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Comprehensive Project
On
Role of Credit Rating Agencies in Investment
Decision
And
IPO Performance
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Role of Credit Rating Agencies in Investment Decision
And
IPO Performance
A Project Report Submitted in Partial Fulfilment of award of MBA Degree
Project Guide
Prof. Shweta Mehta
Submitted
Hitesh Rupareliya-86
Soni Lalit - 100
S.K. PATEL INSTITUTE OF MANAGEMENT & COMPUTER STUDIES
Gandhinagar, India
February - 2010
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CERTIFICATE
This is to certify that Mr. Lalit Soni and Mr. Hitesh Rupareliya of S.K.
Patel Institute Of Management & Computer Studies, Gandhinagar have
submitted their Social Project titled Role of Credit Rating Agencies In
Investment Decision and IPO Performance in the year 2010-11 in partial
fulfilment of Kadi Sarva Vishwavidyalaya requirements for the award of the
title ofMaster of Business Administration.
Prof. Sonu V. Gupta Prof. Prakash M. Chawla Prof. Shweta Mehta
Director Coordinator Grand Project Guide
Date:
DECLARATION
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We, hereby, declare that the Social Project titled, Role of Credit Rating
Agencies and IPO Performance is original of the best of our knowledge and
has not been published elsewhere. This is for the purpose of partial fulfilment of
Kadi Sarva Vishawavidyalaya requirements for the award of the title ofMaster
of Business Administration, only.
Students Names Signature
Hitesh Rupareliya - 86
Soni Lalit - 105
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Acknowledgements
If words are considered to be signs of gratitude then let these words Convey thevery same our sincere gratitude to S.K.Patel Institute of Management &
Computer Applications for providing us an opportunity to prepare this project
to the best of our abilities.
We also thank Prof. Shweta Mehta, S. K. Patel Institute of management,
Gandhinagar, who has sincerely supported us with the valuable insights into the
completion of this project. We also thank to Prof. Sonu Gupta (Director) and
Prof. Prakash Chawla (H.O.D) of SKPIMC, they have given us an opportunity
to work in a corporate world.
We are grateful to all faculty members of S. K. Patel Institute of management,
Gandhinagar, and our friends who have helped us in the successful completion
of this project.
We also thank to our parents and last but not least the
GOD
Executive Summary
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In todays scenario the financial market is very fluctuate and risky. And number
of scams is coming day by day. So it is very difficult to know that which
company performing well or not and about the management and growth.
Research was carried out to find that Credit Rating Agencies give rate to the
equity and IPO according to the fundamentals of companies but what is the
behaviour of the investors towards the rate whether they are considering the rate
or not and how much risk are they taking. The performance of IPO on the basis
of their return.
This study suggests that fifty percentage investors are not considering the rate
because investors are not aware about the procedure of the CRA and they dont
trust because of the certain financial scams. There is less awareness of the rating.
The performance of the initial public offers return on the basis of listing price
and found that return on the long term is higher than the short term. And nine out
of thirty three listed securities during the six months listed price is lower than the
offer price in spite of good rating.
Through this report we were also able to understand and learnt, what is CRA and
its working, process and criteria and the risk related to credit rate and awareness
among investors and the return of the public offer is beneficial if we hold for
long period.
Table of Content
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Chapter No. Title Page No.
Certificate
Declaration
Acknowledgement
Executive Summery
Chapter-1 Introduction 9
Chapter-2 Theoretical Aspects
What is Credit Rating?
Process of CRA Rating Related Products
And Activities
General Criteria of CRA
Credit Rating Symbols
Benefits
Initial Public Offer
Criteria for IPO
11
Chapter-3 Industry Profile
CRISIL
ICRA
CARE
FITCH
BRICKWORKS
24
Chapter-4 Industry Analysis
Credit Rating Industry
Life Cycle
PEST-G analysis
a) Political factors
b) Economic factors
28
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c) Social factors, and
d) Technological factors.
e) Global factors
Five Force Porters ModeAnalysis
Chapter-5 Research Methodology
Objectives
Scope
Research Design
Statistical tools
Limitations of the project
47
Chapter-6 Research or Analysis
Data Analysis of
Questionnaire
HYPOTHESIS Analysis
a) Age & rating consider
by investor
b) Qualification & rating
consider by investor
c) Risk position & rating
consider by investor
d) Risk position & rating
consider by investor
IPO Performance
a) First Day performance
50
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b) Second Day performance
c) Six Months performance
Chapter-7 Findings 73
Chapter-8 Learning 74
Annexure
Bibliography
Chapter - 1
INTRODUCTION
The removal of strict regulatory framework in recent years has led to a spurt in
the number of companies borrowing directly from the capital markets. There
have been several instances in the recent past where the "fly-by-night operators
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have cheated unwary investors. In such a situation, it has become increasingly
difficult for an ordinary investor to distinguish between 'safe and good
investment opportunities' and 'unsafe and bad investments'. Investors find that a
borrower's size or names are no longer a sufficient guarantee of timely payment
of interest and principal. Investors perceive the need of an independent and
credible agency, which judges impartially and in a professional manner, the
credit quality of different companies and assist investors in making their
investment decisions. Credit Rating Agencies, by providing a simple system of
gradation of corporate debt instruments, assist lenders to form an opinion on
-the relative capacities of the borrowers to meet their obligations. These Credit
Rating Agencies, thus, assist and Institutions in Indiaform an integral part of a
broader programme of financial disintermediation and broadening and
deepening of the debt market.
The CRA give rate in spite of this rate there are number of cases happened
where a company having good rate but the scam came out like Satyam and
Enron, these companies had good rate in spite of that the financial scam came
out. So investors also consider the rate of the CRA at the time of investment and
how much he rate consider while taking the risk.
Credit rating is used' extensively for evaluating equity instruments. These
include long-term instruments, like bonds and debentures as well as short-termobligations, like Commercial Paper. In addition, deposits, certificates of
deposits, inter-corporate deposits, structured obligations including non-
convertible portion of partly Convertible Debentures (PCDs) and preferences
shares are also rated. The Securities and Exchange Board of India (SEBI), the
regulator of Indian Capital Market, has now decided to enforce mandatory
rating of all debt instruments irrespective of their maturity. Let us recall that
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earlier only debt issues " of over 18 months maturity had to be compulsorily
rated.
The grade is also give when company come up with new public offer, at that
time company have to show the grade in the prospectus which shows the picture
of the company performance and future expectation. For companies rate is
given but for IPO grade is given. If grade 5 is given which shows good
fundamental but if grade 1 given means very poor fundaments of the company.
So we try to find out the relation of grade and listing price of the IPO and its
return.
So this whole study relate to the importance of the CRA when people in invest,
their risk and return and the performance of the IPO during short term and long
run return.
Chapter - 2
Theoretical Aspects
What is Credit Rating?
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Credit rating is the opinion of the rating agency on the relative ability and
willingness of the issuer of a debt instrument to meet the debt service
obligations as and when they arise.
A credit rating estimates the credit worthiness of an individual, corporation, or
even a country. It is an evaluation made by credit bureaus of a borrower's
overall credit history. A credit rating is also known as an evaluation of a
potential borrower's ability to repay debt, prepared by a credit bureau at the
request of the lender. Credit ratings are calculated from financial history and
current assets & liabilities. A credit rating tells a lender or investor the
probability of the subject being able to pay back a loan. A poor credit rating
indicates a high risk of default of a loan, and leads to high interest rate or the
refusal of a loan by the creditor.
It should be noted that a credit rating is assigned to the investment instrument
and not to the company issuing it as a whole.
It also gives the rate the overall performance of the companies working,
management and future projects.
Process of CRA
o Contract between Rater and Client: first of all the company management
who want the credit rate for the company, they approach to the credit
rating agencies and make the contract for the rating in which certain
condition and provisions are included
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o Sending expert team to client place: after that CRA sent their expert team
to the company, where company exists and all necessary data available.
o Data Collection: the expert committee collects all the necessary and
confidential data which they require and give assurance of confidential.
o Data Analysis: after collecting all the data they analysis the data with the
help of their model to measure the working and condition of the company
o Discussion now the expert committee makes discussion all the aspect of
the analysis data and what they found after analysis all aspect of the
company existence.
o Credit Report Preparation: the committee will prepare the report after
analysis and expert discussion
o Submission to Grading Committee : the report will be submitted to the
grade committee which gives the rate after study of whole analyzed
report.
o Grade Communication to client: at the end grade is given the company
and the report with grade is to be given to the company.
Now if company want show the rate to the public, the responsibility is
company to communicate grade to the public but an agencies cannot
display the rate of the company to any one alse or in the public. If the
company is not satisfied with the rate they can apply re-assessment or any
other agencies for the rate.
Every year the condition, performance, internal and external factors and
working the company changing on so every year a company need to issue
rate for the company.
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Ratingrelated products and activities
CRAs in India rate a large number of financial products:
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o Equity/Company
o Bonds/ debentures- [the main product]
o Commercial paper
o Structured finance products
o Bank loans
o Fixed deposits and bank certificate of deposits
o Mutual fund debt schemes
o Initial Public Offers (IPOs)
CRAs also undertake customised 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 grading are carried out to assess the ability of the
developers to execute.
GENERAL CRITERIA FOR RATING SECURITIES
Some of the key risk factors that CRA analyses while arriving at a credit rating
are discussed in the following sections
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Business RiskThe business risk that an issuer is exposed to is a combination of
the industry risk in its major product segments and its competitive position
within the industry.
Industry Risk The objective here is to understand the attractiveness of the
industry in which the issuer operates. The aspects examined include:
o Existing and expected demand-supply situation
o Intensity of competition
o Vulnerability to imports
o Regulatory risks
o Outlook for user industries
o Working capital intensity
o Overall prospects and outlook for the industry
Issuers Competitive Position An assessment of the issuers competitive
position within an industry is made on the basis of its operating efficiency as
well as its market position. Some of the factors assessed are:
o Scale of operations
o Vintage of technology used
o Capital cost position
o Location advantage in terms of proximity to raw material sources as well
as markets
o Operating efficiencies (yields, rejection rates, energy consumption, etc.)
o Market position as reflected in trends in market share, ability to command
premium pricing, span of distribution network, and relationship with key
customers
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New Project Risks The scale and nature of new projects can significantly
influence the risk profile of an issuer. Unrelated diversification into new
products is invariably assessed in greater detail. Besides the rationale for new
projects, the other factors that are assessed include: (i) track record of the
management in project implementation; (ii) experience and quality of the
project implementation team; (iii) experience and track record of the technology
supplier; (iv) extent to which the capital cost is competitive; (v) financing
arrangements in place; (vi) raw material linkages; (vii) demand outlook; (viii)
competitive environment; and (ix) marketing arrangement and plans.
Financial RiskThe objective here is to determine the issuers current financial
position and its financial risk profile. Some of the aspects analysed in detail in
this context are:
o Operating profitability
o Gearing
o Debt service coverage ratios
o Working capital intensity Cash flow analysis
o Foreign currency related risks
o Tenure mismatches, and risks relating to interest rates and refinancing
o Contingent liabilities/Off-balance sheet exposures
o Financial flexibility
Strength of Promoters/Management Quality All debt ratings necessarily
incorporate an assessment of the quality of the issuers management, as well as
the strengths/weaknesses arising from the issuers being a part of its group.
Usually, a detailed discussion is held with the management of the issuer to
understand its business objectives, plans and strategies, and views on past
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performance, besides the outlook on the issuers industry. Some of the other
points assessed are:
o Experience of the promoter/management in the line of business
concerned
o Commitment of the promoter/management to the line of business
concerned
o Attitude of the promoter/management to risk taking and containment
o The issuers policies on leveraging, interest risks and currency risks
o The issuers plans on new projects, acquisitions, expansion, etc.
o Strength of the other companies belonging to the same group as the issuer
o The ability and willingness of the group to support the issuer through
measures such as capital infusion, if required
o The possible need to support other group entities, in case the issuer is
among the stronger entities within the group
Adequacy of Future Cash Flows Since the prime objective of the rating
exercise is to assess the adequacy of the issuers debt servicing capability;
ICRA draws up projections on the likely financial position of the issuer under
various scenarios. These projections are based on the expected operating and
financial performance of the issuer, the outlook for the industry concerned (inICRAs view), and the issuers medium/long-term business plans. Sensitivity
tests are also performed on certain key drivers, such as selling prices, input
costs, and working capital requirements. Also of particular importance are the
projected capital expenditure and debt repayment obligations of the issuer over
the projection horizon.
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CREDIT RATING SYMBOLS
Credit Rating Agencies rate an instrument by assigning a definite symbol. Each
symbol has a definite meaning. These symbols have been explained indescending order of safety or in ascending order of risk of non-payment. There
are different symbols are given according to the different agencies. But
ultimately it shows the risk. For example: CRISILhas prescribed the following
symbols for debenture issues:
AAA : indicates highest safety of timely payment of interest and principal.
AA : indicates high safety of timely payment of interest and principal.
A : indicates adequate safety of timely payment of interest and principal.
BBB : offers sufficient safety of payment of interest and Institutions in India
principal for the present.
BB : offers inadequate safety of timely payment of interest and principal.
B : indicates great susceptibility to default.
C : indicates vulnerability to default. Timely payment of interest and payment is
possible if favourable circumstances continue.
D : indicates that the debenture is in default in payment of arrears of interest or
principal or is expected to default on maturity.
You will note that as the value of symbol is reduced say from AAA to AA, the
safety of timely payment of interest and principal is decreased. While AAA
indicates highest safety of timely repayment, D indicates actual default or
expected default on maturity. Different symbols indicate different degrees of
risk of repayment of principal and interest.
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BENEFITS
Rating serves as a useful tool for different constituents of the capital market. For
different classes of persons, different benefits accrue from the use of ratedinstruments.
Investors
Rating safeguards against bankruptcy through recognition of risk. It gives an
idea of the risk involved in the investment. It gives a clue to the credibility of
the issuer company. Rating symbols give information on the quality ofinstrument in a simpler way that can be understood by lay investor and help him
in taking decision on investment without the help from broker. Both individuals
and institutions can draw up their credit risk policies and assess the adequacy or
otherwise of the risk premium offered by the market on the basis of credit
ratings.
Issuers of Debt Instruments
A company whose instruments are highly rated has the opportunity to have a
wider access to capital, at lower cost of borrowing. Rating also facilitates the
best pricing and timing of issues and provides financing flexibility. Companies
with rated instruments can use the rating as a marketing tool to create a better
image in dealing with its customers, lenders and creditors. Ratings encourage
the companies to come out with more disclosures about their accounting
systems, financial reporting and management pattern. It also makes it possible
for some category of investors who require mandated rating from reputed rating
agencies to make investments.
Financial Intermediaries
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Financial intermediaries like banks, merchant bankers, and investment advisers
find rating as a very useful input in the decisions relating to lending and
investments. For instance, kith high credit rating, the brokers can convince their
clients to select a particular investment proposal Ignore easily thereby saving on
time, cost and manpower ill convincing their clients.
Business Counter-parties
The credit rating helps business counter-parties in establishing business
relationships particularly for opening letters of credit, awarding contracts,
entering into collaboration agreements, etc.
Regulators
Regulators, with the help of credit ratings, determine eligibility criteria and
entry barriers for new securities, monitor financial soundness of organizations
and promote efficiency in debt securities market. This increases transparency of
the financial system leading to a healthy development of the market.
Initial Public offer
What is IPO grading?
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Grading of Initial Public Offerings (IPOs) is a service aimed at facilitating
assessment of equity issues offered to the public. The Grade assigned to any
individual IPO is a symbolic representation of rating agencys assessment of
fundamentals of the issuer concerned relative to other listed securities.
IPO Grades are assigned on a five-point point scale, where IPO Grade 5
indicates the highest grading and IPO Grade 1 indicates the lowest grading, i.e.
a higher score indicates stronger fundamentals. An IPO Grade is not an opinion
on the price of the issue, pre- or post-listing.
IPO Grade 5: Strong fundamentals
IPO Grade 4: Above-average fundamentals
IPO Grade 3: Average fundamentals
IPO Grade 2: Below-average fundamentals
IPO Grade 1: Poor fundamentals
An investor in a hitherto unlisted company may either have limited access to
information on it, or may find it challenging to appropriately assess, on the basis
of the information available, its business prospects and risks. An IPO Grade
provides an additional input to investors, in arriving at an investment decision
based on independent and objective analysis.
In recent times, with the stock market participation of new and foreign investors
increasing, there is need for greater value-added information on companies
tapping the capital market and their intrinsic quality. In this context, IPO
Grades, being simple, objective indicators of the relative fundamental positions
of the issuers concerned, could help in both widening and deepening the market.
IPO Grading is NOT a recommendation to buy sell or hold the securities
Graded. Similarly, it is NOT a comment on the valuation or pricing of the IPO
Graded nor is it an indication of the likely listing price of the securities Graded.
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Criteria for IPO grading
Business and Competitive Position
New ProjectsRisks and Prospects
Financial Position and Prospects
Management Quality
Corporate Governance practices
Compliance and Litigation History
Table: 1 IPO thought the Years No. IPOs1993-94 692
1994-95 1239
1995-96 1357
1996-97 717
1997-98 52
1998-99 18
1999-2000 51
2000-01 114
2001-02 7
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2002-03 6
2003-04 21
2004-05 23
2005-06 79
2006-07 772007-08
2008-09
2009-10
85
79
73
Source: Handbook of statistics on the Indian securities market 2010
According to the Indian securities market 2010, there were highest public offer
1357 in the year 1994-95 but after that it decline every year till to 2002-2003
because in this year there were only 6 public offer and again that again
increased till to year 2007-08 but because of crisis it again declined.
Chapter - 3
Industry Profile
A Credit Rating Agency is a company that assigns credit ratings for issuers of
certain types of debt obligations as well as debt instruments. There are
following credit rating agencies in India.
CRISIL
This was set-up by ICICI and UTI in 1988, and rates debt instruments. Nearly
half of its ratings on the instruments are being used. CRISIL's market share is
around 75%. It has launched innovative products for credit risks assessment
viz., counter party ratings and bank loan ratings. CRISIL rates debentures,
fixed deposits, commercial papers, preference shares and structured obligations.
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Of the total value of instruments rated, debentures' accounted for 3 1.196, famed
deposits for 42.3% and commercial paper 6.6%. CRISIL publishes CRISIL
rating in SCAN that is a quarterly publication in Hindi and Gujarati, besides
English.
CRISIL evaluation is carried out by professionally qualified persons and
includes data collection, analysis and meeting with key personnel in the
company to discuss strategies, plans and other issues that may effect ,evaluation
of the company. The rating, process ensures confidentiality. , Once. - The
company decides to use rating; CRISIL is obligated to monitor the rating over
the life of the debt instrument.
ICRA
ICRA was promoted by IFCI in 1991. During the year 1996-97, ICRA rated
261 debt instruments of manufacturing companies, finance companies and
financial institutions equivalent to Rs. 12,850 crore as compared to 293
instruments covering debt volume of Rs. 75,742 crore in 1995-96. This showed
a decline of 83.0% over the year in the volume of rated debt instruments. Of the
total amount rated cumulatively until March-end 1997, the share in terms of
number of instruments was 28.5% for debentures (including long
ternr'instruments), 49.4% for Fixed Deposit programme (including medium-
term instruments), and 22.1% for Commercial Paper Programme (including
short term investments). The corresponding figures of amount involved for
these three broad rated categories was 23.8% for debentures, 52.2% for fixed
deposits, and 24.0% for Commercial Paper. The factors that ICRA takes into
consideration for rating depend on the nature of borrowing entity. The inherent
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protective factors, marketing strategies, competitive edge, competence and
effectiveness of management, human resource development policies and
practices, hedging of risks, trends in cash flows and potential liquidity, financial
flexibility, asset quality and past record of servicing of debt as well as
government policies affecting the industry are examined.
CARE
CARE is a credit rating and information services company promoted by IDBI
jointly with investment institutions, banks and finance companies. The company
commenced its operations in October 1993. 'In January 1994, CARE
commenced publication of CAREVIEW, a quarterly journal of CARE
ratings. In addition to the rationale of all accepted ratings, CAREVIEW often
carries special features of interest to issuers of debt instruments, investors and
other market players.
FITCH
Fitch Ratings is an international rating agency that provides global capital
market investors with the highest quality ratings and research. Dual
headquartered in New York and London, Fitch rates entities in 75 countries and
has some 1,100 employees in more than 40 local offices worldwide. Fitch
Ratings provides ratings for Financial Institutions, Insurance, Corporates,
Structured Finance, Sovereigns and Public Finance Markets worldwide.
Recently, three well-known rating agencies were integrated into Fitch. IBCA,
Duff & Phelps and Thomson Bank Watch which expanded our capabilities,
coverage and markets.
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Fitch India is a 100% subsidiary of the Fitch Group. It is the only international
rating agency with a presence on the ground in India. Fitch India is fully geared
to extend the expertise and commitment of its foreign parent to Indian
companies. Fitch India analysts have access to Fitch International's large global
information network. Interacting with other areas of Fitch Ratings, such as the
Sovereign, Structured Finance, Public Finance groups, enhances our analysts'
insights into a global marketplace that is vast and evolving. We arrive at rating
decisions in committees comprising senior management from Fitch
International as well as sectoral specialists from Fitch India. This collaboration
ensures a more comprehensive assessment as we profile an entity's strategic
initiatives, competitive position, financial performance and the overall dynamics
of the industry in which it operates.
FITCH is an internationally acclaimed statistical rating agency recognised by
the US Securities and Exchange Commission, the Federal Reserve Bank, the
Office of the Comptroller of the Currency, the Federal Deposit Insurance
Commission, the National Credit Union Association and many state securities
and legal investment authorities. In addition, it is recognised by many non-US
authorities, including the Ministry of Finance of Japan, the Securities and
Futures Authority of the United Kingdom, the Hong Kong Monetary Authority,
the Central Banks of Finland, Ireland and the Netherlands, the Bank of Italy and
the Bank of England
Brickwork
Brickwork India, was started in year 2008 for provide the services of the rating
to securities, companies, Banks and IPO etc. this credit rating agency has started
two years ago there is very less market share.
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Chapter - 4
Industry Analysis
Credit Rating Industry Life Cycle
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The above graph of the industry life cycle states that the credit rating industry is
in introduction stage the credit rating is a new phenomenon in India but outside
India it is having very good market slowly and gradually credit rating is
expanding its horizons in the Indian market
The last few years have been truly significant for the Indian rating industry, in
terms of increase in investor awareness about ratings and their general
acceptability. From the times when ratings were used primarily for regulatory
Compliance, till now when ratings are recognized as a measure of credit risk
and thus an important pricing determinant, the transition has been significant.
Currently, most of the credit ratings in India are for debt instruments for which
rating is not mandatory. For most Indian businesses, too, the last few years mark
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a phase of adjusting to the new realities of a changing economic landscape.
With deregulation and lowering of government protection, the Indian business
environment is witness to intense competition, both from a larger number of
domestic competitors (following removal of artificial entry barriers), and from
imports (with the lowering of tariff and non-tariff barriers). Currently, the
economy is in the slowdown phase, even as the globalization-induced
uncertainty because of exposure to dynamic demand-supply equations is
chipping away at the growth and profitability figures. At the corporate level,
most Indian companies are seeing their performance take a dip, resulting in a
number of rating changes.
CR has recorded rapid strides. This growth has been caused by the increasing
securitization of debts, by the increasing awareness of the risk of defaults and
propelled by the globalization trends. In the recent past the CR industry has
grown from 3.67 crore in 92-93 to 22 crore in 95-96 for 1
st
half only (sourcethe economic times)
The ratings business in India is divided into three phase development:
Phase I
During the first of these phases, as described above, there was no experience of
credit ratings, and virtually no awareness, on the part of investors and issues
CRISIL was the first rating agency to enter in the Indian market therefore its
primary aim was to create awareness of the concept, and build up its credibility
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in the market, with issuers, investors and regulators. The consistency and
quality of CRISILs work led to increasing levels of issuer and investor
acceptance, and gradual establishment of its market position. This phase lasted
about five years, from 1987 to around 1992.
Phase II
The second phase saw the advent of regulatory support for credit ratings, with
the introduction and increasing rigor of regulations covering primarily the
markets for public issue of debt and for fixed deposits. In this phase the primary
aim was protecting smaller investors, these measures also amounted to
regulatory recognition of the role of credit ratings and the quality of the effort
being made by credit rating agencies, in estimating credit quality. During these
phase credit rating agencies saw an upward trend and domestic credit rating
agencies came into pictures.
Phase III
Recent years have seen a third phase of the markets development with public
issues of debt reducing in volume; the focus has shifted to the market for private
placements. Almost all the privately placed debt issued in the Indian market is
rated, even though this is not a regulatory requirement. This shift is entirely
driven by investors in these securities, who typically tend to be highly
sophisticated financial sector entities besides this rating industry has spread its
wings in other sectors also amongst which grading of healthcare institutions and
equity grading are major part.
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Due to ever increasing demand of rating agencies and oligopolistic situation
prevailing in the market, Credit rating agencies has a long way to go.
PEST-G ANALYSIS:
The PEST- G Analysis is a framework that strategy consultants use to scan the external
macro-environment in which a firm operates. PEST- G is an acronym for the following
factors:
o Political factors
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o Economic factors
o Social factors, and
o Technological factors.
o Global factors
Political & Legal Factors
Regulatory authority
Rating agencies are regulated by RBI & SEBI regulation for credit rating
agencies (1999).
Contract enforcement law
The client wanting to get rated a debt issue being floated by it requires the
services of a credit rating agency. For this purpose they enter into a written
agreement with a credit rating agency in a standardized format. The agreement
specifies the charges for such rating services as well as for regular surveillance
on the existing rating, to see whether it needs to be revised or otherwise. It
becomes mandatory for the rating agency to abide by the contract and rate
instrument issued by the client.
Consumer protection
This factor also affects the ratings assigned by the CRAs. The primary
objective of a credit rating is to provide guidance to investors/creditors in
determining a credit risk associated with a debt instrument/credit obligation
though it does not indicate investors to invest in particular instrument
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Political stability
Political stability in India is one of the vital factor which determines the level of
stability of ratings & grading given by credit rating agencies if the political
instability like unstable government or war situation is existing then it would
surely has its effects on this industry so this indicate that in order to have an
accurate ratings by CRAs it is necessary to have political stability in country
Service tax
Government of India has notified imposition of service tax on twelve new
services in 1998-99 unions Budget that covers credit rating industry. Service tax
is payable both on the fee received for credit rating of the debt instrument and
the surveillance fee.
Tax structure
Value of the taxable service in relation to the service provided by a credit rating
agency to a client, is the gross amount charged by such agency from the client
for services rendered in connection with credit rating of any financial
obligation, instrument or security in any manner.
Economic Factors
Economic growth
The GDP growth rate from 2005-06 to till is the 7% to 8%. And according to
the Reserve Bank of India the expected GDP of India would be in double digit.
If this happens, it would be a major achievement. Thus the economy plays a
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vital role for credit rating agencies as ratings given by the companys is
depended on the internal as well as the external market condition. If the
economy is in the growth condition or the markets are booming then there will
be more number of companies coming with new debt issue in order to grab the
opportunity of market boom.
Inflation & Interest rates
Usually company prefer to go for debt issue in order to maintain adequate debt
equity ratio and to get cheaper source of capital which will also help to take
advantage of leverage so if looking at the present level of inflation in the
economy which is nearly 4.7 % as a result of which interest rates of bank loans
will be high so more companies will prefer to raise capital through debt market
hence rating agencies will be benefited
Consumer confidence
Consumer confidence is an important attribute for development of rating
agencies business as companys rates the instruments only to get confidence
from investors about soundness of the debt instruments issued by them. Rating
agencies long-term survival depends mainly upon confidence of consumers
upon their ratings so they always strive to maintain investors confidence in
their ratings.
Well-Developed money market
Money market is the important factor on which debt instruments issued by both
government and private companies like treasury bills, commercial papers, bonds
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and majority of the debt instruments are rated by the CRAs. A well-developed
money market will make a Boom in issue of debt instruments by companies and
government.
Social Factors
The primary objective of rating is to provide guidance to investors\creditors in
determining a credit risk associated with a debt instrument\credit obligation.
Although it does not recommend buying such instruments but it definitely rates
the instruments based on credit risk associated with the product.
Rating agencies have to disclose the ratings given to the instrument issued by
the issuer in public even if the ratings assigned does not indicate a sound
financial position. It serves the social objective of providing information to the
investors and creditors who are the ultimate consumers of such debt
instruments.
Screening agents
Credit ratings may provide information on the quality of a firm beyond publicly
available information. Rating agencies may receive significant sensitive
information from firms that is not public, as firms may be reluctant to provideinformation publicly that would compromise their strategic programs, in
particular with regard to competitors.Credit ratings agencies are formed to act
as screening agents certifying the values of firms that approach them. rating
agencies could be seen as information-processing agencies that may speed up
the dissemination of information to financial markets.
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Pooling of companies
Credit rating can therefore act as a signal of overall firm quality. Firms would
then be pooled with other firms in the same rating category, where in the
extreme all firms within the same ratings group would be assessed similar
default probabilities and associated yield spreads for their bonds if they are
given the lower rating (even though they are only a marginally worse credit),
they will be pooled into the group of all firms in that worse credit class.
Likewise, firms that are near an upgrade will have an incentive to obtain that
upgrade to be pooled with firms in the higher ratings category.
Purchasing power of consumers
Higher purchasing power shows pumping of savings and investment in the
money as well as capital market also besides this there are institutional investors
and portfolio managers who will invest in debt instruments looking at the
ratings given to them ratings assigned to debt instruments plays a major factor
in taking such vital decisions so companies and government bodies always will
urge for rating their debt instruments.
Technological Factors
New inventions and development
The research and development plays a significant role for rating agencies as
majority of the rating work is of technical nature and lot of information database
about the company has to be collected for rating besides this financial data of
the company has to be analyzed so use of new technological inventions of
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softwares helpful for such analysis, we can take example of Prowess &
Capital line
Speed of technological obsolescence
The speed at which technology gets outdated is reflected in rating agencies due
to constantly changing parameters to grade the various instruments so constant
changes and up gradation in the technology is to be done in order to provide
accurate and timely information
Internet technology
Internet technology has provided rating agencies a platform from where they
can make their presence felt in the market. As credit rating industry is new
phenomenon in our country internet technology provides it a sound base for
development companies, institutional investors and creditors can know online
about the ratings being assigned by CRAs and beside these rating agencies
provide information about the rating methodologies and rating framework,
rating factors, rating grades and also if the rating agencies is venturing into
assigning new grades to other emerging sectors
Global Factors
Global scenario of rating industry
In India there are four rating agencies, which are all, backed by international
rating agencies like Fitch, Standard & Poor, and Moodys thus these
international companies identified potential market in India. As a result the
world has become a global village. Also country ratings are done by
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international a rating company, which determines the economic market
condition in the country.
Global competition
Rating industries in future may face global competition due to increasing
market share and diversification of various rating instruments rating companies
will try to establish its base in developing countries due to saturation of markets
in developed countries and dependency of people on rating agencies.
Like Fitch has enters into the Indian Market.
Five Force Porters Mode Analysis
As every industry has describe by Five force porters model as that model we
cant apply directly we have make change in that and created the a credit
Analysis which helps and doing the same work as porters which is shown
below :
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Regulation
pressure from
SEBI to
Fulfill
Clients pressure to
rate each one at the
top rating
Rating Industry must face the
problem of rating badly the
instrument or any other firm
Threat of new Entry
Threat of New Entrants
Threat of new entrants in Credit rating industry is very low as in India Rating
Industry has not saw such a great success that new players are ready to get in
the Industry.
If anybody wants then they to follow certain rules by the Security Exchange
Board of India.
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SEBIClients
Potential
Default Risk
Or
Rival RatingAgencies
Moderate
Weak
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As per the norms created by SEBI new entrants has to undergo 42 set of rules
which should fulfil certain criteria like:
o Application for grant of certificate
o Promoter of credit rating agency
o Eligibility criteria
o Application to conform to the requirements
o Furnishing of information, clarification and personal representation
o Grant of Certificate
o Conditions of certificate and validity period
o Renewal of certificate
o Procedure where certificate is not granted
o Effect of refusal to grant certificate
o Code of Conduct
o Monitoring of ratings
o Procedure for review of rating
o Internal procedures to be framed
o Disclosure of Rating Definitions and Rationale
o Submission of information to the Board
o Compliance with circulars etc., issued by the Board
o Maintenance of Books of Accounts records, etc
o Confidentiality
o Rating process
o Suspension of registration
o Cancellation of Registration
o Manner of Making Order of Suspension and Cancellation
o
Manner of Holding enquiry before Suspension or Cancellation
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o Show-cause notice and order
o Effect of suspension and cancellation of registration of credit rating
agency Publication of Order of Suspension or Cancellation
Several other factors involved in credit rating:
o Overall fundamentals and earnings capacity of the company and volatility
of the same.
o Overall macro economic and business/industry environment.
o Liquidity position of the company (as distinguished from profits).
o Requirement of funds to meet irrevocable commitments.
o Financial flexibility of the company to raise funds from outside sources to
meet temporary financial needs.
o Guarantee/support from financially strong external bodies.
o Level of existing leverage (borrowings) and financial risk.
Barriers to Entry
Because much of the national credit rating business is dominated by the four
largest CRAs (Crisil, Care, Fitch, Icra), some commentators have claimed that
various Because much of the international credit rating business is dominated
by the three largest CRAs (Crisil, Care, Fitch, Icra), some commentators have
claimed that various barriers to market entry unfairly limit competition in the
CRA industry. Consequently, the Task Force questionnaire asked what, if any,
factors exists in Task Force jurisdictions that may act as barriers to a new CRA
entrants.
For the most part, Task Force members noted that CRAs are not extensively
regulated and those regulations that do exist are not onerous for new entrants.
However, several Task Force members noted that the nature of the CRA
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market makes it difficult for new CRA entrants to succeed. According to
these members, issuers desire ratings from only those CRAs respected by
investors. On the other hand, investors respect only those CRAs with a
reputation for accuracy and timeliness in issuing credit ratings. Establishing
such a reputation can take considerable time and resources. Furthermore, some
commentators have suggested that issuers may prefer to retain, and investors
may prefer to use the opinions of, CRAs that a government regulator or agency
also uses. Where government CRA recognition criteria are based on how
extensively a CRAs opinions are used by issuers and investors, such a situation
arguably may discriminate against new entrants, with regulatory recognition
being based on reliance by the market, and market reliance being influenced by
regulatory recognition.
Challenges to New CRA
The value investors place on the opinions and ratings of a CRA depends, to asignificant extent, on the reputation that CRA has built among investors. This
reputation frequently is based on a history of providing accurate, timely and
useful ratings. Consequently, new CRAs can face several disadvantages to more
established CRAs.
These include:
A lack of a rating history. Without a history of timely and accurate ratings, a
CRA may have difficulty establishing itself. Investors will be reluctant to
accord the ratings of a new entrant the same regard given more established
CRAs because new entrants lack historical default rates by which investors can
compare its performance against other CRAs. As a result, issuers may be
reluctant to engage a new entrant for a rating. Without investor or issuer
interest, it may take considerable time for a CRAs rating business to become
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self-sustaining. Consequently, a new entrant may have to devote considerable
time and expense developing a reputation among investors before it can become
a viable competitor to more established CRAs.
A lack of resources and issuer access. In many (though not all) cases, a new
entrant may have fewer resources (staff, analytical tools and other resources)
than more established CRAs. Without these resources, a new entrant may be at
a disadvantage vis--vis more established CRAs, who may be able to hire more
staff (and more experienced staff) to analyze large issuers involved in numerous
complicated transactions. Likewise, as issuers initially may express no interest
in contracting with a new entrant for a rating, new entrants may be forced to
build their reputation on the basis of unsolicited ratings, without the benefit of
issuer cooperation and input. This last point, however, may be mitigated to
some extent if ongoing issuer disclosure obligations provide sufficient
information to the public that a new entrant can, through careful analysis, draw
accurate and timely conclusions regarding the issuers financial health and
economic prospects.
Special conflicts of interest. Given the high start-up costs new entrants face,
new CRAs may be vulnerable to financial pressures larger CRAs may be
insulated against by their size. To a new entrant, a single fee-paying issuer may
comprise a large portion of the CRAs overall revenue, creating a potential
conflict of interest that may influence its rating decisions should the new entrant
fear a loss of this business. Likewise, the large amount of capital and time
necessary to establish a new entrant may necessitate an affiliation with a larger
firm. As described earlier, such affiliations present their own conflicts of
interest issues if the financial interests of the parent firm influence the rating
decisions of the CRA affiliate.
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Because of inability to specialized know-how of firms already in the industry,
cost and resource disadvantages, Economies of scale, Capital requirements,
Regulatory policies and trade restrictions it is not every ones cup of tea to enter
into the industry.
Then also one reason is standard or reliability of the existing firm in rating or
procedure of rating ion India is one question Mark. As we have to develop a
new model for criteria to rate the instruments as well as firms.
Thus we can say that the threat from new entrants is very low.
Rival Rating Agencies
It is very high among the existing firms in credit rating industry.
There are only four players in credit rating viz, CRISIL, CARE, FITCH, ICRA
out of four agencies CRISIL 60% & ICRA enjoys monopoly by covering 15%
approx. of credit rating market because these two were having the advantage of
entering into credit rating market before any one. But the rivalry among the four
agencies is high in order to maintain the maximum market share & to earn a
maximum profitability from the operation. So the level of rivalry among the
existing firms is high.
Bargaining Power of The Clients
In Credit Rating Industry the Bargaining Power of Buyer is Moderate because
as the debt market is growing at a faster speed it is becoming mandatory for the
issuer company to rate their debt instruments. So it is a clear that the issuer
company has to undergo rating of debt instruments so that the issuer company
can get the trust of investors. It is obvious that individual investors cant
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influence the terms & conditions but it is the group investors which can
influence the terms & conditions.
Rating agencies should implement procedures to manage potential conflict ofinterest that arise when issuers pays for ratings. There is an Oligopolistic
situation thus customers can shift from one rating agency to another.
One reason is also that we know today our economy is going with great boom &
Equity & other instruments want to rate.
So, the bargaining power of the buyers is Moderate.
Switching cost of the companies is high as once issuer of the debt instruments is
not satisfied by the ratings given to debt instruments of company it will switch
over to next company for rating the present instruments or rating of other
instruments in future.
SEBI
This model includes the force of SEBI on credit rating agencies is very high
because the credit rating industry is subject to organized rules & regulations of
SEBI which is controlling body.
As there is very strict regulations of SEBI to fulfil the norms very High because
the CRAs affect to a common man and there should be some control of
government which is done by regulation organization SEBI. So the Guidelines
of SEBI are Mandatory to all Rating Agencies.
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Chapter-5
Research Methodology
Objectives
I. To know the importance of Credit rating for security investment decision
II. To analyze of performance IPO.
Scope
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I. It helps us to know the importance of Credit rating among Ahmedabad
and Gandhinagar retail investors.
II. We analysis the performance of IPO on the basis of short term and long
term return from the listing date from 1st January, 2010 to 31st June, 2010.
Research Design
Descriptive research:
Descriptive research includes surveys and fact finding enquires of different
kinds. The major purpose of descriptive research is description of the state of
affairs as it exists at present. Researcher has no control over the variables of
this type of research.
Data Collection Method:
a) Primary: Questionnaire
b) Secondary: Internet, Magazines, Reference books, Research
Papers, CRA, NSE, BSE, Chittogagh web sites etc.
Sampling technique :
Stratified Random convenient Sampling Technique: In this sampling we
make the strata on the basis of the education investors and select on the
basis of our convenience
Sample : All Retail Investors
Sample size: 250 Investors
Place: Ahmedabad and Gandhinagar
Research Tools :
Questionnaire: Structured questionnaire is framed.
Statistical tools:-
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A) Hypothesis
1. z-test
2. Chi-square test
B) Standard deviation
C) Median
D) Maximum & Minimum
E) Skweness
Limitations of the project
o Our primary data collection only from Ahmedabad and Gandhinagar.
o We collected the secondary data for IPO which we have considered as
authentic data for the return of the IPO
o There are certain models which are used by different agencies for rating
and grading so the CRA are not ready to expose.
o There is lack of expertise.
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Chapter-6
Research Analysis and Findings
Data Analysis
A) How do you put yourself as far as risk is concern?
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RISK
POSITION
NO.OF
INVESTERS
Risk averse 51
Moderate risk
taker
128
High risk taker 61
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Comment : We found that 128 out of 240 investors are moderate risk taker.
And 61 investors are high risk takers generally they trade on their own analysis.
B) Do you know about the CREDIT RATING AGENCIES which rates
securities?
NO. OF
INVESTERS
Yes 192
No 48
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Comment : We found that 80% investors are aware about the CRA in india.
And 20% not aware about the rating agencies because they investing accordingto other people guidance and most of those persons are less educated. So we can
say that it is good awareness among the investors about the agencies but still
need to take certain steps towards the invewtors to create awareness and
considerartion of the rate.
C) Do you know the procedure of CRA?
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NO. OF
INVESTERS
Yes 62
No 178
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Comment : Investors consider the rate but 74% investors are not aware about
the procedure of the CRA they need to follow which create reliability among
the investors.
D) Do you know the criteria of CRA?
NO. OF
INVESTERS
Yes 73
No 167
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Comment: We come to know that 80% investors are aware about the CRA but
the basic criteria which is followed by the CRA only 30% investors aware. So
there is lack of awareness about the criteria so it is necessary to know investors
so more and more people can consider the rate which secure their return and
risk.
E) Do you consider the credit rate which is given by CRA for the securities for
Investment purpose?
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NO. OF
INVESTERS
Always 41
Sometime 94
Never 105
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Comment: All the CRA gives the rate to companies and IPO for secure the risk
and show the real picture of the company to investors but 44% investors are not
considering the rate so there is very less attractiveness of CRA in india. But
there are 39% invesotors ara considering sometime because they cant comletely
rely on these agencies
F) Why do you not consider rating of CRA?
Reason NO. OF
INVESTERS
Prefer rating 135
Do not aware 52
Do not trust 43
Do not know criteria 4
Do not know the
procedure
2
Any other 4
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Comment : There are 135 investors who prefer the rate either sometime or
always but 105 people are not trust and aware about the CRA working and their
existence so they dont consider the rate. So this is very critical situation for the
CRA because the investors are not relying on their rate. And the reasons for that
is some time in spite of good rate companies becomes insolvent and under
scam.
G) Which of the following agency rate do you prefers the most?
CRA NO. OF
INVESTERS
CRISIL 64CARE 27
ICRA 25
FITCH 25
Not
consider
99
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Comment: In india more than 60% market is covered by CRISIL and we found
that 64 invesors have given their reliance towards CRISIL.
H) Up to what extent the rating do you prefer to invest?
RATE NO. OF
INVESTERS
AAA 55
AA 35
A 32
BBB 12BB 2
B 5
Not consider 99
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Comment: Generally AAA and AA rates are given to safe companies equity so
out of total 240 investos only 90 investors consider the safe rate AAA and AA.
So this shows the invesots consider the rate for safety and minimize risk
purpose.
I) Do you agree that CRA have an alarm system to provide alerts on significant
relevant events? Give the rank from 1 to 5. (1 = Strongly Agree, 5= strongly
Disagree)
NO. OF
INVESTERSStrongly agree 14
Agree 66
Neutral 100
Disagree 42
Strongly
disagree
18
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Comment: Very few investors are agreed but 100(40%) investors are neutral
because they believe the CRA not alarm all the time and there are 60% investors
who are disagree because of the different scams.
J) What you think that the CRA shows the real picture of the companies
securities?
NO. OF
INVESTERS
Strongly agree 15
Agree 64
Neutral 110
Disagree 33
Strongly
disagree
18
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Comment: Again the same condition that 110 investors are neutral so there is
lack of completely reliance. And 61 investors are disagreeing because in spite of
good rate number of company had been founded scams.
Chapter-7
HYPOTHESIS
1. Age & rating consider by investor:-
Null hypothesis (H0):-
There is no significant relation between age of an
investors & rating consider by them for that security.
Alternate hypothesis (H1):-
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There is significant relation between age of an
investor & rating consider by him for that security.
Age &
rating
consider
Always Sometime Never Total
15-25 6 20 10 36
25-35 16 34 57 107
35-45 6 28 32 66
45-55 12 11 8 31
Total 40 93 107 240
Calculation:-
Actual
frequency
(fo)
Expected
frequency
(fe=Rt*Ct/n)
(fo-fe) (fo-fe)(fo-
fe)
(fo-fe)(fo-
fe)/fe
6 6 0 0 0
20 13.95 6.05 36.6 2.62
10 16.05 -6.05 36.6 2.28
16 17.83 -1.83 3.35 0.19
34 41.46 -7.46 55.65 1.34
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57 47.7 9.3 86.49 1.52
6 11 -5 25 2.27
28 25.58 2.42 5.86 0.29
32 29.43 2.57 6.6 0.22
12 5.17 6.83 46.65 9.02
11 12.01 -1.01 1.02 0.089
8 13.82 -5.82 33.87 2.45
X^2=E[(fo-fe)(fo-
fe)/fe]=22.225
Degree of freedom:-
D.O.F= (R-1) (C-1)
= (4-1) (3-1)
= 6
X^2 a (6, O.O5) = 12.592
Conclusion:-
As X^2> X^2 a null hypothesis will be rejected and alternate hypothesis
will be accepted. So, there is significant relation between age of an investor &
rating consider by him for that security.
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2. Qualification & rating consider by investor:-
Null hypothesis (H0):-
There is no significant relation between qualification
of an investor & rating consider by him for that security.
Alternate hypothesis (H1):-
There is significant relation between qualification of
an investor & rating consider by him for that security.
Qualification
& rating
Always Sometime Never Total
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consider
10 & 10+2 2 2 24 28
Graduate 8 34 48 90
Post graduate 20 39 24 83
Other 11 20 8 39
Total 41 95 104 240
Calculation:-
Actual
frequency
(fo)
Expected
frequency
(fe=Rt*Ct/n)
(fo-fe) (fo-fe)(fo-
fe)
(fo-fe)(fo-
fe)/fe
2 4.78 -2.78 7.73 1.63
2 11.08 -9.08 82.45 7.44
24 12.13 11.87 140.9 11.62
8 15.38 -7.38 54.46 3.54
34 35.63 .-1.63 2.66 .075
48 39 9 81 2.08
20 14.18 5.82 33.87 2.39
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39 32.85 6.15 37.82 1.15
24 35.97 -11.97 143.28 3.98
11 6.66 4.34 18.84 2.83
20 15.44 4.56 20.79 1.35
8 16.9 -8.9 79.21 4.69
X^2=E[(fo-fe)(fo-
fe)/fe]=42.765
Degree of freedom:-
D.O.F= (R-1) (C-1)
= (4-1) (3-1)
= 6
X^2 a= (6,O.O5) = 12.592
Conclusion:-
As X^2> X^2 a null hypothesis will be rejected and alternate hypothesis
will be accepted. So, there is significant relation between qualification of an
investor & rating consider by him for that security.
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3. Risk position & rating consider by investor:-
Null hypothesis (H0):-
There is no significant relation between qualification
of an investor & rating consider by him for that security.
Alternate hypothesis (H1):-
There is significant relation between qualification of
an investor & rating consider by him for that security.
Qualification
& rating
consider
Always Sometime Never Total
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10 & 10+2 13 8 30 51
Graduate 12 24 25 61
Post graduate 16 62 50 128
Total 41 94 105 240
Calculation:-
Actual
frequency
(fo)
Expected
frequency
(fe=Rt*Ct/n)
(fo-fe) (fo-fe)(fo-
fe)
(fo-fe)(fo-
fe)/fe
13 8.71 4.29 18.4 2.11
8 19.98 -11.98 143.52 7.18
30 22.31 7.69 59.14 2.65
12 10.42 1.58 2.5 0.24
24 23.89 0.11 .0121 0.0005
25 26.69 -1.69 2.86 0,11
16 21.87 -5.87 34.46 1.58
62 50.13 11.87 140.9 2.81
50 56 -6 36 0,64
X^2=E[(fo-fe)(fo-
fe)/fe]=17.32
Degree of freedom:-
D.O.F= (R-1) (C-1)
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= (3-1) (3-1)
= 4
X^2 a= (4,O.O5)= 9.488
Conclusion:-
As X^2> X^2 a null hypothesis will be rejected and alternate hypothesis
will be accepted. So, there is significant relation between risk position of an
investor & rating consider by him for that security.
4. Risk position & rating consider by investor:-
Null hypothesis (H0):-
The proportion of investor consider credit rating are
0.5 (PH0=0.5)
Alternate hypothesis (H1):-
The proportion of investor consider credit rating are
less than 0.5 `(QH0=0.5)
Calculation:-
p=135/240=0.5625 (consider rating)
q=105/240=0.4375 (not consider rating)
Standard error ( p) = [Pho*QHo/n]
= [0.5*0.5/240}
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= o.o3227
Z= p- Pho/ p)
= 0.5625-0.5/0.03227
= 1.94
Conclusion:-
As Z
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1st Performance
opening low High Closing
Average 8.80% -0.97% 20.88% 8.33%
SD 0.024565 0.035828 0.046473 0.057088
Median 4.82% 1.02% 14.33% 5.15%
Maximum 68.75% 42.22% 75.00% 63.56%
Minimum -8.82% -41.11% -3.43% -37.12%
Skewness 2.09 0.05 1.18 0.49
N 34 34 34 34
The above analysis shows the first day performance of the IPO s. The study
reveals the average earnings of the offer open IPO is 8.80% and it ranges to the
maximum of 20.88% and the minimum of -0.97%and at an average of 8.33%
return on the first day of listing. Standard deviation also calculated and
presented in the above table. The Standard deviation shows that how much price
will be deviate from the expected average return, here we found the maximumand minimum deviation ranges between 0.057 to 0.024. The maximum average
return on the first day 75% and minimum average return on the first day is
-37.12%. Out of 34 IPO studied only 9 are listed below the issue price and 25
issues went above the issue price at the time of listing. The median of the first
day highest is 14.33% it shows the middle value of the day trading. The
skewness shows the positive return of the IPO it falls between + 3, if there is
highest return in positive is 1.18 so there are chances of higher return. At all
level there is positive skweness which shows positive return of the IPO.
Second Day of listing Performance
2st Performance
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opening low High closing
Average 8.40% 5.29% 12.33% 7.90%
SD 0.069662 0.071919 0.081921 0.080299
Median 4.25% 3.51% 7.94% 4.89%
Maximum 72.22% 68.96% 81.00% 81.00%
Minimum -43.73% -47.33% -37.67% -43.00%
Skewness 0.26 0.27 0.29 0.28
N 34 34 34 34
The second day's performance of the IPOs return analysis shows that all the IPO
investors gain on the listing day's performance and also on the second day. The
maximum and minimum average return on the second day ranges from 12.33%
to 5.29% respectively. The maximum return on the second day is ranges from
81% to 68.96% and the minimum return on the second day ranges from -43 to
-37.67%. There is less positive return on the second day of the IPO because the
skweness ranges of the day falls between 0.26 to 0.28. Which shows the
positive return but less than the first day and the S.D. of the second day 0.081 to
0.067 which higher deviation return?
Long term
Six Months Performance
6 Month Performance
opening low High closing
Average 23.40% 20.26% 27.71% 23.86%
SD 0.438738 0.41764 0.47552 0.46853
Median 5.44% 2.40% 11.50% 3.06%
Maximum 220.69% 203.79% 220.69% 220.00%
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Minimum -60.22% -61.22% -57.56% -59.56%
Skewness 1.38 1.32 1.34 1.37
N 34 34 34 34
The 6 months performance which we have considered long term the average
return fall from maximum to minimum 27.71% to 20.26% respectively. Which
is higher return than the first and second day of the performance? The median or
middle value of the long term return fall maximum to minimum 11.50% to
5.44%. And the maximum return of the six months 220% and minimum return
is -60.22%. The skewness shows the higher positive results which is highest1.38.
From the above IPO performance we found that the return of the short term
(first and second day) is good but if we compare with the long term (6 months)
is less. Because if an investor buy at the issue price and sell after six months or
one year long term it will give more return than the short term. The average
return of the very first day highest is 20.88% but for six months average highest
return is 27.71%.
So if an investor sells the share on long term rather than short term there are
more chances of the higher return.
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Chapter-7
FINDINGS
The primary research shows that more than 50% investors are moderate
risk taker so if they take slight risk then they will get more return
It shows that 80% investors are aware abut CRA but more than 70%
people are not aware about the procedure & criteria that CRA is consider.
It shows that more than 50% of investors are considering rate given by
CRA for security
The main reason behind not consider the rates are lack of awareness &
trust.
It shows that more investors are considering rate given by CRISIL &
more preference given up to a rate for security.
It shows that investors are somewhat agree that CRA shows the true
picture & alarm signal for market.
The IPO performance shows that long term return is good then short term
return given by IPO.
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Chapter-8
Learning
We did whole project on the Credit rating agencies and the public offering
performance. Earlier we didnt know what CRA is but though this project we
learnt following things:
o The overall working of the credit rating agencies.
o The process and the criteria which they consider during the credit rating
procedure, which give reliable rate to the company and different debt
instruments which show the real picture of the company.
o We come to know about risk position and rate relation and how much rate
important is important among the investors.
o The return of the public offer, when we can earn maximum return and
give us positive return.
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Annexure
Questionnaire for retail investor
Name: ___________________________________
Occupation: ___________________________________
Education: ____________________________________
Age: _____________________________________
1) Do you invest in the securities market?
a) Yes b) No
2) In which of the following options do you invest?
a) Equity b) Debenture c) IPO d) Bonds
3) How do you put yourself as far as risk is concern?
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a) Risk Averse b) moderate risk taker c) high risk taker
4) Do you know about the CREDIT RATING AGENCIES which rates
Securities?
a) Yes b) No
5) Which of the following CRA do you know?
a) CRISIL b) ICRA c) CARE d) FITCH
6) Do you know the procedure of CRA?
a) Yes b) No
7) Do you know the criteria of CRA?
a) Yes b) No
8) Do you consider the credit rate which is given by CRA for the securities for
Investment purpose?
a) Always b) Some time c) Never
9) Why do you not consider rating of CRA?
a) Do not aware b) Do not know the criteria
c) Do not know the procedure d) Do not trust
e) Any other
10) Which of the following agency rate do you prefers the most?
a) CRISIL b) ICRA c) CARE d) FITCH
11) Up to what extent the rating do you prefer to invest?
a) AAA b) AA c) A b) BBB c) BB d) B e) other
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12) Do you agree that CRA have an alarm system to provide alerts on significant relevant
events? Give the rank from 1 to 5. (1 = Strongly Agree, 5= strongly Disagree)
1. Strongly Agree 2. Agree 3. Neutral
4. Disagree 5. Strongly Disagree
13) What you think that the CRA shows the real picture of the companies
securities?
1 .Strongly Agree 2. Agree 3. Neutral
4. Disagree 5. Strongly Disagree
Thank You
Bibliography
o About Credit Rating: Merchant Banking by Dr. S Guruswamy
(Chap. No-25)
o Credit Rating Process:
http://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/CCRA030310_R2.
o Role of Credit Rating Agency: An Article by Radhika Jain
o http://www.google.co.in/#hl=en&source=hp&biw=1024&bih=5
82&q=credit+rating+article+by+Radhika+Jain&aq=f&aqi=&aq
o General Criteria for Security Analysis:
http://www.crisil.com/index.jsp
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o Rating Agencies: Web site of CRISIL, ICRA, FITCH, CARE
o Advisoryresearchconsultancy_2009ipomarket.pdf
o http://www.moneycontrol.com/news/ipo-new-
o listings/hathway-cable-to-listfeb-25_443649.html
o www.chittodhgard.com (IPO performance)
o Moneycontrol.com
http://www.chittodhgard.com/http://www.chittodhgard.com/
