings and popularity index are covered each quarter. CRISIL.com is
also pursuing strategic Alliances/ tie-ups for creating rich contents and value added
products aimed at meeting the research and information needs of business and investment
decision makers.
5. Credibility-First (CF) :-
11Khan MY(2003), CRISIL Ch. Credit Rating, Financial services Tata McGraw Hill Publishing Company
Limited New Delhi, p16.7-16.16
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Credibility –First provides rating and evaluation services across the cross-section
of the Indian economy. While, CRISIL’s rating division focuses on top-ended corporate,
especially in the small sized sector, where information is not easily available. CF
provides its services to banks, financial institutions, B2B exchanges, yellow page
directories and business counterparts.
CF provides the following services:
1. Verification Services.
2. Certification Services.
3. Rating Services.
CF verification services are a pre-requisite for corporate to list on some major B2B
exchanges. CF is positioning this service as a national standard for listing on any
domestic exchange.
CF Certification Services help merchants to communicate their business strength to
the potential buyers. These certifications would help buyers short-list suppliers from a
number of similar suppliers.
CF Rating Services are aimed at corporate to help them establish credibility in trade
and financial transactions. These ratings facilitate the corporate business transactions and
financial transactions.
6. Global Data Services :-
The Global Data Services of India Ltd. is a 100% subsidiary of CRISIL. It has
been formed with a view to using the existing strengths and resources of CRISIL to
provide high quality, reliable and timely financial analysis of Indian corporate, covering
more than 1500 of the largest companies listed on the Indian stock exchanges. This list is
gradually expanded. The data is provided both, online and offline
It also provides data entry services and offers to maintain financial updates of
credit and investment portfolios of clients. This service is especially useful to institutional
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investors, capital market intermediateries, banks and financial institutions, mutual funds,
provident funds and high net worth individual investors including NRIs.
7. CRISIL Training Services :-
CRISIL provides a wide spectrum of training programmes, including the tailor-
made one’s, to meet the specific needs of various agencies and individuals connected
with credit as well as investments. Programmes are specially designed for professionals
whose business necessitates assessment of credit and investment risk. The programmes
are especially useful for credit analysts, lending and investment officers of banks and
financial institutions, portfolio managers and debt market traders, corporate treasurers
and finance managers. Other training programme have been designed for business
strategists including entrepreneurs and company executives, faculty of educational
institutions individual investors and students. At present, all training programme are
available only offline, in various cities of India.12
CRISIL Rating Symbols
CRISIL assigns ratings only to rupee denominated debt instruments. These
symbols are symbolic expression of opinion/assessment of the credit rating agency. Here
is a brief summary of CRISIL’s rating symbols used for the rating of:
1. Debenture.
2. Fixed Deposits.
3. Short Term Instruments.
4. Structured Obligations.
5. Foreign Structured Obligations.
6. Instrument Carrying Non-credit Risk.
7. Financial Strength ratings of insurance companies.
8. Debt Fund Portfolio
9. Real Estate Projects.
10. Government and Creation Ratings
12 Gurusamy S(2006), “Range of Services”, Ch. Credit rating and Information Services of India Limited
(CRISIL), Financial Markets and Institutions, Thomson Business Information India Pvt. Ltd., P288-290.
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Table No. 1.1: CRISIL’s Rating Symbols Chart
Instruments High Investment Grade Investment Grade Speculative Grade
Debentures
Fixed Deposits
Short Term Instrument
Structured Obligations
Foreign Structured Obligations
Debt Funds Portfolio
Instrument Carrying
Non Credit Risk
Rating of Insurance Companies
Debt Fund Portfolio
Real Estate Projects
HighestSafety
HighSafety
AdequateSafety
ModerateSafety
InadequateSafety
HighRisk
SubstantialRisk
Default
AAA
FAAA
P1
AAA(So)
AAA(FSo)
AAAf
AAAr
AAA
AAAf
PA1
AA
FAA
P2
AA(So)
AA(FSo)
AAf
AAr
AA
AAf
PA2
A
FA
P3
A(So)
A(FSo)
Af
Ar
A
Af
PA3
BBB
BBB(So)
BBB(FSo)
BBBf
BBBr
BBB
BBBf
BB
FB
P4
BB(So)
BB(FSo)
BBf
BBr
BB
BBf
B
FC
B(So)
B(FSo)
Br
B
C
C(So)
C(FSo)
Cf
Cr
C
Cf
D
FD
P5
D(So)
D(Fso)
Dr
D
Source: Credit Rating Information Service of India
Note:-CRISIL may apply ‘+’or ‘-‘signs for ratings with rating symbols to reflect
comparative standing within the category.13
13 Khan MY(2003), CRISIL Rating Symbols Ch. Credit Rating, Financial services Tata McGraw Hill
Publishing Company Limited, New Delhi, p16.31-16.38.
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CRISIL places ratings of MFI’s on ‘Rating watch with negative Implications’
CRISIL has placed its outstanding ratings on the debt instruments of 12 micro-
finance institutions (MFI’s) on ‘Rating watch with negative implications’. Six of these
MFI’s have ratings that are in the ‘BB’ category or below. The implementation of the
Andhra Pradesh (Andhra) ordinance has triggered a chain of events that can permanently
damage the business models of MFI’s, by impairing their growth, asset quality,
profitability and capital – raising ability. The Rs. 250 billion (as on 31st March 2010)
microfinance plays an important role in extending formal financial services to 28 million
of India’s under-served rural poor; with the decline of the sector, the flow of credit to this
segment of the population will be curtailed.
The Andhra ordinance has been highly unfavorable for the industry resulting in a
precipitous drop in the collection efficiency and profitability of MFI’s, especially those
operating in Andhra. Further, the flow of funding to the entire sector from the banking
system has been severely constrained. Consequently, the liquidity position and growth
prospects of many MFIs, including those operating outside Andhra Pradesh have been
affected. Structurally, the regulatory jurisdiction and framework for MFIs remain unclear,
with actions by multiple authorities increasing the challenges for the industry. Unless
urgent steps, including regulatory intervention, are taken to address these issues, these
developments have a potential to materially weaken the business and financial risk
profiles of MFIs and result in rating downgrades. The impact on the credit worthiness of
the individual entities will differ depending to their exposure to Andhra, their liquidity
and their ability to raise the capital from alternate sources. CRISIL will actively monitor
the developments in the sector and take appropriate rating actions.
Another risk is that other states may initiate state- level legislation similar to the
Andhra ordinance. Moreover, the regulatory environment for the sector could evolve
further after the decision of Andhra Pradesh High Court, recommendations of the
Malegam committee instituted by the Reserve Bank of India (RBI), any potential changes
in RBI norms related to priority sector funding to the sector, and provisions of the
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microfinance bill proposed by the Ministry of Finance. CRISIL has consistently
highlighted that as an emerging sector, the MFI industry is exposed to the risk of changes
in the political, legislative, and regulatory environment. Some of these risks are now
becoming evident.
Collections in Andhra have plummeted below 20 per cent, from nearly 99 per cent
prior to the ordinance, with MFIs finding it difficult to make contact with borrower
groups, and having to move to a monthly repayment cycle in line with the ordinance.
Fresh disbursements in Andhra have been negligible over the past few weeks. CRISIL
believes that this would lead to a sharp increase in delinquencies for MFIs that have
significant Andhra exposure. So far, MFIs with limited or no Andhra presence have
maintained good collection levels, though their disbursement growth has reduced sharply.
MFIs ability to raise external funding is correctly significantly constrained.
Access to fresh loans from banks and institutions, which form a significantly proportion
of the sector’s total funding, has dropped materially. Reduced access to funding not only
affects MFIs liquidity- and, consequently, their ability to service debt- but also limits
their fresh disbursements, which can have a cascading effect on their growth and asset
quality in the near term. It is possible that bank funding to the sector will resume later,
but the timing and extent of such funding are uncertain. In addition, the quality of the
banks exposure to this sector could weaken from the current strong levels.
CRISIL also rates nine securitization transactions originated by MFIs. Only two
of these transactions have some exposure to loans originated in Andhra Pradesh. The
collection performance of all rated pools remained strong until recently. The credit
enhancements and the structural features currently protect investor payouts from any
potential increase in delinquencies, and are consistent with the outstanding ratings.
CRISIL will continue to monitor the performance of these pools regularly, and will take
appropriate rating actions in case collections drop significantly.14
14 CRISIL Ratings press release 22nd November 2010, Mumbai.
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Table No. 1.2: CRISIL’s Ratings of MFI’s on ‘Rating watch with negative
Implications’
Name Rating ActionAsmitha Microfin Limited BBB(Placed on ‘Rating Watch with Negative
implications’)
Bhartiya Samruddhi Finance Limited BBB (Placed on ‘Rating Watch with Negative
implications’)
Digamber Capfin Limited B+(Placed on ‘Rating Watch with Negative
implications’)
Equitas Micro Finance India Private Limited BBB(Placed on ‘Rating Watch with Negative
implications’)
Grameen Financial Services Private Limited P4+(Placed on ‘Rating Watch with Negative
implications’)
Sanghamithra Rural Financial Services BB(Placed on ‘Rating Watch with Negative
implications’)
Shri Kshetra Dharmasthala Rural Development
Project (R.)
BB+(Placed on ‘Rating Watch with Negative
implications’)
SKS Microfinance Limited P1+(Placed on ‘Rating Watch with Negative
implications’)
South Sundarban Janakalyan Sangha B+(Placed on ‘Rating Watch with Negative
implications’)
Spandana Sphoorty Financial Limited A-/P1(Placed on ‘Rating Watch with Negative
implications’)
Ujjiven Financial Services Private Limited BBB-(Placed on ‘Rating Watch with Negative
implications’)
Vedika Credit Capital Limited B+(Placed on ‘Rating Watch with Negative
implications’)
Source: Credit rating and information services of India ltd.
1.1.8.2 Investment Information and Credit Rating Agency of
India Limited (ICRA)
Established in 1991, ICRA limited is a leading provider of investment information
and credit rating services in India. Promoted by the country’s leading financial
institutions, banks and financial services companies, ICRA has, so far, completed nearly
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1,800 assignments including credit ratings, equity ratings, customized research and need-
based advisory assignments. It has a team of over 100 analysts across nine locations in
India, and is a prominent player in the financial services sector.
Committed to the development of the financial market in India, ICRA is focusing
on developing innovative concepts and products in a dynamic market environment,
generating wider investor education, and enhancing the efficiency and transparency of the
financial markets. Completing its rating and advisory functions, ICRA’s Research and
information services are directed towards the efficient dissemination of information, thus
ensuring the highest standards of quality and credibility.
The growth and globalization of Indian capital markets has led to an exponential
surge in demand for a professional credit risk analysis. ICRA has actively responded to
this need by executing assignments including credit ratings, equity grading 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
broadened its services to the corporate and financial sectors, both in India and overseas.
ICRA presently offers its services under these banners namely Information
services, grading services, rating services and advisory services.
1. Information Services: -
The ICRA, in a way, is a culmination of the efforts of ICRA Information services;
a division that has evolved out of the core strengths of ICRA Limited in business and
financial analysis to service the unique information needs of investors and the capital
markets community.
ICRA’s Information Services endeavors to constantly upgrade its products and
introduce new ones in cognizance of the dynamic and evolving nature of the Indian
business environment. This is done for the purpose of helping sustain its pre - eminence
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as a quality provider of credible, value-added information services, to market
participants, both Indian and Foreign.
ICRA Information Services has built up a diverse portfolio of publications in
response to the increasing market requirements for value-added information and analysis.
These include:
1. ICRA corporate review (ICR):
This is designed to serve as a first level information resource for the market
community.
2. Corporate reports:
This is designed to present extensive information along with an analysis on
selected India corporate entities. The critic in the corporate reports incorporates business,
industry, market and financial and operational analysis.
3. Industry and sector research reports:
These focuses on specific industries like steel, cement, tea and cotton yarn. These
reports are targeted at institutional investors, practitioners in the area of financial services
and decision makers in corporate world.
4. Money and finance bulletin:
Complementing the research on industrial sectors is another ICRA research team
engaged in the analysis of contemporary developments that characterizes the Indian
money and finance sector. The product of this exercise is the quarterly publication titled
money and finance bulletin. This bulletin is directed towards individuals interested in
delving into the reasons underlying economic and fiscal policy initiative and outcome.
5. Rating profile:
The standard reference material for all players in the Indian credit market is the
rating profile, currently a quarterly brought out by ICRA Information Services, is a
compilation of the rationale of that ratings awarded by ICRA. The rating profile contains
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the ratings that are in use, the rationales for the ratings assigned, as well as the rating
symbols and their implications.
6. Customized studies:
The customized studies, which also belong to the portfolio of ICRA Information
Services, cover due diligence studies, equity assessments, group assessments, industry
analysis and market studies. Such studies, the rising demand for which are being driven
by increasing cross-border activities, complexity and volatility, are conducted on an
assignment basis, and provide need-based information in the areas mentioned. Needless
to say, they go a long way in enhancing investment decision.
2. Grading Services : -
ICRA’s grading services are structured to provide authentic information on
relating quality of equity in diverse corporates. The relating quality of equity of company,
its growth, stability and composition of earnings are assessed, by analyzing the
underlying fundamentals that will affect the company’s future performance over the
medium term. A complex combination of variables is examined including, industrial
outlook, quality of management, financial strength, corporate operations, competitive
strength and outlook. The range of grading services include: equity grading, equity
assessment and Earning Prospects and Risk Analysis (EPRA)
3. Rating Services :
As an early entrant in the credit rating business, ICRA is one of the most
experienced credit rating agencies in India today. ICRA rates rupee dominated debt
instruments such as:
1. Bonds and debentures (long-term).
2. Fixed deposit programme (medium-term).
3. Commercial papers and certificates of deposit (short-term).
4. Structured obligations and sector specific debt obligations (issued by
infrastructure companies).
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The ICRA rating is a symbolic indicator of the current opinion of the relative
capability of timely servicing of debts and obligation by the corporate entity with
reference to the instrument being rated. The rating is based on an objective analysis of the
information and clarifications obtained from the enterprises and also other sources, which
are considered by ICRA to be reliable. The independence and professional approach of
ICRA ensures reliable, consistent and unbiased ratings. Ratings facilitate investors to
factor credit risk in their investment decision. ICRA rates long-term, medium-term and
short-term debt instruments. ICRA offers its rating services to wide range of issuers
including:
1. Manufacturing Companies.
2. Banks and financial institutions.
3. Power companies.
4. Service companies.
5. Construction companies.
6. Insurance companies.
7. Municipal and other local bodies.
8. Non-banking financial service companies.
9. Telecom companies.
10. Companies involved in infrastructure such as ports, dams, roads and
highways.
4. Advisory Services : -
ICRA’s foray into advisory services represents an organic growth of the
cumulative expertise built by ICRA in different industries and sector. The main drive for
ICRA’s advisory services has been the growing needs in India for an unbiased and
professional view on adopting the best business practices, against the backdrop of
economic deregulation and increasing competition.
With its extensive knowledge, bank of business and management practices
spanning the major sectors of the Indian economy and as a repository of high quality
analytical talent, ICRA is well positioned to extend advisory services to different Indian
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organizations, regulatory authorities and other organizations having business interest in
India.
ICRA advisory services offers independent, objective and high quality consulting
services to organizations with an interest in India, with the fundamental aim of improving
the quality of decision making. It is active in the following areas:
1. Strategic Consultancy.
2. Risk Management.
3. Inputs for Policy Formulation.15
Strategy Consulting: This comprises the following:
Assisting in the goal setting process.
Improving competitiveness.
Mergers, Acquisitions and growth strategies.
Improving organizational capabilities.
Organizational Restructuring.
Financial Strategy and systems.
Risk management: This comprising the following:
Assisting project risks for investors/developers/lenders.
Project structuring and financial modeling.
Structuring payment mechanisms.
Building organizational skills in credit risk management for banks and lenders.
Risk audit studies.
Policy Formulation: This includes the following:
Deregulation and privatization studies.
Pricing of public goods.15 Gurusamy S(2006), “Range of Services”, Ch. Investment Information and Credit Rating Agency of India
Ltd. from the book titled Financial Markets and Institutions published by Thomson Business
Information India Pvt. Ltd., P298-301.
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Subsidies
Concessions.
Guarantees management.
Fiscal studies.
Preparation of license agreements and documents for large projects.
ICRA Rating Symbols The ICRA rating is a symbolic indicator of the current opinion of the relative
capability of timely servicing of the debt obligations. ICRA rates long term, medium term
and short-term debt instruments.
Following is a brief summary of the rating symbols used by ICRA for the following:
Long Term Instruments (Debentures Bonds, Preference Shares)
Collative Investment Schemes.
Rating of Insurance Companies.
Corp. Governance Rating.
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Table 1.3: ICRA’s Rating Symbols Chart
Instruments SYMBOLS
Long Term Instruments
Medium Term Debt
Short Term Instruments
Collective Instrument
Schemes
Insurance Companies
Corporate Governance
HighestSafety
HighSafety
AdequateSafety
ModerateSafety
InadequateSafety
HighRisk
Substantial
Risk
Default
LAAA
MAAA
A1
iAAA
CGR1
LAA
MAA
A2
CS1
iAA
CGR2
LA
MA
A3
CS2
iA
CGR3
LBBB
CS3
iBBB
CGR4
LBB
MB
CS4
iBB
CGR5
LB
CS5
CGR6
LC
MC
A4
iB
LD
MD
A5
CARE5
iC
Source: Investment Information and Credit Rating Agency of India Limited.
Note: - The Suffix of ‘+’ or ‘-‘may be used with rating symbols to indicate the
comparative position within the group covered by the symbols.16
Knowledge Process Outsourcing and Online Software
ICRA Online Limited (ICRON) is a wholly-owned subsidiary of ICRA Limited.
ICRON was incorporated in January 1999 and has over the period since then established
itself as an independent and credible source of authentic information, software and
outsourcing solutions provider.
ICRON caters for some of the biggest names in the financial services sector in
India and abroad, which is a testimony to its product quality, commitment and credibility.
ICRON has two Strategic Business Units (SBUs) with a list of reputed global and
domestic clients:
16 Khan MY(2003), ICRA Rating Symbols Credit rating, Financial services Tata McGraw Hill Publishing
Company Limited New Delhi sixth edition 2003.p16.39-16.47
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The Knowledge Process Outsourcing Division (KPO Division); and
The Information Services and Technology Solutions Division (MFI Division).
Encouraged by the emerging dynamics of the outsourcing business, ICRON
diversified into the Knowledge Process Outsourcing (KPO) business in April 2004, with
focus on the Banking, Financial Services and Insurance (BFSI) vertical as well as other
verticals like Retail, Healthcare and Pharmaceuticals.
The KPO Division of ICRON offers Knowledge Process Outsourcing services
that combine advanced analytical abilities and deep domain expertise to deliver value by
translating data and information into structured business inputs. It provides back-end
analytical services support to its clients in the areas of Data Extraction, Aggregation,
Validation and Analysis, Accounting and Finance, Research, Report Preparation and
Modeling. The Division has attained ISO 27001 certification through rigorous adherence
to data security policies and practices.
The MFI Division serves the Mutual Fund Industry through Research, Analytics
and Mutual Fund Ranking. Besides, it leverages its domain expertise to deliver high
quality technology solutions, in the form of products, to a large number of Banks, Mutual
Funds, Financial Institutions, Third Party Products’ Distributors, Insurance Companies,
Investment Advisors, Portfolio Managers, Stock Brokers, Treasury Managers, and
Academic Institutions, among others. The Company has developed several innovative
products to meet the varied needs of its clients. The products are customized to meet
specific client requirements, enabling them in research, analysis and decision making
while also helping them achieve automation in business operations.
ICRON has a wholly-owned subsidiary M-Serve Business Solutions Private
Limited, a KPO Services Company headquartered in Kolkata, India.
ICRA assigns equity grading to Havells India Limited
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ICRA online has assigned the fundamental 4 and the valuation grade B to Havells
India Limited (Havells). The fundamental grade 4 assigned to Havells implies that the
company has “strong fundamentals” to other listed securities in India. The grade factors
in Havells diversified product portfolio with core focus on the fast growing consumer
goods sector, its effective marketing and distribution reach that supports premium
pricing, and the significant growth potential of its subsidiary, Sylvania. The grade also
takes note of the intense competition that Havells faces across the segments it operates in.
The valuation Grade B assigned to Havells implies that the company is “moderately
undervalued” on a relative basis (as on the date of the grading assigned).
An ICRA Equity Research assessment, while not specifying any target price for
the shares evaluated, captures two key factors: fundamental earning quality (fundamental
grade) and relative valuation (valuation grade)- that influence the price behaviour of
equity shares of companies over the medium and long term. The fundamental grades are
on five- point scale, with 5 being the highest grade and 1 the lowest. Similarly, valuation
grades are also on five-point scale, wherein A being the significantly undervalued and E
the significantly overvalued.17
1.1.8.3 Credit analysis and research Ltd (CARE)
Credit analysis and research Ltd. was promoted by IDBI jointly with financial
institution, banks and private finance companies. It started its operation in 1993 and now
it offers a wide range of products and services in the field of credit information and
equity research.
CARE Ratings is well equipped to rate all types of debt instruments like
Commercial Paper, Fixed Deposit, Bonds, Debentures, Hybrid instruments, Structured
Obligations, Preference Shares, Loans, Asset Backed Securities(ABS), Residential
Mortgage Backed securities (RMBS) etc .
17 www.icra.com , Investment information and credit rating agency of India ltd
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CARE Ratings has been recognized by statutory authorities and other agencies in
India for rating services. The authorities/agencies include: Securities and Exchange
Board of India (SEBI), Reserve Bank of India (RBI), Director General, Shipping and
Ministry of Petroleum and Natural Gas (MOPNG), Government of India (GOI), National
Housing Bank (NHB), National Bank for Agriculture and Rural development
(NABARD), National Small Scale Industries Commission (NSIC). CARE Ratings has
also been recognized by RBI as an Eligible Credit Rating Agency (ECRA) for Basel II
implementation in India .
CARE Ratings has significant presence in all sectors including Banks / FIs,
Corporate, Public finance. Coverage of CARE Ratings has extended to more than 2811
entities over the past decade and is widely accepted by investors, issuers and other market
participants. CARE Ratings have evolved into a valuable tool for credit risk assessment
for institutional and other investors, and over the years CARE has increasingly become a
preferred rating agency .
CARE‘s Credit Rating is an opinion on the relative ability and willingness of an
issuer to make timely payments on specific debt or related obligations over the life of the
instrument. CARE rates rupee denominated debt of Indian companies and Indian
subsidiaries of multinational companies. CARE ratings are not recommendations to
buy/sell or hold any security.
These services are categorized into the following categories:-
i. Credit Rating Services.
ii. Information Services.
iii. Equity Research.
i. Credit Rating Services :-
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CARE rates all types of debt instruments including long term. It is the core
business of this rating agency.
ii. Information Services :-
Like CRISIL and ICRA. It also provides information services to various players
in the financial market. It provides information on any company, industry or sector to
individuals, mutual funds, and investment companies. So that they can take well
informed investment decision.
iii. Equity Research :-
Equity Research involves extensive study of the shares listed or which are going
to be listed on stock exchange and forecasts Potential looser and winner on the basis of
this study. For this purpose, it analyzes all the fundamentals affecting the industry,
market share, management capabilities etc.
Apart from basic services, CARE also provides some other services like:
CARE Loan Rating
Credit Analysis Rating etc.
Table 1.4: Rating Experience: (As at March 2010)
Total Assignments Completed 8488
Total Instruments Rated 7989
Total Volume of Debt Rated Rs.26609 billion
Total Issuers Rated 3071Source: Credit Analysis and Research Ltd.
Table 1.5: CARE’s Rating Symbols Chart
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Source: Credit Analysis and Research Limited
NOTE: CARE may assign ’+’ or ‘-‘signs after the assigned rating, where necessary, to
indicate the relative position within the brand covered by the symbol.18
1.1.8.4 Duff and Phelps Pvt. Ltd.
Duff & Phelps was founded in 1932 to provide high quality investment research
services focused on the utility industry. Over the decades, it evolved into a diversified
18 Khan MY(2003), Care Ch. Credit rating , Financial services Tata McGraw Hill Publishing Company
Limited New Delhi sixth edition 2003.p16.24-16.25.
Instruments
SYMBOLS
Long Term& Medium
Term Instrume
nts
Short Term
Instruments
Credit Analysis Rating
Long Term Loans
Short Term Loans
Collective Investme
nt Schemes
HighestSafety
HighSafety
AdequateSafety
ModerateSafety
InadequateSafety
HighRisk
SubstantialRisk
Default
CAREAAA
PR1
CARE1
CAREAAA(L)
PL1
CARE1(CIS)
CAREAA
PR2
CARE2
CAREAA(L)
PL2
CARE2(CIS)
CAREA
PR3
CARE3
CAREA(L)
PL3
CARE3(CIS)
CAREBBB
CAREBBB(L)
CAREBB
PR4
CARE4
CAREBB(L)
PL4
CARE4(CIS)
CAREB
CAREB(L)
CAREC
CAREC(L)
CARED
PR5
CARE5
CAREC(L)
PL5
CARE5(CIS)
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financial services firm that provides financial advisory, investment banking, credit rating
and investment management services. The investment management and credit rating
businesses were acquired by Virtus Investment Partners and Fitch, respectively. The
firm’s current management team acquired Duff & Phelps’ financial advisory and
investment banking business in 2004. The following year, Duff & Phelps strengthened its
valuation capabilities with the acquisition of Standard & Poor's Corporate Value
Consulting business. Since then, Duff & Phelps has continued to expand and develop its
core services. In 2006, it acquired specialty investment bank Chanin Capital Partners,
LLC. The following year, it formed a strategic alliance with Tokyo-based Shinsei Bank,
Ltd. and added property tax management services through the acquisition of Rash and
Associates, LP to complement its tax business. In 2008, it grew its dispute and legal
management consulting services with the acquisitions of Dubinsky & Company, P.C. and
Lumin Expert Group. It also enhanced its valuation offerings by acquiring Kane Reece
Associates, Inc., a valuation consulting firm that specializes in the communications,
entertainment and media industries.
In 2010, Duff & Phelps established a presence in Canada and continued to expand
its dispute consulting, valuation and corporate advisory services with the acquisition of
Cole & Partners, a Toronto-based independent financial advisory practice.
Key Facts:
NYSE-listed company since 2007.
Headquartered in New York City.
Offices in North America, Europe and Asia.
Primary services are valuation, investment banking, transaction advisory, dispute,
legal management consulting and tax.19
1.1.8.5 Brickwork Ratings
19 http://www.duffandphelps.com/aboutus/Pages/AboutDuffPhelps.aspx
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Brickwork Ratings is a Bangalore-based company incorporated in 2007 with the
mission of providing unbiased information to Indian investors for making better
investment decisions. Mr. Balasubramanian, Mr. Vivek Kulkarni and Mr. Ravishankar
are the founder directors of Brickwork Ratings. Mr. Balasubramanian is the former
Chairman of SIDBI and a pioneer in the banking industry. He was instrumental in setting
up of SMERA – an SME rating agency. He has tremendous credit experience with the
Bank of Baroda. Mr. Ravishankar is a financial professional with a rich experience of
over 25 years in BFSI segment. He was Managing Director of Asia-Pacific Risk
Solutions business of Standard and Poor's .
The initial concept of Brickwork Ratings was conceived by Mr. Vivek Kulkarni
after the success of providing high-end financial services to the global market through
Brickwork India Pvt. Ltd. – a knowledge process outsourcing company.
Brickwork Ratings, a SEBI licensed credit rating agency, founded by bankers,
credit rating professionals, former regulators as well as professors, is committed to
promoting Financial Literacy, having its corporate office in Bangalore and branches at
New Delhi, Mumbai, Chennai, Hyderabad and Pune.
While Indian financial markets have been liberalized in the past two decades,
useful information is still scarce. Complex structures, inadequacy of information and
below-average disclosures make it difficult for retail investors to make sense of financial
markets. No wonder small investors always lose money in every market crash.
Brickwork's proprietary models in credit risk customized for large corporates,
SMEs, banks, financial institutions, state and local governments, help investors
understand the complexity of the investment world.
Brickwork Rating Symbols
1) Brickwork Rating Symbols for Long Term debt instruments
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The ‘long-term debt instruments’ includes Bonds, Non Convertible Debentures,
Certificate of Deposits, Fixed Deposits, Convertible Preference Shares, Redeemable
Preference Shares and Structured Obligations, all with original maturity exceeding one
year.
1. Investment Grade Ratings :
BWR AAA (BWR Triple A)
Instruments with ‘AAA’ rating are considered to offer the Best credit quality, in terms of timely servicing of debt obligations.
BWR AA (BWR Double A) Instruments with ‘AA’ rating are considered to offer High credit quality.
BWR A Instruments with ‘A’ rating are considered to offer Adequate credit quality.
BWR BBB (BWR Triple B)
Instruments with this rating are considered to offer Moderate credit quality.
2. Speculative grade:
BWR BB (BWR Double B)
Instruments with this rating are considered to offer Inadequate credit quality.
BWR B Instruments with this rating are considered to offer Low credit quality.
BWR C Instruments with this rating are considered to offer Very Low credit quality.
BWR D Instruments with this rating are in Default or expected to Default.
2) Brickwork Rating Symbols for Short Term debt instrumentsShort Term Instruments Rating Scale
The ‘Short Term debt instruments’ with original maturity up to one year.
BWR P1 Instruments with this rating are considered to offer Excellent credit quality
BWR P2 Instruments with this rating are considered to offer High credit quality
BWR P3 Instruments with this rating are considered to offer Moderate credit quality
BWR P4 Instruments with this rating are considered to offer Low credit quality
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BWR P5 Instruments with this rating are in Default or expected to Default
3) Brickwork Rating Symbols for issuer rating
BWR AAA (BWR Triple A)
Issuer with ‘AAA’ rating is considered to offer the BEST credit worthiness.
BWR AA (BWR Double A)
Issuer with ‘AA’ rating is considered to offer High credit worthiness.
BWR A Issuer with ‘A’ rating is considered to offer Adequate credit worthiness.
BWR BBB (BWR Triple B)
Issuer with this rating is considered to offer Moderate credit worthiness.
BWR BB (BWR Double B)
Issuer with this rating is considered to offer Inadequate credit worthiness.
BWR B Issuer with this rating is considered to offer Low credit worthiness.
BWR C Issuer with this rating is considered to offer Very Low credit worthiness.
BWR D Issuer with this rating is in Default or expected to Default.
4) Brickwork Rating Symbols for IPO Grading
BWR IPO Grade 5: Strong fundamentals
BWR IPO Grade 4: Above-average fundamentals
BWR IPO Grade 3: Average fundamentals
BWR IPO Grade 2: Below-average fundamentals
BWR IPO Grade 1: Poor fundamentals
5) Brickwork Rating Symbols for Fixed Deposit Ratings
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a) Investment grade:
BWR FAAA (BWR F Triple A)
Deposits with this rating are considered to offer the BEST safety, in terms of timely servicing of interest & principal
BWR FAA (BWR F Double A)
Deposits with this rating are considered to offer a High safety, in terms of timely servicing of interest & principal
BWR FA Deposits with this rating are considered to offer Adequate safety in terms of timely servicing of interest & principal
b) Speculative grade:
BWR FB Deposits with this rating are considered to offer Low safety, in terms of timely servicing of interest & principal
BWR FC Deposits with this rating are considered to offer Very Low safety, in terms of timely servicing of interest & principal
BWR FD Deposits with this rating are in Default or expected to Default
6) Brickwork Rating Symbols for Corporate Governance
BWR CG 1 Quality of Corporate Governance is The BEST
BWR CG 2 Quality of Corporate Governance is EXCELLENT
BWR CG 3 Quality of Corporate Governance is HIGH
BWR CG 4 Quality of Corporate Governance is ADEQUATE
BWR CG 5 Quality of Corporate Governance is MODERATE
BWR CG 6 Quality of Corporate Governance is INADEQUATE
BWR CG 7 Quality of Corporate Governance is LOW
BWR CG 8 Quality of Corporate Governance is The LOWEST
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7) Brickwork Rating Symbols for SME rating
BWR aaa (BWR Triple a)
SME with ‘aaa’ rating is considered to offer the Best credit worthiness in relation to other SMEs.
BWR aa (BWR Double a)
SME with ‘aa’ rating is considered to offer High credit worthiness in relation to other SMEs.
BWR a SME with ‘a’ rating is considered to offer Adequate credit worthiness in relation to other SMEs.
BWR bbb (BWR Triple b)
SME with ‘bbb’ rating is considered to offer Moderate credit worthiness in relation to other SMEs.
BWR bb (BWR Double b)
SME with ‘bb’ rating is considered to offer Inadequate credit worthiness in relation to other SMEs.
BWR b SME with ‘b’ rating is considered to offer Low credit worthiness in relation to other SMEs.
BWR c SME with ‘c’ rating is considered to offer Very Low credit worthiness in relation to other SMEs.
BWR d SME with ‘d’ rating is in Default or expected to Default
8) Brickwork Rating Symbols for Security Receipts Ratings
BW RR1+ Recovery Value of the Underlying Assets is greater than 150% of SR Face Value.
BW RR1 Recovery Value of the underlying assets in the range of over 100% - 150%of SR Face Value.
BW RR2 Recovery Value of the underlying assets in the range of over 75% - 100%of SR Face Value.
BW RR3 Recovery Value of the underlying assets in the range of over 50% - 75% of SR Face Value.
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BW RR4 Recovery Value of the underlying assets in the range of 25% - 50% of SR Face Value.
BW RR5 Recovery Value of the underlying assets less than 25% of SR Face Value.
9) Brickwork Rating Symbols for Insurance Companies
BWR In AAA BEST financial capability to meet policyholders obligations
BWR In AA HIGH financial capability to meet policyholders obligations
BWR In A ADEQUATE financial capability to meet policyholders obligations
BWR In BBB MODERATE financial capability to meet policyholders obligations
BWR In BB INADEQUATE financial capability to meet policyholders obligations
BWR In B LOW financial capability to meet policyholders obligations
BWR In C VERY LOW financial capability to meet policyholders obligations
BWR In D DEFAULT on current policy holder obligations
10) Brickwork Rating Symbols for Mutual Fund
BWR MF AAA BEST credit quality of underlying Debt portfolio
BWR MF AA HIGH credit quality of underlying Debt portfolio
BWR MF A ADEQUATE credit quality of underlying Debt portfolio
BWR MF BBB MODERATE credit quality of underlying Debt portfolio
BWR MF BB INADEQUATE credit quality of underlying Debt portfolio
BWR MF B LOW credit quality of underlying Debt portfolio
BWR MF C VERY LOW credit quality of underlying Debt portfolio
11) Brickwork Rating Symbols for Real Estate Project
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BWR RP 1+ BEST project implementation
BWR RP 1 EXCELLENT project implementation
BWR RP 2 ADEQUATE project implementation
BWR RP 3 MODERATE project implementation
BWR RP 4 INADEQUATE project implementation
BWR RP 5 LOW project implementation
12) Brickwork Rating Symbols for Real Estate Developer
BWR RD 1+ BEST project implementation capability
BWR RD 1 EXCELLENT project implementation capability
BWR RD 2 ADEQUATE project implementation capability
BWR RD 3 MODERATE project implementation capability
BWR RD 4 INADEQUATE project implementation capability
BWR RD 5 LOW project implementation capability
20
1.1.9 Rating Process
In India all the three credit rating agencies adopt almost a similar rating process
for rating new debt issues and reviewing the rating of existing instruments. The steps
generally taken by the rating agencies in rating process are shown as under: -
20 http://www.brickworkratings.com/scale.html
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1. Rating Request : -
The purpose of the rating starts with the rating request made by the issuer of the
instrument issues a letter to the rating agency and signed an agreement with the agency.
2. Assignment of Analytical Team : -
On the basis of rating request credit rating agencies assign an analytical team
comprising two or more analysts. These analysts would be the experts in the relevant
business area. It is a very detailed process. Normally, two-three persons with the required
technical skills team up for investigations (due diligence) for about three weeks.
No
Yes
50
Issuer request for rating
CRISIL Assigns an analytical team
Analytical team collects and analyses information
Meets Company’s management and resolvesQuestions
Interaction with back up team for industrial formation
Findings presented to a rating committee
Rating committee decides the rating
Notification of rating to issuer Does
issuer
wants to
appeal
Rating is released
Additional data provided is
reviewed and rating revised if
necessary
Page 51
Figure 1.2: Rating Process
They go to the company, talk to the people, go through the company's books and
records, its accounts, talk to its auditors, its bankers, its consumers, look at how the
company has handled investor grievances, look at its track record in servicing debt
obligations and so on. This pile of data is then screened and, based on that, the team
arrives at a structured report.
This report is then presented before the rating committee. A brainstorming session
on due diligence ensures that no one gets away by making a sweeping statement. After a
lot of interaction, the matter is finally put to vote for a decision on the rating.21
3. Analytical Team Obtains & Analysis Information : -
After assignment of Analytical Team, the team obtains and analysis information
relating to its financial statements, cash flow and other relevant information which have
impact on the company’s functioning. Generally, following kind of information is
obtained and analyzed by this team:
A. Annual reports for past five years including cash flow statements and interim
reports.
B. Two copies of the prospectus offering statement and application for listing on
any major stock exchange.
C. Consolidated financial statements for the past three fiscal years.
D. Two copies of the projected financial statements along with assumptions on
which projection have made.
E. A certified copy of resolution passed by the Board of Directors authorizing the
insurance of debentures instruments, including the name of authorized
signatories.
21 Khan MY(2003), Rating Process Ch. Credit rating, Financial services Tata McGraw Hill Publishing
Company Limited New Delhi sixth edition 2003.p16.25-16.31.
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F. List of bank showing lines of credit along with the contact officers. Apart
from this, analytical team may obtain some addition information, which it
considers to be necessary for this purpose.
4. Meeting with Management :-
After obtaining and analyzing the information explained in previous step,
analytical team meets with the management of the company and obtains more
information on some important aspects which have impact on the credit quality of the
instrument being rated. Though the topics discussed during the management meeting are
wide ranging but discussion with management might reveal more information like:
Management’s Philosophy and Plan for the company in future.
Business segment analysis.
Competitive position, strategies, financial policies.
Historical performance.
5. Interaction with Back Up Team :-
While Analytical team collects the information from company; its back up team
collects the information on industry which this company belongs. It also makes
interaction with back up team in order to collect information on industry along with the
industry prospects in near future.
6. Rating Committee : -
After collecting and analyzing information from company and its management,
the analytical team presents their report to a rating committee which then decides on the
rating. The rating committee meeting is the only aspects of the process in which the
issuer does not participate.
7. Deciding on Rating by Rating Committee :-
Now the rating committee makes assessment or evaluate all the factors
concerning the issuer giving greater attention to some key issues. After proper analysis
rating committee arrives at the rating, which is suitable to the proposed issue.
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8. Notification to the issuer : -
After the committee has assigned the rating, this decision is communicated to the
issuer along with the reasons or rational supporting the rating. If the issuer agrees with
the ratings and does not wish to appeal fo9r reviewing the rating given to the instrument,
then as a last movement rating is released through print media by the rating agency. But
if issuer raises objection on the rating given by the rating agency and wants to furnish
additional data for that, then this additional information is reviewed and rating agency
may revise previous rating. Then this revised rating is released through media and formal
notification of final rating assigned to the issuer.22
1.1.10 International Credit Rating Agencies (CRAs)
Currently, the following rating agencies rate general obligation bonds, notes,
lease-purchase revenue bonds and commercial papers:
Figure 1.3 International Credit Rating Agencies
How are bonds rated?
The rating process begins with an application to the rating agencies by the issuer
or its agent either via a telephone call or in writing. The State of California has engaged
Standard & Poor's, Moody's and Fitch in rating all its debt instruments for decades.
22 V Bhalla VK(2001), Investment Management S. Chand and Co. Ltd. New Delhi 8th edition 2001.p 136-
137
53
International Credit Rating Agencies
Fitch Moody’s Investor Service
Standard & Poor’s Ratings Services
Page 54
The rating request is usually done several weeks before the issuance of the bonds
to allow time for the rating agencies to perform their review and analysis. Generally, the
following documentations are provided to the rating agencies as soon as possible:
a. The preliminary official statement;
b. Latest audited and unaudited financial statements;
c. The latest budget information, including economic assumptions and
trends;
d. Capital outlay plans;
The bond counsel opinion addressing the authority and tax-exempt status of the
bond issuance; All legal documents relating to the security for the bonds; and Any other
documents that may pertain to the bond issuance as requested by the rating agencies.
Following this, a meeting is set up at the rating agency's or issuer's office to
present the credit worthiness. The credit analyst prepares a municipal credit report, which
discusses key analytical factors. The credit analyst presents credit for "sign-off" with the
senior analyst and makes a recommendation for rating. The credit analyst makes a
presentation before a rating committee comprised of senior analysts. Finally, the rating is
released to the issuer, then to a wire service, followed by a publication of full credit
report.
Table 1.6: International CRA’s Rating Symbols Chart
Moody’s S&P Fitch NAIC
Aaa AAA AAA 1
Aa1 AA+ AA+ 1
Aa2 AA AA 1
Aa3 AA- AA- 1
A1 A+ A+ 1
A2 A A 1
A3 A- A- 1
Baa1 BBB+ BBB+ 2
Baa2 BBB BBB 2
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Baa3 BBB- BBB- 2
Ba1 BB+ BB+ 3
Ba2 BB BB 3
Ba3 BB- BB- 3
B1 B+ B+ 3
B2 B B 3
B3 B- B- 3
Source: National Association of Insurance Commissioners
Moody's Explanation
Aaa indicates Best quality.
Aa indicates High quality.
A indicates Higher-medium grade.
Baa indicates Medium grade.
Ba indicates Possess speculative elements.
B Generally lack characteristics of desirable investment.
Caa indicates Poor standing; may be in default.
Ca indicates Speculative in a high degree; often in default.
C indicates lowest grade.
Standard & Poor's Explanation
AAA Highest grade.
AA High grade.
A Upper medium grade.
BBB Medium grade.
BB Lower medium grade.
B Speculative.
CCC-CC Outright speculation.
C' Reserved for income bonds.
DDD-DD In default, with rating indicating relative salvage value.
All of these agencies are represented in India through their collaborations:
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S&P: CRISIL
Moody’s: ICRA
Fitch: CARE (for 1 year only)
Fitch: Fitch India (formerly Duff & Phelps India)
These collaborations bring in financial capital, and more importantly, know how,
experience, depth of expertise, research capabilities and manpower synergies. The global
orientation received by CRAs in India is further enhanced by two factors Affiliation to
the Association of Credit Rating Agencies in Asia (ACRAA), an ADB sponsored body.
Indian CRAs are founder members. Alignment with the IOSCO Code of Conduct, to the
extent they coincide with the SEBI Code of Conduct for CRAs. These collaborations,
affiliations and alignments enable the Indian CRAs to benefit from an exposure to an
international environment. It is also a notable feature that Indian CRAs, in turn, provide
technical expertise and knowhow to CRAs in Mexico and other countries in the SAARC
and ASEAN regions. This provides an emerging markets perspective. Indian CRAs have
a leadership position in Asia, behind only Japan, who’s CRAs show a greater affinity in
interacting with CRAs from the developed (G7) countries.
1.1.11 Elements involved in determining a credit rating
Economic Factors.
Evaluation of historical and current economic factors.
Economic diversity.
Response to business cycles.
Economic restructuring.
Assessing the quality of life in the given area.
Debt/Issue Structure.
Economic feasibility and need for project.
Length of bond's maturity, short-term debt financing.
Pledged security and other bondholder protections.
Futuristic outlook: capital improvement plan.
Financial Factors.
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Sufficient resources accumulated to meet unforeseen contingencies and liquidity
requirements.
On-going operations are financed with recurring revenues.
Prudent investing of cash balances.
Ability to meet expenditures within economic base.
Management/Structural Factors.
Organization of government and management.
Taxes and tax limits.
Clear delineation of financial and budgetary responsibilities.
Definitions of Ratings by Standard & Poor’s and Moody’s.
Investors are often confused or uncertain about bond ratings used by the major
security rating services.
1.1.12 Credit Rating: Its Trustworthiness
Why ratings are so trustworthiness?
Investors and creditors are primarily concerned with relative value based on their
lending and for the investment horizon they have. Accordingly, the credit ratings have
traditionally provided one element in support of the investment decision-making process.
As such, they help lower the aggregate costs of borrowing and lending and increase
overall market transparency and efficiency for both issuers and investors. However,
certain attributes of ratings have, over time, encouraged proliferation in the types of users
and uses of ratings:
Public dissemination
Because ratings are publicly available, information about issuers can easily and
quickly be disseminated to broad and varying groups of users.
Simplicity
Rating symbols distill much information into an easy to use symbol.
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Breadth of coverage
The worldwide ratings exist on a large and diverse group of entities and debt
instruments. Rating service allows investors to assign an individual issuer or debt
instrument into a credit risk class vis-a-vis the overall universe of debt issuers and
instruments.
Objectivity and independence
The few reputable players in the Rating industry have strict internal policies and
procedures have mitigated the latent conflict of interest that is inherent in the rating
agency business model. As such, the rating opinions are the product of analysis that is
widely accepted as unbiased and trustworthy.
Predictive content
The predictive content of the world-recognized ratings has been consistently
mapped and measured. All top rating agencies and many academic researchers have
published studies on the relationship between the ratings and credit defaults. Research
has shown a strong relationship between assigned ratings and actual default experience.
Judicious rating process
The recognized rating agencies assign ratings through a rigorous and judicious
process that tends not to react to transitory conditions in favor of longer-term
considerations and ratings stability. For different class of persons different benefits
accrue from use of rated instruments. Such benefits directly accruing to investors through
rated instruments that become a reason for trustworthiness are as follows:
1.1.12.1 Trustworthiness to Investors
Investors are benefited in very many ways if the corporate security in which they
intend to invest their saving has been rated by credit rating agency. Some of the benefits,
which become a reason for trustworthiness to investors, are as:
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Safeguards against bankruptcy:
Credit rating of an instrument by credit rating agency give an idea to the investors
about degree of financial strength of the issuer company, which enables him to decide
about the investment. Highly rated instrument of a company gives an assurance to the
investors of safety of instrument and minimum risk of bankruptcy.
Recognition of risk:
Credit rating provides investors with rating symbols, which carry information in
easily recognizable manner for the benefit of investors to perceive risk involved in
investment. Rating symbol gives them the idea about the risk involved or the expected
advantages from the investment.
Credibility of Issuer:
Rating gives a clue to the credibility of the issuer company. The rating agency is
quite independent of the issuer company and has no business connections or otherwise
any relationship with it or its Board of Directors, etc.
Easy understandability of investment proposal:
Rating symbols can be understood by an investor, which needs no analytical
knowledge on his part. Investor can take quick decisions about the investment to be made
in any particular rated security of a company.
Saving of resources:
Investors rely upon credit rating. This relieves investors from the 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.
Independent of investment decisions:
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For making investment decisions, investors have to seek advice of financial
intermediaries, the stock brokers, merchant bankers, the portfolio managers etc. about the
good investment proposal, but 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.
Benefits of rating surveillance :
Investors get the benefit of credit rating agency’s on-going surveillance of the
rating and rated instruments of different companies. The credit rating agency downgrades
the rating of any instrument if subsequently the company’s financial strength declines or
any event takes place, which necessitates consequent dissemination of information on its
position to the investor.
1.1.12.2 Trustworthiness to Company
Company which had its credit instrument or security rated by a credit rating
agency is benefited in many ways as summarized below:
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 through yielding marginally lower rate of return.
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 understands the
degree of certainty about timely payment of interest and principal on a debt instrument
with better rating.
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Rating as marketing tool:
Companies with rated instrument improve their own image and avail of the rating
as a marketing tool to create better image in dealing with its customers feel confident in
the utility products manufactured by the companies carrying higher rating for their credit
instruments.
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 economies 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.
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 through 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.
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’.
Benefits to brokers and financial intermediaries:
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 inter-mediaries to save time, energy,
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costs, and man-power in convincing their clients about investment in any particular
instrument.
1.1.13 Credit Rating as a tool for Credit risk management
in BanksA simple way to evaluate credit risk is to think in terms of past credit worthiness.
Apart from the big credit rating agencies like Moody’s, Standard & Poor or Fitch-IBCA,
there are the databases compiled by Equifax and CCN on people whose credit-
worthiness is frequently queried by companies and banks.16
CRISIL believes that for radically improving credit risk management, the use of
better tools and techniques needs to be complemented by improved information systems,
redesigned organizational structures and processes, skill up gradation and most of all, the
willingness and ability to adapt attitudes and organizational cultures to suit the changing
environment.
The RBI guidelines for risk rating on credit risk management are as:
Set up comprehensive risk scoring system (6 to 8 point scale)
Clearly define rating thresholds.
Periodic (half yearly) review of ratings
Map rating migrations to estimate expected loss.
For purpose of better control, the RBI study group (Tandon Committee) has also
suggested a system of borrower classification in each bank within a credit rating scale.
The study group has suggested a five point-point scale in which borrowers could
be classified as excellent, good, average, Below-Average or Unsatisfactory: an
alphabetical range would do equally well. Such a system of classification according to
credit risk, which results for periodic review will facilitate easy identification of the
borrower whose affair require to be watched with more than ordinary care. Moreover,
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such classification will be advantageous for the formulation of a rational base for fixing
the rates of interest according to the credit rating of the borrower.
A customer who is given the finest credit rating may be given the lowest lending
rate of the bank. On the other hand, a customer who is rated as a poor risk, will have to
pay the worst interest rate. In such a case the bank should take appropriate action to
improve the quality of loan and lessen the bank’s exposure.
The recommendation of the study group have been, by & large, accepted by the
Reserve Bank. Banks have, therefore accepted the suggested procedure as a regular part
of their follow-up machinery. A procedural consideration will have to do how
management chooses to deal with loans graded anything less than satisfactory, that is,
those that are classified ‘below average’ or unsatisfactory. In effect, the entire
administration of a substandard loan should be shared or regularly reviewed with
management.
Rating Industry Performance
Surprisingly, the largest wealth creating sectors are the industrials-oil & gas,
utilities, transportation, financial services, and metals & mining. On the other hand,
growth oriented sectors like leisure, telecom, and FMCGs have destroyed shareholders
wealth. Moreover wealth-creating sectors have created more wealth than the growth-
oriented sectors.
Role of Rating Agencies in Capital Market
The capital and financial markets in developing countries are remarkable for their
lack of sophistication. Apart from a few stock exchanges and government-appointed
regulators, there aren’t many reliable intermediaries like Credit rating agencies,
investment analysts, merchant bankers, or venture capital firms.
Credit rating agencies have played an important role in the capital markets for
almost a century by providing analytic opinions to investors on the ability and
willingness of issuers to make timely payments on debt instruments over the life of those
instruments. Issuers pay for the ratings in order to lower the cost of and increase their
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access to capital. Investors trust the agencies’ impartiality and quality, and rely on the
ratings.
1.1.14 Limitations of Credit Rating System in India
(1) The first problem of Credit Rating System relates to the rating symbols. Sometimes,
rating symbols according to the tenure of the instrument and not by the instrument’s
characteristics creates confusion. For example the instruments like Fixed Deposits, Non
Convertible Debentures or Commercial papers are rated by ICRA on the basis of their
maturity period, them will be given the same rating by ICRA.But on the other hand
CRISIL provides rating symbols in accordance with the characteristics of instrument. For
example, CRISIL prefix ‘F’ to the rating for Fixed Deposits. This problem of assigning
rating symbols cause confusion among treasury managers and investors who otherwise
can determine the product or the instrument on the instrument on seeing the rating.
(2) The rating agencies do not perform an audit and they rely only on the information
provided by the issuer of the instrument. If the information provided is inaccurate or
incomplete, the ratings process is compromised. Therefore, ultimately, this kind of rating
will not reflect the true picture behind the issuance of security or in other words, it will
not assess the true creditworthiness of the issuer.
(3) A Credit Rating provides only guidance to the investors and creditors in determining
the risk associated with a instrument. It does not recommend buying selling a particular
security because it does not take into account factors like: market prices and personal risk
preferences, which might influence investor’s decision. So apart from Credit Rating,
investors should analyze all those factors depending on his proposed investment decision.
(4) Sometimes, certain instrument of a specific company is provided lower rating by a
rating agency. Now the company has an incentive to go around for the best possible
rating by compromising the authenticity of the rating process itself.
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(5) Some companies use Credit Rating as a tool to cheat the investors. They get rating
done by more then one rating agency and publish only that rating which reflects highest
safely. But this published rating may not be true which can mislead investor’s decision.23
(6) Conflict between the two rating agencies can be happen. E.g. IDBI Bank has been
upgraded to AA+ from A on account of the merger with Industrial Development Bank of
India (IDBI), said Crisil. Meanwhile, Icra has placed IDBI Bank under rating watch with
positive implications. The agency said that the rating action takes into account the
announcement of the in-principle approval of the merger of the IDBI Bank with IDBI.
The rating agency is in the process of evaluating the impact of the merger and would
announce its final view on the outstanding rating after completion of the merger, an Icra
official said. The rating agency is in the process of evaluating the impact of the merger
and would announce its final view on the outstanding rating after completion of the
merger said an official with the rating agency. Agency has also assigned outstanding
ratings of LAA, MAA+ and A1+ to IDBI’s long-term, medium-term and short-term debt
plans. Now it can create controversy between the two rating agency if the ratings of the
bank varies.24
(7) Ratings volatility The most important issue arising in the present turmoil is do rating
agencies need the quasi government authority of inside access at all as rating agencies
access to inside access at all as rating agencies access to inside information did not help
them anticipate the financial information is essential to understanding company
creditworthiness, it is not helpful to detect fraud. It is not economically viable for rating
agencies to act as guarantors of fraud. Financial instruments are increasingly designed
solely to carry a particular rating, not the other way round. The effect is to discourage
agencies from changing ratings on objective grounds until it is too late. Further, though
companies tend to give credit rating agencies access to confidential documents in general
23 Bhalla VK(2001), Investment Management S. Chand and Co. Ltd. New Delhi 8th edition 2001.p 136-
13724 Sowdeepti(2004), Rating volatility titled financial services rating agencies inducing competition,
Chartered Financial Analyst, Vol. X, Issue 1, p.49
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to justify the highest possible credit rating, there is no requirement that they divulge
everything.
1.1.15 Evaluation of RatingsIn evaluation and monitoring ratings, both qualitative and quantitative criteria are
employed. The methodology involves an analysis of the past performance of the
company and an assessment of its future prospects which involves judgment of the
company’s competitive position and evaluation of its management and strategies. In order
to eliminate subjectivity, a multi-layered decision-making process is applied in assigning
a rating which ensures that no single individual decides on a rating.
Table 1.7: Key Factors considered in the Evaluation of Ratings
Management Evaluation
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Track record of the management; planning and control systems; depth of
managerial talent; succession plans.
Evaluation of capacity to overcome adverse situations.
Goals, philosophy and strategies.25
1.2 Rationale of Study Main purpose of this study is to examine the activities of Credit rating agencies in
India and their influence on the investment decisions, also, to determine the awareness
and trustworthiness of Credit rating agencies among the investors and brokers. Credit
rating is an opinion expressed by an independent professional organization, after making
a detailed study of all relevant factors. Credit Rating assesses the credit worthiness of an
individual, a corporation or even a country. It is basically calculated from the financial
history and current assets and liabilities. It tells a lender or an investor the probability of
the subject to pay back a loan. This study can help the issuers of debt instrument to price
their issues correctly and to reach out to new investors.
1.3 Objectives of the Study
a) To examine the awareness of Credit Rating Agencies among the investors and its effect on various investment decisions.
b) To examine the trustworthiness of Credit Rating Agencies among the investors and its effect on various investment decisions.
c) To study the impact of Credit Rating Agencies activities on the Risk Management.
d) To study the satisfaction level of investors with the working of Credit Rating Agencies and its effect on various investment decisions.
25 http://www.adbi.org/publications/ Qualitative and quantitative risk. Dated: 8/18/2004.
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CHAPTER – 2
REVIEW OF LITERATUREIn this chapter the review of literature related to the credit rating agencies and there
operations will be highlighted. The development of research on emotional intelligence
(EI) over the years and the evidence of its impact on the work stress among the
employees in insurance sector will be reviewed
Madhav Godbole (1998), the purpose of this paper was to ensure that investors and
the public at large are not misled by the credit rating agencies' glowing certificates.
The increase in fraud, waste and corruption in government, of which everyone
complaints, is a direct result of the absurd and unworkable arrangement for audit and
accounts, in particular the heavy concentration of work with the comptroller and
auditor general (CAG) which has destroyed accountability in government.
Arturo Estrella et.al. (2000), this report contains background information about
credit ratings and complementary sources of credit quality information, which may
be helpful to those revising the proposed accord and more generally to those
interested in the use of credit ratings in regulation. The focus of the study is on
factual information, rather than on subjective assessments or explicit policy
recommendations. The material may be classified into four basic categories: (1) facts
about the credit ratings industry, such as lists of rating agencies, the extent of their
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activities, market practices, etc., (2) factual information about alternative sources of
credit quality information, (3) summaries of the results of earlier research on credit
ratings from various sources, including academics, supervisory institutions, and
rating agencies, and (4) empirical work performed specifically for this study,
intended to fill in a few gaps in the existing empirical literature.
M K Datar (2000), the study shows that the role of credit rating agencies in the US
credit crisis by transferring risks through new structured products has attracted much
attention, especially since rating downgrades of these products were much faster than
the other products. Improved disclosures in rating methodologies and the
performance of rating models, avoiding conflict of interest situations, relevance of
issuer to pay models and dealing with the oligopolistic nature of the industry are
some of the lines along which new regulatory efforts could be organized. A clear
articulation of the conditions for the use of ratings of “new” products by different
investor classes may improve regulatory efficiency.
Amitabh Kundu (2001), this paper shows the emergence, politics and economics of
the credit rating agencies in India. With the financial markets becoming global and
competitive and the borrowers’ base increasingly diversified, investors and
regulators prefer to rely on the opinion of these institutions for their decisions. The
rating of the debt instruments of the corporate bodies and municipal enterprises are
currently being done by institutions like Information and Credit Rating Agency of
India (ICRA), Credit Analysis and Research (CARE) and Credit Rating Information
Services of India Limited (CRISIL), etc. The case discussed in this paper includes
the information regarding the norms and procedures of CRISIL’s functioning has
been available for sometimes now, often the discussion on the future of credit rating
in the context of urban development takes place largely based on the experience of
this agency.
Avinash D Persaud (2007), the paper discusses the flaws and regulation criterions
in credit rating. The paper shows that One fundamental flaw with the originate, rate
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and relocate model of banking is that credit risks were being transferred, in part, to
traders of risk who did not intend to hold on to these instruments for a long time and
so had little incentive to invest in learning more about them.
Francois Coppens, Fernando Gonzalez and Gerhard Winkler (2007), the aims of
this paper are twofold: first, the attempt is made to express the threshold of a single
“A” rating as issued by major international rating agencies in terms of annualized
probabilities of default. The data from Standard & Poor’s and Moody’s was used to
construct confidence intervals for the level of probability of default to be associated
with the single “A” rating. The focus on the single “A” rating level is not accidental,
as this is the credit quality level at which the Euro system considers financial assets
to be eligible collateral for its monetary policy operations. The second aim is to
review various existing validation models for the probability of default which enable
the analyst to check the ability of credit assessment systems to forecast future default
events. Within this context the paper proposes a simple mechanism for the
comparison of the performance of major rating agencies and that of other credit
assessment systems, such as the internal ratings-based systems of commercial banks.
This is done to provide a simple validation yardstick to help in the monitoring of the
performance of the different credit assessment systems participating in the
assessment of eligible collateral underlying Euro system monetary policy operations.
Uwe Blaurock (2007), the study shows that credit rating is now attracting worldwide
legal interest. Whilst, in some legal systems, transparent requirements for attaining
recognition status have been published, other legal systems do not have such
requirements. However, in almost all systems, only those agencies that can show
large market acceptance are recognized. In one case, this is elevated to an express
criterion and in other cases, it is applied as an indicator of the reliability and
trustworthiness of the agency. The competent authorities do not appear to want to do
away with this criterion as a guarantee of high professional standards and financial
independence, despite the damaging effects on competition.
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Marwan Elkhoury (2008), this paper outlines the role of credit rating agencies and
their potential impact on developing countries. Credit rating agencies (CRAs) play
key role in financial markets by helping to reduce the informative asymmetry
between lenders and investors, on one side, and issuers on the other side, about the
creditworthiness of companies or countries. Ratings tend to be sticky, lagging
markets, and overreact when they do change. In making their ratings, CRAs analyse
public and non-public financial and accounting data as well as information about
economic and political factors that may affect the ability and willingness of a
government or firms to meet their obligations in a timely manner. Promotion of
competition may require policy action at national and international level to
encourage the establishment of new agencies and to channel business generated by
new regulatory requirements in their direction.
M Jayadev (2008), this paper presents an analysis of the current status of internal
credit rating practices of Indian banks. The survey reveals that the components of
internal rating systems, their architecture, and operation differ substantially across
banks. The range of grades and risks associated with each grade vary across banks
analysed. This implies that lending decisions may vary across banks. There are
differences among the rating systems of various banks. This paper presents a set of
actions to improve the quality of internal rating models of Indian banks.
Charles W. Calomiris and Joseph R. Mason(2009), in this paper the Policymakers
and academic critics have identified “conflicts of interest” in the rating industry that
have led to poor ratings quality, harming investors who purchase over- or miss-rated
investments. Without appropriate regulatory interventions the perverse incentives
that allow entrenched credit rating agencies and corporate governance rating
agencies to dominate their respective industries will persist. Because of the market
power in existing industry alliances, competitive pressures alone will not be
sufficient to overturn these bad equilibrium. In Section II, they reviewed on
theoretical arguments about the sources of low-quality ratings, placing corporate
governance ratings and credit ratings within the broader context of the literature on
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ratings quality problems and “conflicts of interest” in the production of ratings. In
Section III, described the empirical evidence on the corporate governance rating
industry. Section IV considers appropriate regulatory interventions that could help to
restore good equilibrium in credit ratings and corporate governance ratings.
Martha Lagace (2009), the purpose of this paper was to find out the impact of
competition o n the ratings given by the credit rating agencies. Here the discussion is
made on why the users of ratings should exercise a little caution. Credit rating
agencies provide an assessment of the creditworthiness of a corporation or security,
based on the issuer's quality of assets, existing liabilities, borrowing history, and
overall business performance. Investors depend on the ratings to predict the
likelihood of default on financial obligations and the expected repayment in the event
of default. The study shows that when competition is increased among credit rating
agencies, the result was less accurate ratings.
Ministry of Finance Capital Markets Division (2009), This Report is in response
to the direction given by the High Level Coordination Committee on Financial
Markets to reflect on the inter regulatory issues emanating from the activities of
Credit Rating Agencies. Accordingly, the Committee was set up with representation
from all the financial sector regulators. The High level Coordination Committee on
Financial Matters (HLCCFM) in its meeting decided that ―the legal and policy
framework for regulating the activities of CRAs should be revisited in order to take a
larger view of the entire policy with respect to banking, insurance and securities
market. 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.
Piero Cinquegrana (2009), this policy brief argues that credit ratings are a quasi-
public good, and investors and financial markets regulators need an independent
assessment of the credit-worthiness of an issuing entity because of information
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asymmetries and principal agent problems. In light of the high volatility of market-
based measures and the failure of internal risk management, private CRAs are best fit
for purpose. However, natural barriers of entry in the rating business and conflicts of
interest have led to an inflation of ratings and deterioration in their quality. It would
thus appear that CRAs need closer supervision. While certainly burdensome and
likely to raise barriers of entry, the European Commission's proposal seems to be the
most sensible solution given the circumstances. Market discipline based on
competition and transparency as envisioned in the US will lead to a weak
surveillance regime, while leaving the regulatory license intact.
Crisil’s Press release (2010), this Press Release is transmitted to show that how the
damage to the micro finance institutions can affect the rural poor. CRISIL has placed
its outstanding ratings on the debt instruments of 12 microfinance institutions (MFIs)
on ‘Rating Watch with Negative Implications’. The paper shows that how the
implementation of the Andhra Pradesh (Andhra) ordinance has triggered a chain of
events that can permanently damage the business models of MFIs, by impairing their
growth, asset quality, profitability, and capital-raising ability.
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CHAPTER – 3
RESEARCH METHODOLOGY
The lifeblood of business and commerce in the modern world is information. The
ability to gather, analyze, evaluate, present and utilize information is therefore is a vital
skill for the manager of today.
It is well known fact that the most important step in research process is to the
problems choose for investigation, because a problem well defined is half solved. A
questionnaire was designed major emphasis of which was gathering new ideas or insight
so as to determine and bind out solution to the problems.
3.1 Sample Design
For carrying out any research or study on any subject it is very difficult to cover
even 10% of the total population. Therefore the sample size has to be decided for a
meaningful conclusion. For designing the sample size, it was thought proper to cover a
very small percentage of population in various age groups. The method used for sample
technique was non-probability convenience sampling method. This method is used
because it is known previously as to whether a particular person will be asked to fill the
questionnaire. Convenient sampling is used because only those people will be asked to
fill the questionnaires that were easily accessible and available to the researcher.
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3.2 Scaling technique The scaling technique is used to analyses the data collected from the survey. By scaling
we mean the process of assigning numbers to objects or observation, the levels of
measurement being a function of the rules under which the numbers are assigned.
The research study is based on the close-ended questionnaire. The analysis is to be done
on the basis of non-comparative scaling. In non-comparative scaling, respondents need to
evaluate a single object. Their evaluation is independent of the other object which the
researcher is studying. The scale used is Likert Scale and Guttmann Scaling.
3.3 Tools and Techniques
This research will adopt a Descriptive Research Design, which involves
answering questions that start with words like which, how, what etc. The data collection
in a descriptive research involves structured questionnaires, with a question having a
number of options to choose from. The data collected is usually expected to yield a
specific characteristic of a specific population. Gill & Johnson (1991), “A descriptive
survey is concerned primarily with addressing the particular characteristic of a specific
population of subjects, either at a fixed point in time or at varying times for comparative
purposes”. Furthermore, the collected data is presented in the form of bar codes or charts,
and interpreted to form the conclusions.
The research will be carried out in the form of structured as well as unstructured
questionnaires. The research study will be based on the close-ended questionnaire. The
unstructured questionnaire will be a part of the qualitative research, which is expected to
yield some common factors that consumers report to have affected them. Out of these
factors, the most prominent factors will be chosen, and a quantitative research will be
conducted using those factors. The quantitative survey results will be in the form of a
major factors which has been recorded to have affected the investment decisions of the
investors and brokers.
3.4 Data Collection
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To achieve at some fruitful results the task of data collection begins after a
research problem has been defined. Being a Descriptive Research, the researcher will
adopt the Survey Strategy to collect primary data, keeping in view the emphasis on
description of consumer behavior involved. The survey strategy allows the researcher to
answer questions like what, who, how much etc. which is why it is most appropriate for
this research, keeping in view the research question already mentioned. There are two
ways to collect the data, these are: -
Primary data
Secondary data
Primary Data: - The primary data are those which are collected afresh and for the
first, and thus happened to be original in character. The primary data is collected from
survey and by making the use of questionnaires.
Secondary Data: - The secondary data on the other hand, are those which have
already been collected by someone else and which have already been passed through the
statistical process. The secondary data collected from the annual reports, pamphlets,
magazines, broachers, newspapers etc.
Data is collected from primary sources including investors and brokers:
Population: - All Investors, All Brokers & Sub Brokers in northern India.
Samples:- Some Investors, Brokers & Sub Brokers are randomly chosen from
the population
Sample Size :- 60
Sampling Procedure: -Non-probability convenience sampling.
3.5Data Analysis
The data will be analyzed in two ways- individual analysis of responses to
different questions and comparative analysis using co-relation between responses of
different questions. The tool used for the comparative data analysis is Pearson Co-
relation and is calculated with help of SPSS software. The tool is helpful in finding the
validity and reliability of the data. Also helps in finding the co-relation and regression
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analysis. These numbers measure the strength and direction of the linear relationship
between the two variables. The correlation coefficient can range from -1 to +1, with -1
indicating a perfect negative correlation, +1 indicating a perfect positive correlation, and
0 indicating no correlation at all.
CHAPTER – 4
RESULTS AND DISCUSSIONSThe aim of this section is to analyze and assess the data obtained through primary
research (Qualitative & Quantitative). This section will establish the accomplishment of
research objectives, through data analysis. Besides, this section will also throw light on
other findings, which were achieved through this research. The data was collected
through qualitative and quantitative surveys, both of which were self-administered ones.
1.1 Individual Data Analysis and Interpretation 1. How many credit rating agencies listed below are you aware of?
Table 4.1 Responses to awareness of Credit rating AgenciesMultiple Responses Percentage
CRISIL 41 68.33CARE 16 26.66ICRA 17 28.33
Duff & Phelps 5 83.33
Figure 4.1 Awareness about different Credit Rating Agencies
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From fig. 4.1 we can see that most of the people are aware of CRISIL. But the awareness and knowledge about other CRAs is less among the investors as compared to CARE, ICRA and Duff &Phelps.
2. Are you aware of credit rating agencies with their rating symbols?
Table 4.2 Responses to Awareness about Credit Rating Agencies SymbolsYes 43No 17
Figure 4.2 Awareness about Credit Rating Symbols
The majority of the investors can recognize credit rating agency from its symbols.
As shown in the table and chart i.e.71.33% investors says yes. While only 17investors
says no.
3. Do you trust credit rating agencies?Table 4.3 Responses to trust on Credit Rating Agencies
Yes 46No 14
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Figure 4.3 Trust on Credit Rating Agencies
The majority of the investors and brokers have trust on credit rating agency i.e. 76.67% investors says they trust on credit rating and 23.33% investors says they don’t have trust on credit rating.
4. In which of these securities you prefer to invest your money?Table 4.4 Responses to Preferences of investment
Multiple Responses PercentageShares 48 80Debentures 9 15Bonds 11 18.33Government Securities 43 71.66
Figure 4.4 Preferences in Investment
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The above table and chart shows that 80 per cent of respondents invest in shares
while 71.66 per cent of respondents invest in debenture frequently and rest invest in
bonds.
5. How occasionally do you invest in shares and debentures?Table 4.5 Responses to frequency of investment in shares and debentures
Very Frequently 44Frequently 9Rarely 7
Figure 4.5 Frequency of Investment in shares and debentures
The above table and chart shows that 73.33% investors invest in share and debenture
frequently while 15% respondents invest in share and debenture frequently and rest are
partly and not invest in share and debentures.
6. In which of these financial Institutions you prefer to invest your money?Table 4.6 Responses to preference of investment in financial institutions
Multiple Responses PercentageCommercial Banks 32 53.33Insurance Companies 23 38.33Mutual Funds 41 68.33Government Securities 24 40Other FI's 13 21.66
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Figure 4.6 Preferences of Investment in Various Financial InstitutionsThe above fig 4.6 shows that most of the respondents prefer to invest in mutual funds
i.e. 68.33% of respondents and not invest in share and debentures.
7. Does your investment decision get affected by rating given to the instrument by credit rating agencies?
Table 4.7 Responses to ratings influencing investment decisionYes 21No 39
Figure 4.7 Ratings influencing Investment Decisions
The majority of the investors do not made their investment decision on the rating
given to the instrument by credit rating agencies. As shown in fig.4.7 i.e.65% investor’s
says they do not make their investment based. On rating .While only 35% investors make
their investment based on rating.
8. Are you satisfied with the working and rating of Credit Rating Agencies in India?Table 4.8 Responses to Satisfaction with the working of Credit rating Agencies
Yes 21No 39
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Figure 4.8 Satisfaction with the working of Credit Rating Agencies
As per the results from fig. 4.8, only 21 investors are satisfied with the working of credit rating agencies. While 39said no.
9. Do you know anything about Multiple Credit Rating?Table 4.9 Responses to Multiple Credit Rating
Yes 25No 35
Figure 4.9 Multiple Credit Ratings
From fig. 4.9 we can see that, only 25respondents know about the Multiple Credit
Rating. While 35investors don’t know about Multiple Credit rating.
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10. Do you think Multiple Credit rating is boom to the capital market?Table 4.10 Responses to Multiple credit rating boom to capital market
Yes 14
No 46
Figure 4.10 MCR boom to Capital MarketOnly 34 investors think that Multiple Credit Rating is boom to capital market.
While 46said no.
11. Do you think Credit Rating Agencies prove to be an effective tool for risk management?
Table 4.11 Responses to Effectiveness of CRAs in risk managementYes 45No 15
Figure 4.11 Credit Rating Agencies effective tool for risk management
Only 45 investors have the opinion that credit rating agencies will prove to be an effective tool for risk management. While 15 investor’s said no.
12. Do you think that it is safe for small investor to depend upon the ratings provided by the Credit Rating Agencies?
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Table 4.12 Responses to effects of CRAs on Small InvestorsYes 18No 42
Figure 4.12 Effects of Credit Rating Agencies on Small Investors
The above table and figure shows that only 18 investor’s have the opinion that it
is safer for the small investors depending upon the rating given to the instrument by the
credit rating agencies. However, 42 investor’s said no that it is not safer for the small
investors.
13. Do you know any of these services provided by Credit Rating Agencies?Table 4.13 Responses to Credit rating Services
Multiple Responses PercentageCredit Rating Services 48 80Advisory Services 9 15Equity research 6 10Research and Information Services 22 36.66Info assistance to govt 19 31.66
Figure 4.13 Services provided by Credit Rating Agencies
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It is shown from the fig. 4.13 that only one service i.e. credit rating service is recognized by most of the respondents while they have full ignorance regarding others
14. Should the rating agencies monitor the issue already rated?Table 4.14 Responses to monitoring of already rated issues
Yes 46No 14
Figure 4.14 Monitoring of already rated issuesMajority of the investors i.e. 46 investors said that rating agencies should monitor
the issue already rated or not. While 14 said no.
15. Do you think a good rating given to an instrument can help it sail easily in the market?
Table 4.15 Responses to Help in sailing of instruments by CRAsYes 48No 12
Figure 4.15 Rating’s help in sail of an instrument in Market
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The majority of the respondents have the opinion that a good rating given to a instrument can help it’s easily sail in the capital market While 12 respondent said no, that this is not provide any help in it’s easily sail.
16. Does the introduction of Credit Rating Agencies prove conductive for capital market?
Table 4.16 Responses to CRA being conductive for capital marketYes 21No 39
Figure 4.16 Credit Rating Agencies – Conductive for capital Market
Only 21 respondents said that these ratings agencies have proved conductive for the
capital market, while 39 said no.
17. What are the main shortcomings of credit rating agencies in India?Table 4.17 Responses to Shortcomings of Credit rating Agencies
Multiple Responses PercentageConfusion created by various rating symbols 31 51.67%Rely only on information provided by issuer of the instrument 13
21.67%
Companies publishing only the higher rated securities 23 38.33%
Conflict between ratings given by two agencies 7 11.67%
Any, Other
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Figure 4.17 Shortcomings of Credit rating Agencies
We can see from the chart that most of the respondents get confused by rating symbols of various companies. Also, some of them think that the credit rating agencies publish only the higher rated securities.
One of the respondents says that a credit rating agency jacks up the share prices of certain companies.
18. What are the sources from where you get credit rating information?Table 4.18 Responses to sources of Credit rating Agencies
Multiple Responses PercentageNews Paper 42 70%Magazines 29 48.33%Web-sites 16 26.66%Personal Contacts 6 10%Other Sources 15 25%
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Figure 4.18 Sources of Credit Rating Agencies Information
Most of the respondents says that the sources of information regarding the credit
rating is are news papers (i.e. 70%) and magazines (48.33). While 26.6 % of the sample
also uses the web-sites to the information regarding credit agencies. Some Respondents
say that TV is also one of the sources of getting information about the ratings.
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4.2 Comparative Data Analysis and Interpretation
The software used for the comparative data analysis is SPSS. The tool is helpful
in finding the validity and reliability of the data. Also helps in finding the co-relation and
regression analysis. Here we have used Pearson’s Correlation to find out the relation
between various variables and to find out how much they affect each other.
1. Awareness of Credit rating Agencies with their Symbols and Trust on Credit
Rating Agencies
Table 4.19 Descriptive Statistics of Awareness and Trust
Mean Std.
DeviationN
Awareness about CRA symbols 1.717 0.454 60Trust on CRAs 1.233 0.427 60
Table 4.20 Correlation between Awareness and Trust
Awareness about
CRA symbolsAwareness about CRA symbols Pearson Correlation 1
Sig. (2-tailed) N 60
Trust on CRAs Pearson Correlation 0.172
Sig. (2-tailed) 0.189N 60
As we can see from the table 4.19 that more people are aware of CRAs with their
symbols but less people trust CRAs. This can be seen from the values of mean i.e. 1.717
and 1.233 of Awareness about CRAs with their symbols and Trust on CRAs respectively.
Also, from table 4.20 we observe that Pearson’s correlation coefficient of Awareness and
Trust is 0.172 which shows that they are not highly correlated i.e. it is not necessary that
people who are aware of CRAs with their symbols also trust the CRA ratings.
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2. Awareness and Investment Decision
Table 4.21 Descriptive Statistics of Awareness and Investment Decision
Mean Std.
DeviationN
Awareness about CRA symbols 1.717 0.454 60Investment Decision 1.717 0.454 60
Table 4.22 Correlation between Awareness and Investment Decision
Awareness about
CRA symbolsAwareness about CRA symbols Pearson Correlation 1
Sig. (2-tailed) N 60
Investment Decision Pearson Correlation 0.754**
Sig. (2-tailed) 0.000N 60
**. Correlation is significant at the 0.01 level (2-tailed).
As we can see from the table 4.21 that number of people who are aware of CRAs
with their symbols is same to the number of people whose Investment Decision get
affected by CRA ratings. Also, from table 4.22 we observe that Pearson’s correlation
coefficient of Awareness and Investment Decision is 0.754 which shows that they are
highly correlated i.e. investment decisions are affected positively with the awareness of
CRAs with their symbols. More the awareness among investors more their investment
decision will be affected.
3. Awareness and Satisfaction
Table 4.23 Descriptive Statistics of Awareness and Satisfaction
Mean Std.
DeviationN
Awareness about CRA symbols 1.717 0.454 60Satisfaction with the working of CRAs 1.633 0.486 60
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Table 4.24 Correlation between Awareness and Satisfaction
Awareness about
CRA symbolsAwareness about CRA symbols Pearson Correlation 1
Sig. (2-tailed) N 60
Satisfaction with the working of CRAs Pearson Correlation 0.596*
Sig. (2-tailed) 0.000N 60
*Correlation is significant at the 0.01 level (2-tailed).
As we can see from the table 4.23 that more number of people are aware of CRAs
with their symbols as compared to the number of people who are satisfied with the
working of CRAs. The difference is not very high, almost same i.e. 1.717 and 1.633
respectively. Also, from table 4.24 we observe that Pearson’s correlation coefficient of
Awareness and Satisfaction is 0.596 which shows that they are positively correlated i.e.
More the awareness among investors more are they satisfied.
4. Awareness and Risk Management
Table 4.25 Descriptive Statistics of Awareness and Risk Management
Mean Std.
DeviationN
Awareness about CRA symbols 1.717 0.454 60Risk Management 1.250 0.437 60
Table 4.26 Correlation between Awareness and Risk Management
Awareness about
CRA symbolsAwareness about CRA symbols Pearson Correlation 1
Sig. (2-tailed) N 60
Risk Management Pearson Correlation 0.107
Sig. (2-tailed) 0.417N 60
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Here we can see from table 4.25 that there are more investors who are aware of
CRAs with their symbols than they think it will act as an effective tool for risk
management. Also, looking from table 4.26 the value of Pearson’s Co-relation comes out
to be 0.107 only which shows that our variables were not strongly correlated. This shows
that awareness does influence much the risk management.
5. Awareness and Safety of Small Investors
Table 4.27 Descriptive Statistics of Awareness and Safety
Mean Std.
DeviationN
Awareness about CRA symbols 1.717 0.454 60Safety for Small Investors 1.700 0.462 60
Table 4.28 Correlation between Awareness and Safety
Awareness about
CRA symbolsAwareness about CRA symbols Pearson Correlation 1
Sig. (2-tailed) N 60
Safety for Small Investors Pearson Correlation 0.718**
Sig. (2-tailed) 0.000N 60
**. Correlation is significant at the 0.01 level (2-tailed).
As we can see from the table 4.27 that number of people who are aware of CRAs
with their symbols is same to the number of people think it safe for small investors to
depend on the ratings given by CRAs. Also, from table4.28 we observe that Pearson’s
correlation coefficient of Awareness and Investment Decision is 0.718 which shows that
they are highly correlated.
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6. Awareness and Conductivity
Table 4.29 Descriptive Statistics of Awareness and Conductivity
Mean Std.
Deviation NAwareness about CRA symbols 1.717 0.454 60Conductivity for capital market 1.683 0.469 60
Table 4.30 Correlation between Awareness and Conductivity
Awareness about
CRA symbolsAwareness about CRA symbols Pearson Correlation 1
Sig. (2-tailed) N 60
Conductivity for capital market Pearson Correlation 0.049
Sig. (2-tailed) 0.710N 60
As we can see from the table 4.29 that number of people who are aware of CRAs
with their symbols is same to the number of people whose Investment Decision gets
affected by CRA ratings. Also, from table 4.30 we observe that Pearson’s correlation
coefficient of Awareness and Investment Decision is 0.049 which shows that they are not
correlated i.e. both are totally different. They do not depend on each other, Awareness
about CRAs and CRAs proved to be conductive for market are almost independent of
each other.
7. Trust and Investment Decision
Table 4.31 Descriptive Statistics of Trust and Investment decisionMean Std. Deviation N
Trust on CRAs 1.233 0.427 60Investment Decision 1.717 0.454 60
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Table 4.32 Correlation between Trust and Investment Decision
Trust on CRAs
Trust on CRAs Pearson Correlation 1
Sig. (2-tailed) N 60
Investment Decision Pearson Correlation 0.347**
Sig. (2-tailed) 0.007N 60
**. Correlation is significant at the 0.01 level (2-tailed).
This means that there is a weak relationship between the two variables. This
means that changes in one variable are not correlated with changes in the second variable.
From table 4.32 we observe that Pearson’s correlation coefficient of Trust on CRAs and
Investment Decision is 0.347 which shows that they are very less correlated i.e. they do
not depend on each other, Trust on CRAs and Investment decisions depends less on each
other. But looking at the significance level which is less than 0.05 we can say that those
who trust CRAs also depends on CRAs to make their decisions regarding investment.
8. Trust and Satisfaction
Table 4.33 Descriptive Statistics of Trust and Satisfaction
Mean Std.
DeviationN
Trust on CRAs 1.233 0.427 60Satisfaction with the working of CRAs 1.633 0.486 60
Table 4.34 Correlation between Trust and Satisfaction
Trust on CRAs
Trust on CRAs Pearson Correlation 1
Sig. (2-tailed) N 60
Satisfaction with the working of CRAs Pearson Correlation 0.338**
Sig. (2-tailed) 0.008N 60
**. Correlation is significant at the 0.01 level (2-tailed).
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This means that there is a weak relationship between the two variables. This
means that changes in one variable are not correlated with changes in the second variable.
From table 4.34 we observe that Pearson’s correlation coefficient of Trust on CRAs and
Satisfaction with the working of CRAs is 0.338 which shows that they are very less
correlated i.e. they do not depend on each other, Trust on CRAs and Satisfaction with the
working of CRAs depends less on each other. But looking at the significance level which
is less than 0.05 we can say that those who trust CRAs are also satisfied with the working
of CRAs.
9. Trust and Risk Management
Table 4.35 Descriptive Statistics of Trust and Risk Management
Mean Std. Deviation N
Trust on CRAs 1.233 0.427 60Risk Management 1.250 0.437 60
Table 4.36 Correlation between Trust and Risk Management
Trust on CRAs
Trust on CRAs Pearson Correlation 1
Sig. (2-tailed) N 60
Risk Management Pearson Correlation 0.956**
Sig. (2-tailed) 0.000N 60
**. Correlation is significant at the 0.01 level (2-tailed).
Almost same number of respondents trusts CRAs and thinks it an effective tool
for risk management. By applying the Pearson’s co-relation, we analyzed that it is the
trust on the Credit Rating Agencies that proves them an effective tool for risk
management. In our study, the value is 0.956 at a significant level of 0.01.
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10. Trust and safety of small Investors
Table 4.37 Descriptive Statistics of Trust and Safety
Mean Std.
DeviationN
Trust on CRAs 1.233 0.427 60Safety for Small Investors 1.700 0.462 60
Table 4.38 Correlation between Trust and Safety
Trust on CRAs
Trust on CRAs Pearson Correlation 1
Sig. (2-tailed) N 60
Safety for Small Investors Pearson Correlation 0.275*
Sig. (2-tailed) 0.033N 60
*. Correlation is significant at the 0.05 level (2-tailed).
The result shows that there is a weak relationship between two variables. This
means that changes in one variable are not correlated with changes in the second variable.
From table 4.38 we observe that Pearson’s correlation coefficient of Trust on CRAs and
Safety for Small Investors is 0.275 which shows that they are very less correlated i.e. they
do not depend on each other, Trust on CRAs and Safety for Small Investors depends less
on each other. But looking at the significance level which is less than 0.05 we can say
that those who trust CRAs are also think it safe for small Investors to depend on the
ratings given by CRAs.
11. Investment Decision and satisfaction
Table 4.39 Descriptive Statistics of Investment Decision and Satisfaction
Mean Std.
DeviationN
Investment Decision 1.717 0.454 60Satisfaction with the working of CRAs 1.633 0.486 60
Table 4.40 Correlation between Investment Decision and Satisfaction
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Investment Decision
Investment Decision Pearson Correlation 1
Sig. (2-tailed) N 60
Satisfaction with the working of CRAs Pearson Correlation 0.519**
Sig. (2-tailed) 0.000N 60
**. Correlation is significant at the 0.01 level (2-tailed).
As per table 4.40 we can see that there is a positive relation between investment
Decision and satisfaction with the working of CRAs. Significance level is below 0.05
which shows that the investment decision of investors depends on their satisfaction with
the working of CRAs.
12. Investment Decision and Risk Management
Table 4.41 Descriptive Statistics of Investment Decision and Risk management
Mean Std.
DeviationN
Investment Decision 1.717 0.454 60Risk Management 1.250 0.437 60
Table 4.42 Correlation between Investment Decision and Risk Management
Investment Decision
Investment Decision Pearson Correlation 1
Sig. (2-tailed) N 60
Risk Management Pearson Correlation 0.278*
Sig. (2-tailed) 0.032N 60
*. Correlation is significant at the 0.05 level (2-tailed).
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The results from table 4.42 show that there is a positive relation between
Investment Decision and Risk Management. Significance level is below 0.05 which
shows that the investment decision of those investors depends on their perception that
CRAs prove to be an effective tool for risk management.
13. Investment Decision and safety of Small Investors
Table 4.43 Descriptive Statistics of Investment Decision and SafetyMean Std.
DeviationN
Investment Decision 1.717 0.454 60Safety for Small Investors 1.700 0.462 60
Table 4.44 Correlation Investment Decision and Safety
Investment Decision
Investment Decision Pearson Correlation 1
Sig. (2-tailed) N 60
Safety for Small Investors Pearson Correlation 0.799**
Sig. (2-tailed) 0.000N 60
**. Correlation is significant at the 0.01 level (2-tailed).
As we can see from the table 4.43 that number of people whose investment
decision gets affected CRAs ratings is same to the number of people think it safe for
small investors to depend on the ratings given by CRAs. Also, from table 4.44 we
observe that Pearson’s correlation coefficient of Investment Decision and safety for small
investors is 0.799 which shows that they are highly correlated. Also, as the significance
level is below 0.05 which shows that the investors whose investment decision depends on
CRAs also thinks it safe for small investors to depend on CRA ratings.
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14. Investment Decision and Conductivity
Table 4.45 Descriptive Statistics of Investment Decision and Conductivity
Mean Std.
DeviationN
Investment Decision 1.717 0.454 60Conductivity for capital market 1.683 0.469 60
Table 4.46 Correlation between Investment Decision and Conductivity
Investment Decision
Investment Decision Pearson Correlation 1
Sig. (2-tailed) N 60
Conductivity for capital market Pearson Correlation 0.049
Sig. (2-tailed) 0.710N 60
Looking at the results from table 4.46 we can see there exist a weak relationship
between your two variables. This means that changes in one variable are not correlated
with changes in the second variable. Those investors whose investment decision gets
affected by CRA ratings don’t think CRA Ratings proven to be conductive for capital
market.
15. Satisfaction and Risk Management
Table 4.47 Descriptive Statistics of Satisfaction and Risk Management
Mean Std.
DeviationN
Satisfaction with the working of CRAs 1.633 0.486 60Risk Management 1.250 0.437 60
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Table 4.48 Correlation between Satisfaction and Risk Management
Satisfaction with the
working of CRAs Satisfaction with the working of CRAs Pearson Correlation 1
Sig. (2-tailed) N 60
Risk Management Pearson Correlation 0.280*
Sig. (2-tailed) 0.031N 60
*. Correlation is significant at the 0.05 level (2-tailed).
The result of table 4.48 shows that there is a positive relation between Satisfaction
with the working of CRAs and Risk Management. Significance level is below 0.05 which
shows that those investors who are satisfied with the working of CRAs also thinks CRAs
to be an effective tool for risk management.
16. Satisfaction and Safety of Small Investors
Table 4.49 Descriptive Statistics of Satisfaction and Safety
Mean Std.
DeviationN
Satisfaction with the working of CRAs 1.633 0.486 60Safety for Small Investors 1.700 0.462 60
Table 4.50 Correlation between Satisfaction and Safety
Satisfaction with the
working of CRAs Satisfaction with the working of CRAs Pearson Correlation 1 Sig. (2-tailed) N 60Safety for Small Investors Pearson Correlation 0.483** Sig. (2-tailed) 0.000 N 60**. Correlation is significant at the 0.01 level (2-tailed).
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From that table 4.50, we can see that the value of Pearson’s Correlation is 0.483
that shows there is a positive relation between Satisfaction with the working of CRAs and
safety for small investors. Significance level is below 0.05 which shows that the
investment decision of investors depends on their satisfaction with the working of CRAs.
17. Risk Management and Safety of Small Investors
Table 4.51 Descriptive Statistics of Risk management and Safety
Mean Std. Deviation N
Risk Management 1.250 0.437 60Safety for Small Investors 1.700 0.462 60
Table 4.52 Correlation between Risk management and Safety
Risk Management
Risk Management Pearson Correlation 1
Sig. (2-tailed) N 60
Safety for Small Investors Pearson Correlation 0.210
Sig. (2-tailed) 0.107N 60
As per the results of co-relation from table 4.52 value of co-relation is very low.
This means that as one variable increases in value, the second variable also increase in
value. Here risk management and safety for small investors are positively correlated.
18. Risk management and Conductivity
Table 4.53 Descriptive Statistics of Risk management and Conductivity
Mean Std. Deviation N
Risk Management 1.250 0.437 60Conductivity for capital market 1.683 0.469 60
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Table 4.54 Correlation between Risk management and Conductivity
Risk Management
Risk Management Pearson Correlation 1
Sig. (2-tailed) N 60
Conductivity for capital market Pearson Correlation 0.145
Sig. (2-tailed) 0.270N 60
From the results of table 4.54 it can be easily seen that there is a weak relationship
between two variables. This means that changes in one variable are not correlated with
changes in the second variable. Here we can see that it is not necessary that if an investor
or broker thinks CRA to be an effective tool for risk management then he also thinks
CRAs to be conductive for capital market. The value of Pearson’s Co-relation comes out
to be 0.172 only which shows that our variables were not strongly correlated.
4.3 Observations and Findings
a. Pearson Correlation - These numbers measure the strength and direction of the linear
relationship between the two variables. The correlation coefficient can range from -1 to
+1, with -1 indicating a perfect negative correlation, +1 indicating a perfect positive
correlation, and 0 indicating no correlation at all.
When Pearson’s r is close to 1…By applying the Pearson’s co-relation, from table 4.22 we analyzed that awareness about
credit rating symbols directly affects the Investment decisions. In our study, the value is
0.754 at a significant level of 0.01. Also, it comes out of the study that the awareness
about the credit rating agencies directly affects the safety of small investors. This is clear
from the value of Pearson’s co-relation i.e. 0.718.
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Another interesting fact that came out of the study from table 4.54 is that it is the trust on
the Credit Rating Agencies that proves them an effective tool for risk management not
just the awareness about the Credit Rating Agencies ( value of Pearson co-relation is
0.956). For this reason, we can conclude that there is strong relation between risk
management and trust on CRAs.
When Pearson’s r is close to 0…
This means that there is a weak relationship between your two variables. This means that
changes in one variable are not correlated with changes in the second variable. Here we
can see that it is not necessary that if an investor or broker is aware about CRA then he
also trusts on it. We can see table 4.22, the value of Pearson’s Co-relation comes out to
be 0.172 only which shows that our variables were not strongly correlated. Similar is the
case with Awareness and Risk management. But the relation is somewhat weaker as the
value comes out just 0.107(From table 4.26). The smallest value comes out to be 0.049
between the Awareness about CRAs and CRAs contribution for Capital market to be
conductive.
When Pearson’s r is positive (+)…
This means that as one variable increases in value, the second variable also increase in
value. Similarly, as one variable decreases in value, the second variable also decreases in
value. This is called a positive correlation. In our example, our Pearson’s r value of
Awareness about CRAs comes out to be positive with Trust on CRAs (0.172), Investment
Decisions (0.754), Risk Management (0.107) and Safety for Small Investors (0.718) was
positive (From tables 4.2, 4.4, 4.8 and 4.10 respectively). We know this value is positive
because SPSS did not put a negative sign in front of it. So, positive is the default.
When Pearson’s r is negative (-)…
This means that as one variable increases in value, the second variable decreases in value.
This is called a negative correlation. In our example, Pearson’s r value is negative (-
0.333) between the Awareness about CRAs and how good rating by CRA can help the
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instrument in its sail easily in the market. This means that Awareness about CRAs does
not helps the instruments in their sail in the capital market.
Sig. (2-tailed) - This is the p-value associated with the correlation. The footnote under
the correlation table explains what the single and double asterisks signify. This value will
tell you if there is a statistically significant correlation between your two variables.
When the Sig (2-Tailed) value is greater than .05…
You can conclude that there is no statistically significant correlation between your two
variables. That means, increases or decreases in one variable do not significantly relate to
increases or decreases in your second variable.
If the Sig (2-Tailed) value is less than or equal to .05…
We can conclude that there is a statistically significant correlation between your two
variables. That means, increases or decreases in one variable do significantly relate to
increases or decreases in your second variable. There is a significant correlation between
the awareness about CRAs and their contribution in the sail of instruments in the capital
market. Also, the Trust on the CRAs is significantly related to the Investment Decisions
and helpful in providing a sense of safety to small investors.
c. N - This is number of cases that were used in the correlation. Because we have no
missing data in this data set, all correlations were based on all 60 cases in the data set.
However, if some variables had missing values, the N's would be different for the
different correlations.
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CHAPTER – 5
SUMMARY AND CONCLUSION
This section will review the results and findings of this research, and present the
conclusions based on the quantitative results obtained. The conclusions will be presented
on the basis of research objectives and their findings. The study is limited to a sample
size of 45 investors which include all students, institutional investors and retail investors
etc. and 15 brokers and sub-brokers.
5.1 Data Collection: The research is done with the help of both Primary data and
Secondary data. The primary sources include students, brokers & sub-brokers & retail
investors and the secondary from internet site, newspapers, journals and books).
5.2 Analysis: The research study is based on the close-ended questionnaire. The analysis
is to be done on the basis of non-comparative scaling. In non-comparative scaling,
respondents need to evaluate a single object. Their evaluation is independent of the other
object which the researcher is studying. The scale used is Guttman Scaling.
5.3 Conclusion
From the project it is clear today most of the investors are aware of the Credit
rating Agencies. The investor has the knowledge and awareness regarding credit rating
agencies. They are not fully aware of all kind of services provided by the credit rating
agencies and their role in debt and equity ratings. As the study shows that 68.33% of the
respondents know about the CRISIL and out of 60 respondents 10% did not know
anything about the credit rating agencies working in India.
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The investors know about Credit Rating Agencies but are not able to differentiate
between them from their symbols. This can be seen easily from the fig4.2 that only 17 of
the samples were able to differentiate the CRAs from their symbols. Despite of this about
43 of the respondents trust the CRA ratings.
The majority of the investors do not made their investment decision on the rating
given to the instrument by credit rating agencies. As shown in the fig.4.7.i.e. 39. While
only 21 investors make their investment decisions based on rating. We can see from the
fig.4.10 that 14 said yes, it helps in booming the capital market, while 46 of investors
think that it does not helps in booming the capital market.
As per fig. 4.11, 45 of the investors have the opinion that credit rating agencies
will prove to be an effective tool for risk management, while 15 said no. However, from
fig 4.12 we can see that 42 said no that it is not safer for the small investors. Only one
service i.e. credit rating service is recognized by respondents while the others are not
recognized well by the respondents. After analyzing, the information given by the process
in the questionnaire it can be concluded that they all invest in Shares and Debentures and
also in government securities agencies have the knowledge of the Credit Rating Agencies
but unable to differentiate between various credit rating. At the time of rating any
investment decision in any debt instrument, only few investors take put consideration of
the rating given to the instrument by the different rating agencies. The respondents who
have the knowledge about Credit Rating Agencies they also have the knowledge
“Multiple Credit Rating”. Most of the Brokers only knows what this Multiple Credit
Rating but they do not know whether those are helpful in booming the capital market or
not. Most of the Brokers have or opinion that if the rating any country goes up or down it
has a long impact on the country’s economy and the stock market.
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5.4 Scope of the Study
This study is made to find out the impacts of the Credit Rating Agencies on the
investor’s decision and to find out awareness and trustworthiness of Credit Rating
Agencies amongst the Investors and Brokers. This study can help investor’s to get an
introduction of the various credit rating agencies in India and to study their credit rating
symbols. This study can help the issuers of the debt instrument to price their issues
correctly and to reach out to new investors.
5.5 Suggestions and Recommendations
There is a need for a framework to be agreed upon by all CRAs and regulators to
have a standardized and operational definition of default.
For a market in India, where financial literacy is at a nascent stage, multiple rating
symbols could confuse the investing community. It could also result in ‘rating
inflation’ and foster unhealthy competition. Rating scales, brought under
comparable bands, need to be hosted on the websites of SEBI, RBI, IRDA and
PFRDA and also on the sites of investors’ associations.
Some CRAs have a clear-cut policy of staying away completely from services
other than credit rating. This is a healthy sign. Yet, some other agencies continue
to offer services other than ratings. It is to be ensured that the registered CRA, as
a corporate entity, must not engage in any services other than ratings.
In the interest of unbiased judgment, it is necessary to constitute an Appeals
Committee that is different from the one that was involved in the initial rating
exercises.
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The presence of External Committee Members brings with it a whole baggage of
conflict of interest. Some CRAs have demonstrated that it is possible to develop
the expertise either with full time employees from the domestic CRAs or in
collaboration with the overseas CRAs. Alternately, External Committee members
could be deployed for providing inputs, leaving the final ratings to an Internal
Committee.
Issuers attempt to seek informal ratings from various CRAs and pass the final
rating mandate to the agency that could potentially offer the highest rating. To
curb this unhealthy practice, it is necessary to come to a stage where all ratings,
including unaccepted ratings, are published.
Along the lines of the compulsory Internal Audit for Stock Brokers, it is found
necessary to stipulate an Operational Audit to ascertain that the rating processes
leave a documentary trail. This could cover details of site inspections,
management meetings, rating committee meetings, dissent notes, surveillance and
monitoring schedules, minutes of the appeal process. It addresses the basic issue
of good housekeeping and could be performed twice in a year. Some CRAs have
taken the initiative to appoint a person with the task of Quality Control, and he is
involved in all rating exercises.
Public Education on Usage of Ratings: There is a danger that ratings may be
accepted blindly without a self-check or giving due importance to the time gap
between two review dates. Ratings are not to be construed as a guarantee. This is
true of all intermediaries: Merchant Bankers, Bankers, and Mutual Funds etc – no
one can provide a guarantee. Ratings must be one of the inputs in the decision
making process. Of course, this does not absolve the responsibility of the CRAs
for negligence. There is also the practice of issuers using ratings for marketing
purposes – exhibited on all their business literature and office stationery.
There could be information gaps that arise due to factors beyond anybody’s
control. In line with the Risk Factors highlighted on various products, CRAs also
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need to mention a disclaimer on all rating announcements as well as on the
website. This is to the minds of the reader (user) of Ratings to the fact that credit
related information is dynamic and subject to changes. Rating disclosures could
also mention the latest review date.
It is important for the members of the public to know that the relationship of the
CRA is at arm’s length with that of the rated entity, in letter and spirit. Hence,
shareholding ownership patterns of all CRAs need to be made public.
Policy on Unsolicited Ratings: There have been instances in USA where S&P
and Moody’s have deliberately given low ratings to various issues on an
unsolicited basis. This was used as a means of arm-twisting the issuers. This is a
classic instance of abuse of independence provided to CRAs. Unsolicited ratings
must not be permitted, in case the CRA community makes a representation to this
effect in the future.
Bad governance can contaminate financial statements, and hence annul the entire
credit rating exercise. It is sad to know that CRAs heavily depend on the audited
financial statements and do very little to gain the maximum from cross-
verification from formal and informal sources. While this is a lacuna on the part
of auditors and CRAs, much needs to be done on Corporate Governance, since a
governance code works only on paper. It is much easier and practical for the
Regulators rather than CRAs to enforce governance.
5.6 Limitations of the Study 1. The sample was collected using convenience-sampling techniques. As the result
may not give an exact representation of the population.
2. Shortage of time was reason for the incomprehensiveness.
3. The respondents may have not given the true and fair information. Therefore, the
result of the research is not cent per cent accurate.
4. Credit rating change infrequently.
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5. Sample size or no. of respondents is less which may not represent true result of
whole population.
6. Sometimes it happens that we take a wrong sample (Sampling error).
7. The perception of respondents cannot remain constant it always changes with
time.
8. There are always biases on the part of brokers and investors while filling up
questionnaire due to lack of interest.
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perceived risk: conceptualizations and models. European Journal of Marketing 33(1/2),
163-195.
Mehta VK and Prasad Narayan(2008), “Credit rating Agencies in India”,
www.egyankosh.ac.in/bitstream/123456789/25902/1/Unit13.pdf
Persaud D Avinash(2007), The Right and Wrong Way to Regulate Credit Rating
Agencies, Economic and Political Weekly, Vol. 42, No.42
Sowdeepti(2004), Rating volatility titled financial services rating agencies inducing
competition, Chartered Financial Analyst, Vol. X, Issue 1, p.49
Editor’s views Compulsory Rating Titled outlook a notch up, The Economic Times India
Mumbai bureau
Ministry of Finance, Capital market division, p17-18
Links and Websites
http://www.duffandphelps.com/aboutus/Pages/AboutDuffPhelps.aspx
http://www.brickworkratings.com/scale.html
www.icraindia.com/services/inves/sebi.htm, “SEBI Guidelines for Rating Agency”
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http://www.icra.com , Investment information and credit rating agency of India ltd
http://www.adbi.org/publications/ Qualitative and quantitative risk. Dated: 8/18/2004.
ANNEXUREQuestionnaire on Impact of Activities of CRAs on the
Investment DecisionPlease read the instructions below and answer all questions:
1. This information collected will be kept confidential and only
aggregated results will be presented in the research.
2. Please answer the questions by putting a tick mark on the relevant choice that best
reflects your opinion.
3. If for any reason you feel uncomfortable with answering some questions, simply
leave them blank. However, we would appreciate it if you answer all questions.
4. Try to answer as accurately as possible.
5. You can put a tick mark on more than one option also.
PART - 1
Basic InformationContact Name :Age : Contact No : Email :Occupation :Qualification :
PART – 2Please indicate your response to each question by ticking the relevant option. You can
mark more than one choice also.
1. How many credit rating agencies listed below are you aware of?a) CRISIL b) CARE c) ICRA d) Duff & Phelps.
2. Are you aware of credit rating agencies with their rating symbols?
a) Yes. b) No.
3. Do you trust credit rating agencies?
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a) Yes b) No
4. In which of these securities you prefer to invest your money?a) Shares. b) Debentures. c) Bonds. d) Government Securities.
5. How occasionally do you invest in shares and debentures?a) Very frequently. b) Frequently. c) Rarely.
6. In which of these financial Institutions you prefer to invest your money?a) Commercial Banks. b) Insurance Companies. c) Mutual Fundsd) Government Securities. e) Other FI’s.
7. Does your investment decision get affected by rating given to the instrument by credit rating agencies?a) Yes. b) No.
8. Are you satisfied with the working and rating of Credit Rating Agencies in India?a) Yes. b) No.
9. Do you know anything about Multiple Credit Rating?a) Yes. b) No.
10. Do you think Multiple Credit rating is boom to the capital market?a) Yes. b) No.
11. Do you think Credit Rating Agencies prove to be an effective tool for risk management?a) Yes. b) No.
12. Do you think that it is safe for small investor to depend upon the ratings provided by the Credit Rating Agencies?a) Yes. b) No.
13. Do you know any of these services provided by Credit Rating Agencies?a) Credit Rating Services. b) Advisory Services. c) Equity Research.d) Research and Information Services. e) Information Assistant to govt.
14. Should the rating agencies monitor the issue already rated?a) Yes. b) No.
15. Do you think a good rating given to an instrument can help it sail easily in the market?a) Yes. b) No.
16. Does the introduction of Credit Rating Agencies prove conductive for capital market?a) Yes. b) No.
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17. What are the main shortcomings of credit rating agencies in India?a) Confusion created by various rating symbols.b) Rely only on information provided by issuer of the instrument.c) Companies publishing only the higher rated securities.d) Conflict between ratings given by two agencies.e) Any, Other.
If, any other, specify.Ans:
18. What are the sources from where you get credit rating information?a) News Paper. b) Magazines. c) Web-sites d) Personal Contacts.e) Television f) Other Sources.
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