Project Report

(Submitted for the degree of B.Com Honours in Accounting &

Finance under the University of Calcutta)

Title of the Project

CREDIT RATING OF INDIA

Submitted by
Name of the Candidate: Neha Jajodia
Registration No: 224-1221-0286-10
Roll No: 903
Name of the College: Seth Anandram Jaipuria College

Supervised by
Name of the Supervisor: Prof. D. Bhattacharya
Name of the University: University of Calcutta

Month & Year of Submission

February, 2013

1
 Acknowledgement
I would like to thank Mr. D. Bhattacharya, external faculty for
being our external guide and helping us with the finer details
of the project. We sincerely thank him for extending his help
on the theoretical as well as the practical aspect of the
project without which the project would not have been
possible.

Grateful acknowledgement is also made to Mr. A.

Mukhopadhyay, Principle of the Seth Anandram Jaipuria
college and Dr. T.K.Ghosh, Head of the Department, Seth
Anandram Jaipuria college for their guidance and support.

We also indebted to the organization which permitted us to

carryout the survey work and we thank everyone who helped
in the project who made this project possible.

2
Annexure – I

Supervisor’s Certificate
This is to certify that Ms. Neha Jajodia, a student of B.Com
Honours. In Accounting & Finance of Seth Anandram
Jaipuria College under the University of Calcutta has worked
under my supervision and guidance for her project work and
prepared a Project Report with the title Credit Rating of
India.
The project report, which she is submitting, is her genuine
and original work to the best of my knowledge.

Signature:

Place: Kolkata Name: D. Bhattacharya

Date: Designation: External Faculty
Name of the College: Seth
Anandram Jaipuria College

3
Annexure – II

Student’s Declaration
I hereby declare that the Project Work with the title CREDIT
RATING OF INDIA submitted by me for the partial fulfillment of
the degree of B.Com Honours in Accounting & Finance under the
University of Calcutta is my original work and has not been
submitted earlier to any other University/Institution for the
fulfillment of the requirement of any course of study.

I also declare that no chapter of this manuscript in whole or in part

has been incorporated in this report from any earlier work done by
others or by me. However, extracts of any literature which has
been used for this report has been duly acknowledge providing
details of such literature in the references.

Signature:

Place: Kolkata Name: Neha Jajodia

Date: Address:5, Gopal Ch. Mukherjee
Lane, Howrah 711 101
Registration No.:224-1221-0286-10
Roll No.: 903

4
 TABLE OF CONTENTS

S. PARTICULARS PG
NO. NO.
1. Objective Of Study 06
2. Introduction 06
3. International Scenario 07
4. Advent in India 12
5. Objective Of Credit Rating 13
6. Functions Of Credit Rating 13
8 Rating Process 14
9 Criteria For Rating 16
10 Credit Rating Agencies: 17
 Credit Rating Information Services Of 18
India Limited(CRISIL)
 Investment Information And Credit 30
Rating(ICRA)
11 Recent Ratings Given By Different Agencies 34
12 Benefits Of Credit Rating 36
13 Disadvantages Of Credit Rating 40
14 Conclusions And Recommendations 42
15 Bibliography 44

5
 OBJECTIVE OF STUDY

In these days where a lot of options are present before the

investors to invest their deposit, it is quite difficult to choose
an instrument which can give high safety with good returns.
In this time credit rating agencies came into existence which
suggests the safest mode. That’s why I have chosen this
Research Topic with in Primary objective to know more
about the agencies provided such services. Some other
objectives are as follows:
(i) To determine the process for credit rating.
(ii) To determine various credit rating agencies in India
and the services provided by them.
(iii) To determine the process adopted by these credit
rating agencies.
(iv) Are these credit rating agencies provided reliable
services.

INTRODUCTION

Credit rating is a qualified assessment and formal

evaluation of company’s credit history and capability of
repaying obligations. It measures the default probability of
the borrower, and its ability to repay fully and timely its
financial debt obligations.
Rating usually expressed in alphabetical or alphanumeric
symbols, are a simple and easily understood tool enabling
the investor to differentiate between debt instruments on the
basis of their under laying credit quality. It is focused on
communicating to the investors, the relative ranking of the
defaults loss probability for a given fixed income investment,
in comparison with other related instruments.

6
 The primary objective of rating is to provide
guidance to investors and creditors in determining the credit
risk associated with a debt instrument, It does not amount to
a recommendation to buy, hold or sell an instrument as it
does not takes into consideration factors such as market
prices, personal risks preferences and other consideration,
which may influence an investment decision. The rating
process is itself based on certain ‘Givens’. The agency, for
instance, does not perform an audit. Instead, it is required to
rely on information provided by other experts in the field of
audit (Audit Firms). The authenticity of the rating depends on
the completeness or accuracy of the information on which
the experts rely.

INTERNATIONAL SCENARIO

Credit Rating has its roots in America. In the process of

creating infrastructure, Rail road companies in U.S. resorted
to capital market for raising funds to finance acquisition of
land and stock. To sell their issue they were required to
convince the prospective investors by providing them
relevant data. Henry Poor, to whom ‘Standard and Poor’s’
can trace its ancestry, started publishing relevant data for
Rail road companies. From 1854, John Moody, the founder
of ‘Moody’s investor’s Services’, started analyzing the
published data to extract more precise and accurate
information for making investment in railways bonds. On the
basis of this extensive analysis the concept of rating started
where in Moody put different bond in different categories as
to their ability to pay Interest Due and Redemption of
Principal amount in time. It was Moody who for the first time
used the English Alphabets as symbols for different

7
categories of bonds as per risk involved for repayment of
interest in time.
Formally, rating of debt obligation was first introduced in
1909. Ratings was made obligatory when in 1933 after great
depression, the US controller of currency required banks to
purchase Securities rated at least BBB/Baa. Similarly to
protect the interest of investors, 1970 onwards all
commercial papers issued by US companies were required
to be rated along with all types of corporate bonds. Such st\
ps were the outcome of bankruptcy of very big companies,
the most prominent being Penn Central (a large chain of
retail stores). Credit rating, which basically aims at guiding
the lay investors about the corporate entities, now exerts a
very powerful influence in the domestic US market, Today
credit rating agencies have been established in more than
25 countries to serve the needs of the investors and the
corporate borrowers. Ratings thus, are a universal
phenomenon as both developing as well as developed
economics are opting for it. Since Credit Rating Agencies
established credibility in US, countries throughout world like
Spain, Chile, Sweden, Portugal, UK, Canada, France,
Thailand, Malaysia, Australia have appreciated the
importance of Credit Rating Agencies. In France all issues of
‘Certificate of Deposits’ and other debt instrument with
maturing over 2 yrs must publish the rating they have
obtained from a specialized rating agency. Three credit
rating agencies are recognized worldwide:
 Standard & Poor’s
 Moody’s Investor Service
 Fitch Ratings
They assign domestic and external ratings at the
borrower’s request. Each of them is present in most of the
countries and has a universal rating scale.

8
 STANDARD & POOR’S

Standard & Poor’s was established in 1860 by Henry

Varnum Poor. The agency’s founding principle was “the
investor has the right to know”. The company provided
independent financial analysis and information worldwide.

In 1906, Standard Statistics Bureau Company was formed to

provide previously unavailable financial information on US
companies. In 1916, Standard Statistics Bureau began to
assign debt ratings to corporate bonds and sovereign debt.
Municipal bond ratings have been introduced in 1940.

In 1941, Poor’s Publishing and Standard Statistics merged to

form the Standard & Poor’s Corporation.

In 1966, The McGraw-Hill Companies, Inc. acquired

Standard & Poor’s. Today Standard & Poor’s is a division of
Corporation, which provides financial consulting, credit
ratings, numerous analytical materials on securities,
companies, banks (Bond Guide, Earnings Forecaster, New
Issue Investor, Stock Guide, Analyst’s Handbook,
Corporation Records, Poor’s Register, Securities Dealers of
North America).

Now, the company has 21 offices and 1,200 analysts,

including some of the world’s foremost economists.

9
 MOODY’S INVESTOR SERVICE
‘Moody’s Investors Service’ is a leading global credit rating,
research and risk analysis firm that publishes credit opinions,
research and ratings on fixed-income securities, issuers of
securities and other credit obligations.

The company was established in New York by John Moody

in 1900. Initially John Moody & Company published Moody’s
Manual of Industrial and Miscellaneous Securities. The
manual provided information and statistics on stocks and
bonds of financial institutions, government agencies,
manufacturing, mining and food companies.

In 1909, Moody’s Analysis of Railroads Investments

described for readers, the analytic principles that Moody
used to assess railroad’s operations, management, and
finance.

In 1913, the company expanded its base of analyzed

companies, launching the evaluation of industrial companies
and utilities. On July 1st, 1914, Moody’s Investor Service was
incorporated.

By 1924, Moody’s ratings covered nearly 100% of the US

bond market.

Moody’s continued to publish and monitor ratings during the

Great Depression.

In the 1970s, the Moody’s ratings were further extended to

the commercial paper market and to bank deposits.

Now, Moody’s Corporation comprises two subsidiaries:

Moody’s Investors Service and Moody’s KMV. The

10
corporation employs approximately 2,100 people worldwide
and maintains offices in 18 counties.

FITCH RATINGS
Agency provides credit ratings to corporate and municipal
bonds, preferred stocks, commercial paper, and to non-
commercial organizations. Fitch Ratings was founded as the
Fitch Publishing Company on December 24 th, 1913 by John
Knowles Fitch in New York City.

The Fitch Publishing Company began as a publisher of

financial statistics whose consumers included the New York
Stock Exchange. Soon Fitch became the recognized leader
in providing critical financial statistics to the investment
community through such publications as the “Fitch Bond
Book” and the “Fitch Stock and Bond Manual”.

Fitch was one of the three rating agencies first recognized as

a Nationally Recognized Statistical Rating Organization
(NRSRO) by the Securities and Exchanges Commission in
1975.

Fitch has a rating presence in 75 countries and 40 offices

worldwide. It today has 1,300 employees, including 725
analysts.

Fitch currently covers 2,300 banks and financial institutions,

1,000 corporates and maintains surveillance on 3,300
structured financings and 17,000 municipal bond ratings in
the U.S. tax-exempt market. Fitch also rates over 700
insurance companies plus 70 sovereigns.

11
 ADVENT IN INDIA

Credit rating emerged in India with the Birth of Credit Rating

Information Services of India Limited (CRISIL) in January,
1988. Corporate sector enterprises in India are dependent
upon the financial institutions and banks for funds to finance
their projects or expansion of existing projects. The rating
issued by these agencies enhances its credit worthiness and
its reputation in the capital market. The need for credit
Rating Agencies has been felt much more now when the
capital market is grooving to attain efficiency and corporate
enterprises are raising funds from the issue of securities
depending on the trends in the capital market. A move in the
corporate sector from ‘Debt – Age’ to ‘Free Market Finance
Age’ has further increased the need for credit rating
agencies. This is the time for investor to measure risk as well
as for the corporate units to use credit rating as a marketing
tool.
The growth of capital market is discernible from the fact
that there are 21 stock exchanges operating in India with
over 6500 listed companies and more than 1.5 crores
individuals’ investors with increasing trend of invertible funds
and increasing demand for funds from the industry. Investors
have to rely upon rated instruments rather than following the
advices of the financial intermediaries. However, rating has
not been made compulsory in India for companies going
public. It is only debt instrument i.e. debentures, certificate of
deposits or money market instruments like commercial paper
for which rating is obligatory under the recent guidelines
issued in this regard.

12
 OBJECTIVES OF CREDIT RATING

1. It‘s primary objective is to provide guidance to the

investors and creditors in determining the credit risk
associated with debt instrument.
2. To shift the primary burden of establishing corporate
credit quality from the broker/underwriter to the rating
agency and thus lessen potential conflicts of interest
between underwriter and investors.
3. Provide an increased disclosure, better accounting
standards and improved financial information to
institutional investors.
4. Encourage the direct mobilization and saving from
individuals rather than from intermediary lending
institution.
5. Providing benefits to the borrowing company by
reducing interest cost for higher rated companies.
6. Enhance the borrowing capability of high rated
companies and thus play a role in its expansion plan.

FUNCTIONS OF CREDIT RATING

CREDIT RATING AGENCIES:

1) Provide superior information on credit risk for

three reasons :
I. An independent rating agency, unlike brokers,
financial intermediaries, underwriters who have
vested interest in an issue, is likely to provide an
unbiased opinion.
II. Due to professional & highly trained staff, their
ability to assess risk is better, &

13
 III. The rating firm has access to a lot of information
which may not be publicly available.
2) Low cost information: Rating firm gathers, analyses,
interprets and summaries complex information in a
simple and readily understood formal manner. It is
highly welcome by most investors who find it prohibitive
and simply impossible to do such credit evaluation of
their own.
3) Basis for a proper risk and return: If an instrument is
rated by a rating agency, then such instrument enjoy
higher confidence from investors. Investors have some
idea as to the risk associated with the instrument in
which he/she is likely to invest.
4) Healthy discipline on corporate borrowers: Higher
credit rating to any credit investment tends to enhance
the corporate image and visibility and hence it induces
a healthy discipline on corporates.

RATING PROCESS

Any rating agency assign a rating entry when there is

adequate information available to form a credible opinion
and only after extensive quantitative, qualitative and if
appropriate legal analyses are performed.
The process of rating is broadly three-tier system:
a) Receipt of information
b) Analysis of information.
c) Granting rating symbols.

A) RECEIPTS OF INFORMATION
The rating exercise is based on quality and
quantity of information received by the rating agency.
The more authentic the information the more reliable is

14
 the rating. The information required by the rating
agency is such which gives the real picture of the
issuer. The credit rating agency besides depending on
the information provided by the issuer collects
additional information from its own sources. The
information required about the issuer is not only of the
past but also about its future.

B) ANALYSIS OF INFORMATION
The rating process of different rating agencies is
almost similar since the basic parameters to be
observed to assess associated risks are almost same.
Rating is a search for long-term fundamentals and the
probabilities for charges in fundamentals which could
affect the credit worthiness of the borrower. Rating
fundamentals analyses not only the financial profile of
the concerned issuer in context of the instrument to be
rated but also evaluate its business and compressive
strengths and weaknesses.

C) GRANTING RATING SYMBOLS

The process starts with a formal request from the
prospective issuer for rating. The issuer is generally
asked to submit required information in a set Performa
for essential items. The rating agency assigns an
analytical team for the issue. The analysts take up the
assignment of collection of additional data, which they
consider to be relevant. The team interacts with clients
and undertakes sites or premises visit to gather first
hand information especially about quantitative aspects.
They may also examine the books of accounts. They
can interact with the executive and other concerned
officials. They review in detail the borrowers key

15
 operating and financial plans, management policies and
credit factors. The data base of the rating agency about
industry concerned is also extensively used.
Following this review and discussions, the
analysts makes a recommendation and a rating
committee meeting is conveyed. The committee
discusses the recommendations and the pertinent facts
supporting the rating. Finally, the committee awards a
rating on the basis of these recommendations. The
client is subsequently notified of the rating and all other
major supporting consideration. The client has an
option not to accept the rating and appeal against the
rating decision prior to its publications. After further
deliberations, the agency will issue a final rating. The
client has no option but to accept the rating and publish
it.

CRITERIA FOR RATING

 Past performance of the company and its

future prospects.
 Management of the Company.
 Goodwill.
 Credit Worthiness.
 Interest Coverage Ratio.
 Debt Service Coverage Ratio.
 Net Cash Accruals to total debt.
 Capital Structure.
 Gearing.
 Total debt/Tangible Net worth.
 Total debt/Adjusted Net worth.

16
 Total debt + off balance sheet funding
liabilities/TNW.
 Total debt + off B/S liabilities/Adjusted Net
Worth.
 Credit Enhancements.
 Group Support.

CREDIT RATING AGENCIES

Credit rating agences play a very vital role in the debt market
of an economy. In India however, a secondary debt market
for corporate securities is virtually non-existent. A lack of a
vibrant debt market prevents the investors from knowing the
true value of their bond holding. The credit rating agencies in
India have evolved as a prominent force in creating
awareness among the investors over the years. Serving as
information intermediaries between the issuers and
investors, the rating agencies are in the process of
developing new methods for performance measurement. In
its decades long existence, the rating Industry has evolved
greatly and continuous to play a pivotal role in the Indian
Market.

In India there are many credit rating agencies are present.

These are:
1) Credit Rating information services of India Limited
(CRISIL)
2) Investment information and credit Rating (ICRA)
3) Credit Analysis and Research (CARE)
4) Duff & Phelps credit rating India private limited.
5) Fitch Rating India Private Limited.
In the above agencies the first three agencies i.e. CRISIL,
ICRA and CARE are major agencies.

17
CREDIT RATING INFORMATION SERVICES
OF INDIA LIMITED (CRISIL)

INTRODUCTION

The Credit Rating Information Services of India Ltd (CRISIL)

began operations in 1987, offering credit rating services in a
market where this concept was totally new. Interest rates at
that time were government determined, and CRISIL’s
business was therefore built entirely on guiding the market
for its investment decisions. CRISIL had the challenge of
building a new business in an unknown area from a zero
base.

OWNERSHIP

CRISIL’s promoters represent a broad cross-section of the

financial sector. The list includes major Indian Financial
Institutions such as ICICI and HDFC, a large mutual fund
(the Unit Trust of India), a number of Indian and foreign
banks, and the Asian Development Bank (ADB), Manila.
This distinguished and broad-based parentage ensured an
initial market perception of CRISIL as a credible,
professional and independent entity, an image that CRISIL
strives to maintain.
A clear and comprehensive account of the ownership has
been circulated in the public domain, and is updated
whenever there are significant changes in the ownership.

MANAGEMENT

CRISIL is a professionally-managed company, where the

management is independent of the ownership. The members
of the CRISIL Board are distinguished professionals.

18
Executive Directors, and other senior managers of CRISIL,
are financial professionals who have exhibited excellence in
their respective fields, and have a track record of significant
achievement behind them.

OBJECTIVE OF CRISIL

The main objective of CRISIL is as under:

 To assist investors in making investment decisions.
 To assist issuers in raising funds from a wider investor
base.
 To provide a marketing tool to entities.
 To assist in the development of the capital markets.
 To institutionalize a viable and market-driven system of
credit rating in
India.
 To encourage individuals to invest in Financial
Instruments rather than in
non-productive assets.

ACHIEVEMENTS OF CRISIL

 CRISIL was the world’s first agency to develop criteria

for rating instruments carrying partial guarantees.
 CRISIL was the first agency in India to develop criteria
for rating banks, state governments, and urban local
bodies.
 CRISIL introduced ratings for structured finance
instruments in India.
 CRISIL introduced performance ratings for
o Real estate developers

19
 o Capital market brokers
 CRISIL also introduced ratings of healthcare institutions
on quality of delivered care.
CRISIL’S RATING PROCESS:

THE RATING PROCESS OF CRISIL CAN BE EXPLANED

WITH THE HELP OF DIAGRAM:

Plant visit followed by

Management Meetings

APPEAL
Rating Committee assigns
rating

Communication of rating
To issuers

Dissemination of rating
publication

Surveillance & Annual

Review

20
RATING SYMBOLS USED BY CRISIL

 DEBENTURES

1). High investment grade:

Symbols Definition
Debentures rated “AAA” are judged to
offer higher safety to timely payment of
interest and principal. Though the
AAA– (Triple circumstances providing this degree of
A) safety are likely to change, such changes
HIGH SAFTEY as can be envisaged are most unlikely to
affect adversely the fundamentally story
position of such issues.

Debentures rated “AAA” are judged or

AA – (Double offer high safety of timely payment of
A) interest and principal. They differ in safety
HIGH SAFETY from “AAA” issues only.

2). Investment Grades:

Definition
Symbols
Debentures rated “A: are judged to offer
adequate safety of timely payment of
A
interest and principal, however, change in
Adequate
circumstances can adversely affect such
Safety
issues more than those in higher rated
categories

21
 Debentures rated “BBB” are judged to
offer sufficient safety of timely payment of
interest and principal for the present,
BBB (Triple B) however, changing circumstances are
Moderate more likely to lead to a weakened
Safety capacity to pay interest and repay
principal than for debenture in higher
rated categories.

Debentures rated “BB” are judged to

carry in adequate safety of timely
payment of interest and principal while
BB (Double B)
they are less susceptible to default than
Inadequate
other speculative grade debentures in the
safety
immediate future the uncertainties that
the issuer faces could lead to inadequate
capacity to make timely interest and
principal payments
Debentures rated “B” are judged to have
greater susceptibility to default, while
B currently interest and principal payment
high risk are met, adverse business or economic
condition would lead to lack of ability or
willingness to pay interest or principal
Debentures rated “C” are judged to have
factors present that make them
C
vulnerable to default, timely, payment of
Substantial
interest and principal is possible only if
Risk
favorable circumstances continue.

D Debentures rated “D” are in default and in

Default arrears of interest or principal payments

22
 or are expected to default on maturity.
Such debentures are extremely
speculative and returns from these
debentures may be realized only on
reorganization liquidation.

 FIXED DEPOSIT

Definition
Symbols
This rating indicates that the degree of
FAAA (F – safety regarding timely payment of interest
Triple A) and principal is very strong.
Higher Safety

This rating indicates that the degree of

safety regarding timely payment of interest
FAA – (F- and principal is strong. However, the
Double A) relative degrees of safety are not as high
High Safety as for fixed deposits “FAAA” rating.

This rating indicates that the degree of

safety regarding timely payment of interest
FA and principal are satisfactory changes in
Adequate circumstances can affect such issues more
Safety than those in the higher rated categories.

FB The rating indicates inadequate safety of

23
 timely payment and interest and principal
such issues are less susceptible to
Inadequate inadequate capacity to make timely
Safety interest and principal payments.

This rating indicates that the degree of

safety regarding timely payment of interest
and principal is doubtful. Such issues have
FC factors at present that make them
high risk vulnerable to default, adverse business or
economic conditions would lead to lack of
ability or willingness to pay interest or
principal.
This rating indicates that the issue is either
FD in default or in expected to be in default
Default upon maturity.

 SHORT TERM INSTRUMENTS

Definition
Symbols
This indicates that safety regarding strong.
P-1

P-2 This rating indicates that the degree of

safety regarding timely payment on the
instruments is strong, however the relative
degrees of safety is lower than that for
instrument rated P-1.

24
 This rating indicates that the degree of
safety regarding timely payment on the
instrument is adequate; however the
instrument is more vulnerable to the
P-3 adverse effect of changing circumstances
than an instrument rated in the two higher
categories.

This rating indicates that the degree of

safety regarding timely payment on the
instrument is minimal and it is likely to be
P-4 adversely affected by short term adversity
or less favorable conditions.

This rating indicates that the instrument is

expected to be in default on maturity or in
P-5 default.

25
 FINANCIAL PERFORMANCE OF CRISIL OVER THE
YEARS

A) SEGMENT WISE (WITHOUT CONSOLIDATION)

TABLE - 1 – AN OVERVIEW OF THE FIANCIAL PERFORM,ANCE

OVER THE YEARS1
(Rs. In
FINANCIAL YEAR Lakhs)
PARTICULARS 2007 2008 2009 2010 2011

OPERATING 25,532. 44,162. 52,87

INCOME 28 37,835.37 34 1.21 63,915.62
NON-
OPERATING
INCOME 1,555.72 2,553.66 2,283.02 7,362.23 4,301.39
PROFIT 9,147.3 24,7
BEFORE TAX 6 17,512.33 19,034.16 24,897.36 56.22
PROFIT 18,6
AFTER TAX 7,067.08 13,737.81 15,033.72 19,575.46 51.22
27644.3 20,95 3606
NET WORTH 9 35751.28 43381.13 9.74 4.06
DIVIDEND (%) 250 700 1000 1000 1100
EARNING PER
SHARE (Rs.) 11.80 19.50 22.30 28.50 29.10

1
Annual Report of the last Five Financial Years

26
 TABLE - 2 – REVENUE FROM CREDIT RATING AND
COMPARISON WITH PREVIOUS YEARS

PERCENTAGE RISE
FINANCIAL CREDIT RATING IN CREDIT RATING
YEAR FEES EARNED2 FEES
(Rs. In Thousands) (Using YoY Figures)
1
2006 - 2007 3,007.84 50.95%
1
2007 - 2008 8,877.53 45.12%
2
2008 - 2009 3,890.16 26.55%
28
2009- 2010 ,408.77 18.91%
32
2010- 2011 ,600.13 14.75%

2
Profit & Loss A/c of the Annual Report of last Five Financial Years

27
 FINANCIAL PERFORMANCE OF ICRA LTD OVER
THE YEARS

A) SEGMENT WISE (WITHOUT CONSOLIDATION)

TABLE - 1 – AN OVERVIEW OF THE FIANCIAL PERFORM,ANCE OVER THE YEARS 3

(Rs. In
FINANCIAL YEAR Lakhs)
PARTICULARS 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11

OPERATING 10,616.
INCOME 3,321.28 3,978.99 6,069.50 8,872.80 39 12931
NON
OPERATING 2,177.9
INCOME 539.47 697.94 793.73 1,270.78 9 1254
PROFIT BEFORE 7,411.2
TAX 1,739.06 2,223.14 3,785.37 5,265.95 4 6880
PROFIT AFTER 5,000.3
TAX 1,265.10 1,610.01 2,665.86 3,615.10 7 4491
20,959.
NET WORTH 26,821.00 14,232.02 15,730.09 17,941.25 74 24234
DIVIDEND (%) 40 45 100 120 170 170
EARNING PER
SHARE (Rs.) 14.37 18.3 26.66 36.15 50 44.91

TABLE - 2 – REVENUE FROM CREDIT RATING AND

3
Annual Report of the last Five Financial Years

28
 COMPARISON WITH PREVIOUS YEARS

PERCENTAGE RISE
FINANCIAL CREDIT RATING IN CREDIT RATING
YEAR FEES EARNED4 FEES
(Rs. In Thousands) (Using YoY Figures)
3
2006 - 2007 88,950.33 24.29%
6
2007 - 2008 02,609.00 54.93%
8
2008 - 2009 85,157.00 46.89%
1,
2009- 2010 061,481.00 19.92%
1,
2010- 2011 293,050.00 21.82%

4
Profit & Loss A/c of the Annual Report of last Five Financial Years

29
INVESTMENT INFORMATION AND CREDIT
RATING AGENCY (ICRA)

INTRODUCTION

ICRA Ltd. has been promoted by Industrial Finance

Corporation of India (IFCI) as its main promoter with its Head
quarters at New Delhi. It is an independent credit rating
agency established in 1991. At present, ICRA comprises of a
number of leading public sector banks and financial
institutions such as IFCI, state Bank of India, UTI, GIC, PNB,
Central Bank of India, Bank of Baroda, UCO Bank etc.

OBJECTIVES OF ICRA

1. To provide Information and Guidance to institutional

and individual investors and creditors.
2. To enhance the ability of borrower/issuers to access
the money market and capital market for tapping a
larger volume of resources in the financial markets.
3. To enable banks, investments bankers and brokers
in placing debt with investors by providing them with
a marketing tool.
4. To encourage healthy growth of the capital markets
in a disciplined manner without an additional burden
on the government.

30
ICRA’S RATING PROCESS

I) Rating Request:
Rating is initiated by a formal request from the
prospective issuer. This mandate spells out the terms of
the rating assignment. Important issues that are
covered include:
 Binding the credit rating agency to maintain
confidentiality
 The right to the issuer to accept or not to
accept the rating
 The obligation of the issuer to provide
required information by the credit rating
agency for rating and subsequent
surveillance.

ii) Rating Team:
The team usually comprises two members. The
composition of the teams if based on the expertise and
skills required for evaluating the business of the issuer.

iii) Information Requirements:

Issuers are provided a list of information
requirements and broad framework for discussions.

iv) Secondary Information:

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

31
v) Management meetings and Plant Visits:
Rating involves assessment of number of
qualitative factors with a view to estimate the future
earnings of the issuer. This requires intensive
interactions with issuer’s management specifically
relating current financial position, future utlook,
competitive position and funding policies. Plant visits
facilitates understanding of the production process and
assessment of equipments and main facilities.

VI) Preview Meeting:

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

vii) Rating Committee Meeting;

This is the final authority for assigning ratings. All
the issues identified during discussions in the internal
committee are discussed. The rating committee also
considers the recommendations of the internal
committee for the rating. Finally, a rating is assigned
and all the issues which influence the rating are clearly
spelt out.

viii) Rating Communication:

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

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DYNAMICS
Key areas considered during a rating analysis include
the following:

i) Business Risk:
Industry characteristics, performance and outlook,
operating position, capacity, market share, distribution
system, marketing networks, technological aspects,
business cycle and capital intensity.
ii) Financial Risk:
Financial management, capital structure, liquidity
position, financial flexibility and cash flow adequacy,
profitability, leverage, interest coverage, accounting
policies and practices, income recognition and
inventory valuation.

iii) Management Assessment:

Background and history of the issuer, corporate
strategy and philosophy, organizational structure,
quality of management and management capability
under stress, personnel policies including succession
planning.

iv) Environment Analysis:

Regulatory environment, operating environment,
national economic outlook, areas of special significance
to the company, pending litigation, tax status, possibility
of default risk under a variety of future scenarios.

33
 Rating Symbols for Debt Funds
The ICRA Rating Symbols for Credit Risk Rating of Debt
Funds and their implications are as follows:
mfAAA Indicates highest quality. This investment
quality is of highest grade and is similar to that
of fixed income obligations of highest safety.
mfAA+
Indicates high quality. This investment quality is
mfAA of high grade and is similar to that of fixed
income obligations of high safety.
mfAA-

mfA+ Indicates adequate quality. This investment

quality is of upper medium grade and is similar
mfA
to that of fixed income obligations of adequate
mfA- safety.

mfBBB+
Indicates moderate quality. This investment
mfBBB quality is of medium grade and is similar to that
of fixed income obligations of moderate safety.
mfBBB-

mfBB+
Indicates inadequate quality. This investment
mfBB quality is of low grade and is similar to that of
fixed income obligations of inadequate safety.
mfBB-

mfB+
Indicates poor quality. This investment quality
mfB is of lowest grade and is similar to that of fixed
income obligations that are risk prone.
mfB-

34
 RECENT RATINGS GIVEN BY DIFFERENT
AGENCIES

BY CRISIL:
 CRISIL assigned grade 3/5 to Rural Electrification
Corporation IPO
 CRISIL assigned grade 3/5 to Vascon Engineers Ltd
IPO
 CRISIL assigned grade 4/5 to Acme Tele Power IPO.
 CRISIL assigned grade 3/5 for V-Guard Industries IPO
 CRISIL assigned grade 3/5 for Shriram EPC IPO
 CRISIL assigned grade 4/5 to Reliance Power IPO
 CRISIL assigned grade 3/5 for KNR Constructions Ltd
IPO
 CRISIL assigned grade 4/5 to Persistent Systems Ltd
IPO
 CRISIL assigned grade 4/5 to OnMobile IPO
 CRISIL assigned grade 3/5 to Tecpro Systems IPO
 CRISIL assigned grade 3/5 to eClerx Services IPO
 CRISIL assigned grade 4/5 to Edelweiss Capital IPO
 CRISIL assigned grade 1/5 to Varun Industries IPO
 CRISIL assigned grade 4/5 to Precision Pipes and
Profiles IPO

BY ICRA:

 ICRA assigned grade 1 to Saamya Biotech (India) Ltd.

IPO.
 ICRA assigned grade 3 to Future Capital Holdings IPO.
 ICRA assigned grade 4 to Reliance Power IPO.

35
  ICRA assigned grade 2 to J.Kumar Infraprojects Limited
IPO.
 ICRA assigned grade 1 to Ankit Metal & Power Limited
IPO.
 ICRA assigned grade 2 to Hilton Metal Forging Limited
(HMFL) IPO.
 ICRA assigned grade 3 to Consolidated Construction
Consortium Ltd. IPO
 ICRA assigned grade 2 to Renaissance Jewellery Ltd.
IPO.
 ICRA assigned grade 2 to Brahamputra Consortium
Limited IPO.
 ICRA assigned grade 3 to Religare Enterprises Limited
IPO.
 ICRA assigned grade 3 for BGR Energy Systems
Limited IPO.
 ICRA assigned grade 3 to Brigade Enterprises Limited
IPO.

BENTIFITS OF CREDIT RATING

For different class of persons different benefits accrue from

use of rated instruments. Such benefits directly accruing to
investors through rated instruments are:

(A) BENEFITS TO INVESTORS:

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

(i) Safeguards against Bankruptcy:

36
 Credit Rating of an instrument, by a rating agency,
gives an idea to the prospective investors about degree
of financial strength of the issuer company. Highly rated
instruments of a company give an assurance to the
investors and acts as a cushion against bankruptcy.

(ii) 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 instruments. In becomes easier for the
investors by looking at the symbol to understand the
worth of the issuer company. Rating symbol gives them
the idea about the risk involved or the expected
advantages from the investment.

(iii) Credibility of Issuer:

Rating symbols assigned to a credit instrument 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.
(iv) Easy Understandability of Investments Proposals:
Rating symbol can be easily understood by an
investor. It needs no analytical skills on his part.
Investor can take quick decision as to whether he
should or shouldn’t invest in any particular rated
security of a company.

(iv) Independence of Investment Decisions:

Flkor making investment in non-rated instruments,
investors may seek the advice of financial
intermediaries, stock brokers, merchant bankers, the
portfolio managers etc. But for rated instruments,

37
 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.

(vii) Choice of Investments:

Several alternative credit rating instruments are
available at a particular point of time for making
investment is the capital market. The investor can make
choice depending upon their own risk profile and
diversification plan, if he has access to the ratings
assigned by various credit rating agencies and
understands them well.

(B) BENEFITS OF RATING TO COMPANY:

Company which has its credit instrument or
security rated by a credit rating agency is benefited in the
following ways:

(i) Lower cast of borrowing:

A company with highly rated instrument has the
opportunity to reduce the cost of borrowing from the
public by quoting lesser interest on fixed deposits or
debentures or bonds as the investors with low risk
preference would come forward to invest in safe
securities though yielding marginally lower rate of
return.
(ii) Wider Audience for borrowing:
A company with a highly rated instrument can
approach the investor extensively for the resource
mobilization using the press media. Investors in
different strata of the society could be attracted by

38
 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.

(iii) Rating as Marketing Tools:

Companies with rated instruments improve their
own image and use rating as a marketing tool to credit
better image in dealing with its customer. Investors feel
confident in the utility products manufactured by the
companies carrying higher rating for their credit
instruments.

(iv) Reduction of cost in Public Issues:

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

(v) Motivation for Growth:

Rating provides motivation to the company for
growth. The promoter feels confident and are
encouraged to undertake new projects or expansion of
their operations with the backing of better image
created through higher credit rating. The company can
mobilize funds from public, financial 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.

39
 DISADVANTAGES OF CREDIT RATING

Although rated instruments are at premium as opposed to

non-rated instruments,
but they may suffer from the following disadvantages:

i) Biased rating and misrepresentations:

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

(ii) Static Study:

Rating is done on the present and past historic
data of the company and this is only a static study.
Prediction of the company’s health through rating is
momentary and anything can happen after assignment
of rating symbols to the company. Many changes take
place in economic environment, political situation,
government policy framework which directly affect the
working of a company.

(iii) Concealment of material information:

Rating company might conceal material
information from the investigating team of the credit

40
 rating company. In such cases quality of rating suffers
and renders the rating unreliable.

(iv) Rating is no guarantee for soundness of company:

Rating is done for a particular instrument to
assess the credit risk but it should not be construed as
a certificate for the matching quality of the company or
its management. Independent views should be formed
by the user public in general of the rating symbol.

(v) Human Bias:

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

(vi) Reflections of temporary adverse conditions:

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

(vii) Difference in rating of two agencies:

Rating done by the two different credit rating
agencies for the same instrument of the issuer
company in many cases would not be identical. Such
difference is likely to occur because of value judgment
differences on qualitative aspects of the analysis in two
different agencies. This can confuse the prospective
investors as to the reliability of the ratings of the two
agencies.

41
 CONCLUSIONS & RECOMMENDATIONS

1. There are two main reasons that the information about

credit rating are not available to the investors a) As per
the SEBI guidelines a company does not required a
credit rating if the maturity period of the debt is less
than 18 months. A company can therefore avoid a
rating by issuing bonds with shorter maturities and
rolling them over if necessary b) A company does not
need a credit rating if it borrows money from the banks
of the financial institutions.
2. The credit rating agencies play a vital role by providing
rating to different company’s debts but there are no
agencies, which can rate these credit rating agencies.
3. Credit rating given by different credit rating agencies is
not so reliable that anyone can believe it with closed
eyes.
4. Rating does not advise an investor to buy. The reason
is that some factors, which are of significance to an
investor in arriving at an investment decision, are not
taken into account by rating agencies. These include
reasonableness of the issue price or the coupon rate,
secondary market liquidity and pre-payment risk.
Further, different investors have different views
regarding the level of risk to be taken and rating
agencies can only express their views on the relative
risk
5. Company can fulfill their requirements by having link
with these credit rating agencies.
6. In these days it is important for a company to gain a
rating because they can use it as a marketing tool.
7. Same instrument is being rated by different rating
agencies therefore lots of money, time & effort is
wasted for rating a single instrument.

42
India is a developing country and in developing countries
there is a shortage of financial resources. Therefore, they
are more dependent on the deposits of public. Credit rating
agencies fulfill the requirement of those companies by giving
rating to them. This helps the investors to help them to invest
in safe securities and they can earn good return. Although
these credit rating agencies having some disadvantages but
these can be controlled by proper check from the
government and then it can really be useful for the investors.
In the nutshell, we can conclude that the future of credit
rating in India is a very bright.

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 Bibliography

1)http://www.crisil.com/Ratings/Brochureware/News/2010-dec-
audited-income-statement.pdf?cn=null
2) http://www.icra.in/files/pdf/investors/AR-2010-11.pdf
3) http://www.icra.in/files/pdf/investors/AR-2009-10.pdf
4) http://www.crisil.com/pdf/investors/2008-annual-report-
crisil.pdf
5) http://www.crisil.com/pdf/investors/2009-annual-report-
crisil.pdf
6)http://www.crisil.com/pdf/investors/2007-annual-report-
crisil.pdf
7) http://www.crisil.com/pdf/investors/2010-performance-ten-
years.pdf
8) http://icra.in/files/pdf/investors/AP-2008.pdf
9) http://icra.in/files/pdf/investors/annual_reports_2006_07.pdf
10)http://www.crisil.com/pdf/investors/2011-annual-report-
crisil.pdf

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