Sheel's Project On Credit Rating

A PROJECT REPORT
ON
SIGNIFICANCE OF CREDIT RATING IN INDIA
BY
SHEEL KUMAR HANS
(MBA-Applied Management)
EN.NO.4740800891
SUBMITTED
TO
NIS ACADEMY,INDORE
(A division of NIS Sparta, a Reliance ADA Group company)

PROJECT REPORT ON SIGNIFICANCE OF CREDIT RATING IN INDIA
CERTIFICATE OF PROJECT COMPLETION
This to certify that Mr. Sheel Kumar Hans a Bonafide student of Nis Academy
Institute of Management, Indore has completed the project title
“SINGNIFICANCE OF CREDIT RATING IN INDIA”. The Project was
undertaken in degree of Master in Applied Management under University of
Annamalai during the academic year 2008-2010.
He has carried out this project under my guidance and supervision. His work is
found to be satisfactory in all respects. He duly acknowledged the source of
information and data used for the purpose of completion of the project report.
We wish him all the best for his future endeavors.
Mr. Feroz Banglowala Prof. Abhishek Kumar Jain
(Director) (Project guide)

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ACKNOWLEDGEMENT
I take this opportunity to pay my sincere thanks to all the people who have helped
me directly or indirectly to complete my project successfully.
First of all, I would like to express my sincere gratitude to Mr. Abhishek Kumar
Jain senior faculty of NIS Academy, who gave me the opportunity to carry out this
project.
I am equally grateful to Ms. Neha Chawala, Faculty of Nis Academy, who in spite
of her busy schedule provided her valuable guidance and sufficient material needed
for the completion of my project. In fact, she has been my guide throughout my
project.
I am also grateful to Mr. Feroz Banglowala, Director (NIS Academy), for granting
me an approval to undertake this project, my sincere thanks to Mr. Gajendra
Rathor, for their invaluable guidance and support.
Date: Sheel Kumar Hans
Place: Indore MBA 2nd year
Financial Management
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DECLARATION
I hereby declare that the project entitled “ Significance of Credit Rating in
India” submitted for the degree of business administration in Applied
Management is my original work and the project has not formed the basis for the
award of any degree, diploma, associate ship, fellowship or similar other titles. It
has not been submitted to any other university or Institution for the award of any
degree or diploma.
Date: Signature of the Student
Place: Name:
Enrolment no: 4740800891
INDEX
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• INTRODUCTION 07
Concept of credit rating and features
• ORIGIN OF CREDIT RATING 11
• THE CREDIT RATING SYSTEM 13
• CRDIT SCORE 15
• CREDIT RATING AGENCY 18
Reasons for the origin of the credit rating agencies
Functions and the way of working.
• GROWTH OF CREDIT RATING AGENCIESG 22
• CRITISISM FOR CREDIT RATING AGENCIES 30
• CREDIT RATING IN INDIA 39
Credit rating agencies in India and working procedures.
• USES OF RATING 49
• TAXABLE EVENTS AND SCOPE OF SERVICES 59
Value of Taxable Service, Exemption and Exclusion
•LIST OF DATA REQUIREMENTS FOR CREDIT RATING 64
•FUTURE OF CRIDIT RATING IN INDIA 68
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•BENIFITS AND DRAWBACKS OF CREDIT RATING 69
•NEED AND IMPORTANCE OF CREDIT RATING 74
•PRACTICAL PROBLEMS WITH CREDIT RATING 80
•INDIVIDUAL CREDIT RATING 84
•RAGULATORY FRAMEWORKS 96
SEBI Guidelines
•IPO RATING 154
• BOND RATING 162
•SME RATINGS BY NSIC – CRISIL 175
• FINDINGS 182
•CONCLUSION 191
• QUESTIONARIES 192
•BIBLIOGRAPHY 196
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INTRODUCTION
In a market, financial markets play the role of efficient intermediary. They act as a
link between savers and investors, mobilizing capital on one hand, and efficiently
allocating them between competing users to the other hand. In addition to this an
investor can also base the investment decision on the grading offered by credit
rating agencies.
Concept of Credit ratings
A credit rating is a measure used by creditors to determine how much they can
trust a certain borrower, whether the borrower is an individual, a corporation, or a
country. The credit rating is derived using past financial data or the borrower’s
credit history. There are several factors that can affect the credit rating of an
individual including:
 the person’s ability to pay a loan – Reflected by the person’s salary and
other assets
 the amount of credit in existence – This is what credit limits are for. If the
person is near his credit limit or has reached it is harder to get a loan. This
also reflects whether the person is in the habit of going into debt
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 credit history – Shows whether the person makes payments on time. This
also reflects the persons spending and saving patterns.
Definition
The process of assigning a symbol with specific reference to the instrument being
rated, that acts as an indicator of the Current opinion on relative capability on the
issuer to service its debt obligation in a timely fashion, is known as credit rating.
According to the Moody’s, “A rating on the future ability and legal obligation of
the issuer to make timely payments of Principal and interest on a specific fixed
income security. The rating measures the probability that the issuer will default on
the security over its life, which depending on the instrument of the expected
monetary loss, should a default occur.
Acc to Standard & poor’s, “it helps investors by providing
An easily recognizable, simple tool that couples a possibly
Unknown issuer with an informative and meaningful symbol of credit quality.
According to ICRA, “Credit ratings are opinions on the relative capability of
timely servicing of corporate debt and obligations.
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These are not recommendations to buy or sell…….neither the accuracy nor are
completeness of the information guaranteed.
Features of Credit ratings
 Specificity.
 Relativity.
 Guidance.
 Not a Recommendation.
 Broad Parameters.
 No Guarantee.
 Quantitative and Qualitative.
Function of credit ratings
 Superior Information
 Low cost information
 Basis for proper risk- return trade off
 Healthy discipline on corporate borrowers
 Formulation of public policy guidelines on institutional investment
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Exercising responsibility
Credit is a part of everyday life. It enables people to buy everything from
necessities to luxuries. However, if you do not exercise responsibility in managing
your finances you will find that the concept of credit will cripple you instead of
empower you.
To make sure you exercise responsibilities always keep track of your purchases,
loans, and overall expenses. Keep yourself informed and do not fall for the “buy
now pay later” mentality. Buy only what you need and if buying for luxuries
makes sure that it is planned and not a spontaneous buy. Pay your bills on time and
do not allow yourself to go in debt.
In the end being responsible will not only yield in an excellent credit history but
will also ensure that you will have more options for finding money fast in case you
need it in the future.
ORIGIN OF CREDIT RATING
 Origin in 1840 following the crisis in 1837
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 The First Merchantile Credit Agency was set up in New York by Louis
Tappan in 1841.
 First rating guide was published in 1859
 John Broad Street set up the similar agency in 1849 which published its
rating books in 1857
 In 1900 John Moody founded “ Moody’s Investors Services and in 1909
Published his manual of “Rail Road Services”
History of Credit Rating
The initial rating exercise was started by Henry Poor who published financial
statistics of Railroad companies in 1860. In addition to his publishing business,
John Moody (Moody’s Investors Services) started publishing ratings for railroad
bonds from the year1909.
The rating activity got a boost post Great Depression of 1933 when US
Government Controller of Currency directed the banks in USA to purchase bonds
rated BBB/Baa and above and the rest came to be known as ‘junk’ bonds. At
present in US markets all commercial bonds are invariably rated.
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IMPETUS
The credit rating system originated in the USA in seventies.
The high levels of default, which occurred after Great Depression, in the US
capital markets, gave the impetus for the growth of credit rating.
The default of $82 million of commercial paper by Penn Central in the year 1970.
and the consequent panic of investor in commercial papers, resulted in massive
defaults and liquidity crisis.
US made rating Mandatory for institutions such as Govt Pension funds, and
Insurance companies.
THE CREDIT RATING SYSTEM
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Credit rating has facilitated authorities around the world to issue mandatory rating
requirements. For instance, specific rules restrict the of new issues that are rated
below a particular grade.
Growth Factors
 Credibility and Independence.
 Capital Market Mechanism.
 Disclosure requirements.
 Credit Education.
 Creation of Debt Market.
Major issues
 Investment Vs speculative Grades.
 Continuous Monitoring.
 Grade Surveillance.
 Rating Ceiling.
 Evaluation of Line.
 Ownership Consideration.
 Investment Grade Ratings
 S&P and Others

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CRDIT SCORE
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Credit score is a number which lenders use to assess the risk of extending credit to
you.
In other words, credit score is an estimate of the risk that a bank will take to lend
you money. It is also a snapshot of your credit file at a certain point in time.
The FICO score is developed by Fair Isaac Corporation and based on credit files
maintained by consumer credit reporting agencies. It is widely used by banks,
credit unions, insurance agencies, financing companies and other lenders.
However, it is not the only factor determining your ability to obtain credit. Other
important factors include: income, employment history, previous and current
relationships with a lender, to name a few. Each lender decides on its own what
will be taken into account when it considers lending money to you.
Credit score is a mathematical formula which takes into account many different
pieces of information and compares it with hundreds of thousands of other credit
reports from the past, to create patterns, which identify statistical possibility of
future credit risk.
Every person with a credit file has three credit scores based on
information from three credit bureaus.
They are not exactly the same, but for most people they will be only slightly
different.
If your credit report does not contain enough information, your score cannot be
calculated as there aren't enough “items” to be compared with generated patterns.

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In that case, a different formula is used to provide your credit rating to a lender.
It is important to remember that while most lenders use FICO score, they decide
Tips to improve and maintain a good credit score
1. Collect credit report from Experian, TransUnion and Equifax. Review the report
for any error or mistake.
2. Try to reduce the debt of those with high interest.
3. If not in full, try to make payment of minimum balance due of credit cards.
4. Pay all you bills on time. Late payment can do a serious damage to your report.
5. Avoid credit from financial companies. It can negatively affect your score.
6. Don't apply for too many credit accounts.Credit score determine your financial
status, so one should always try to keep it as good as possible and avoid any such
actions that can affect it and result a low score.
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CREDIT RATING AGENCY
A credit ratings agency is a company that assigns credit ratings to institutions that
issue debt obligations (i.e. assets backed by receivables on loans, such as
mortgage-backed securities. These institutions can be companies, cities, non-profit
organizations, or national governments, and the securities they issue can be traded
on a secondary market.
A credit rating measures credit worthiness, or the ability to pay back a loan. It
affects the interest rate applied to loans - interest rates vary depending on the risk
of the investment. A low-rated security has a high interest rate, in order to attract
buyers to this high-risk investment. Conversely, a highly-rated security (carrying a
AAA rating, like a municipal bond which is backed by stable government
agencies) has a lower interest rate, because it is a low-risk investment. These low-
risk bonds are available to a wide range of investors, whereas high-risk bonds cater
to a narrow investing demographic.
Companies that issue credit scores for individuals are usually called credit bureaus
and are distinct from corporate ratings agencies.
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Definition
"Credit Rating Agency" means any commercial concern engaged
in the business of credit rating of any debt obligation or of any
project or programme requiring finance, whether in the form of
debt or otherwise, and includes credit rating of any financial
obligation, instrument or security, which has the purpose of
providing a potential investor or any other person any information
pertaining to the relative safety of timely payment of interest or
principal; (Section 65(21) of Finance Act, 1994 as amended)
Big Three
The top three credit ratings agencies in the United States are:
 Moody's
 Standard & Poor's
 Fitch Ratings
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In the wake of recent credit-market turmoil, some niche agencies are picking up
market share or at least additional visibility. Among the niche agencies are DBRS
and Egan-Jones.
Credit rating agencies
Agencies that assign credit ratings for corporations include:
 M. Best (U.S.)
 Bay corp. Advantage (Australia)
 Dominion Bond Rating Service (Canada)
 China Credit Information Service (China)
 Fitch Ratings (U.S.)
 Japan Credit Rating Agency (Japan)
 Moody's Investors Service (U.S.)
 Standard & Poor's (U.S.)
 Rating Agency Malaysia (Malaysia)
 Egan-Jones Rating Company (U.S.)
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Reasons for the origin of credit rating agencies
 the increasing role of capital and money markets consequent to
disintermediation.
 Increased securitization of borrowing and lending consequent to
disintermediation.
 Globalization of the credit market.
 The continuing growth of information technology.
 The growth of confidence in the efficiency of the market mechanism.
 the withdrawal of Govt safety nets and the trend towards privatization
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GROWTH OF CRDIT RATING AGENCIES
1841- Merchantile Credit Agency (USA)
1900- Moody’s Investors Services (USA)
1916- Poor Publishing Company (USA)
1922- Standard Statistics Company (USA)
1924- Pitch Publishing Company (USA)
1941- Standard and Poor (USA)
1074- Thomson Bank Watch (USA)
1975- Japanese Bond Rating Institution (JAPAN)
1987- CRISIL by ICICI (INDIA)
1991- ICRA by IFCI (INDIA)
1994- CARE by IDBI (INDIA)
Rating Grades
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Each rating agency has developed its own system of rating grades for sovereign
and corporate borrowers. Fitch Ratings developed a rating grade system in 1924
that was adopted by Standard & Poor's. Moody's grading is slightly different.
Moody's sometimes argues that their ratings embed a conceptually superior
approach that directly considers not only the likelihood of default but also the
severity of loss in the event of default.
Long Term Credit Rankings
Fitch Ratings and Standard & Poor's use a system of letter sliding from the best
rating "AAA" to "D" for issuers already defaulting on payments.
 Investment Grade
• AAA : best quality borrowers, reliable and stable without a
foreseeable risk to future payments of interest and principal
• AA : very strong borrowers; a bit higher risk than AAA
• A : upper medium grade; economic situation can affect finance
• BBB : medium grade borrowers, which are satisfactory at the
moment
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 Non-Investment Grade
• BB : lower medium grade borrowers, more prone to changes in the
economy, somewhat speculative
• B : low grade, financial situation varies noticeably, speculative
• CCC : poor quality, currently vulnerable and may default
• CC : highly vulnerable, most speculative bonds
• C : highly vulnerable, perhaps in bankruptcy or in arrears but still
continuing to pay out on obligations
• CI : past due on interest
• R : under regulatory supervision due to its financial situation
• SD : has selectively defaulted on some obligations
• D : has defaulted on obligations and S&P believes that it will
generally default on most or all obligations
• NR : not rated
Moody's grading follows a different system
 Investment Grade
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• Aaa: Obligations rated Aaa are judged to be of the highest quality,
with the "smallest degree of risk"
• Aa1, Aa2, Aa3: Obligations rated Aa are judged to be of high quality
and are subject to very low credit risk, but "their susceptibility to
long-term risks appears somewhat greater".
• A1, A2, A3: Obligations rated A are considered upper-medium grade
and are subject to low credit risk, but that have elements "present that
suggest a susceptibility to impairment over the long term".
• Baa1, Baa2, Baa3: Obligations rated Baa are subject to moderate
credit risk. They are considered medium-grade and as such "protective
elements may be lacking or may be characteristically unreliable".
 Non-Investment Grade
• Ba1, Ba2, Ba3: Obligations rated Ba are judged to have
"questionable credit quality."
• B1, B2, B3: Obligations rated B are considered speculative and are
subject to high credit risk, and have "generally poor credit quality."
• Caa1, Caa2, Caa3: Obligations rated Caa are judged to be of poor
standing and are subject to very high credit risk, and have
"extremely poor credit quality. Such banks may be in default..."
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• Ca: Obligations rated Ca are highly speculative and are "usually in
default on their deposit obligations".
• C: Obligations rated C are the lowest rated class of bonds and are
typically in default, and "potential recovery values are low".
 Others
• WR: Withdrawn Rating
• NR: Not Rated
• P: Provisional
Recent developments
Since the beginning of the credit crunch in early 2007 rating agencies have come
under fire for their high ratings of mortgage backed securities (MBS) that did not
reflect the financial stability of the borrowers. This has also reopened a discussion
whether rating agencies, which get paid by borrowers for their rating, are not in a
conflict of interest.
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Description Moody\'s S&P Fitch

Maximum Safety Aaa AAA AAA
High grade Aa1 AA+ AA+
High grade Aa2 AA AA
High grade Aa3 AA- AA-
Higher medium Grade A1 A+ A+
Higher medium Grade A2 A A
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Higher medium Grade A3 A- A-

Lower medium Grade Baa1 BBB+ BBB+
Lower medium Grade Baa2 BBB BBB
Lower medium Grade Baa3 BBB- BBB-
Speculative Ba1 BB+ BB+
Speculative Ba2 BB BB
Speculative Ba3 BB- BB-
Highly Speculative B1 B+
Highly Speculative B2 B B
Highly Speculative B3 B-
Substantially risky CCC+ CCC+
Substantially risky Caa CCC CCC
May be in default Ca CC CC
Extremely Speculative C C C
Income bonds - not paying interest CI
Default DDD
Default DD
Default D D
CRITISISM FOR CREDIT RATING AGENCIES
Credit rating agencies have been subject to the following criticisms:
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 Credit rating agencies do not downgrade companies promptly enough.
For example, Enron's rating remained at investment grade four days before
the company went bankrupt, despite the fact that credit rating agencies had
been aware of the company's problems for months.[5][6] Some empirical
studies have documented that yield spreads of corporate bonds start to
expand as credit quality deteriorates but before a rating downgrade, implying
that the market often leads a downgrade and questioning the informational
value of credit ratings.[7] This has led to suggestions that, rather than rely on
CRA ratings in financial regulation, financial regulators should instead
require banks, broker-dealers and insurance firms (among others) to
use credit spreads when calculating the risk in their portfolio.
 Large corporate rating agencies have been criticized for having too familiar
a relationship with company management, possibly opening themselves
to undue influence or the vulnerability of being misled.[8] These agencies
meet frequently in person with the management of many companies, and
advise on actions the company should take to maintain a certain rating.
Furthermore, because information about ratings changes from the larger

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CRAs can spread so quickly (by word of mouth, email, etc.), the larger
CRAs charge debt issuers, rather than investors, for their ratings. This has
led to accusations that these CRAs are plagued by conflicts of interest that
might inhibit them from providing accurate and honest ratings. At the same
time, more generally, the largest agencies (Moody's and Standard & Poor's)
are often seen as agents of globalization and/or "Anglo-American" market
forces, that drive companies to consider how a proposed activity might
affect their credit rating, possibly at the expense of employees, the
environment, or long-term research and development. These accusations are
not entirely consistent: on one hand, the larger CRAs are accused of being
too cozy with the companies they rate, and on the other hand they are
accused of being too focused on a company's "bottom line" and unwilling to
listen to a company's explanations for its actions.
 The lowering of a credit score by a CRA can create a vicious cycle, as not
only interest rates for that company would go up, but other contracts with
financial institutions may be affected adversely, causing an increase in
expenses and ensuing decrease in credit worthiness. In some cases, large
loans to companies contain a clause that makes the loan due in full if the
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companies' credit rating is lowered beyond a certain point (usually a
"speculative" or "junk bond" rating). The purpose of these "ratings triggers"
is to ensure that the bank is able to lay claim to a weak company's assets
before the company declares bankruptcy and a receiver is appointed to
divide up the claims against the company. The effect of such ratings triggers,
however, can be devastating: under a worst-case scenario, once the
company's debt is downgraded by a CRA, the company's loans become due
in full; since the troubled company likely is incapable of paying all of these
loans in full at once, it is forced into bankruptcy (a so-called "death spiral").
These rating triggers were instrumental in the collapse of Enron. Since that
time, major agencies have put extra effort into detecting these triggers and
discouraging their use, and the U.S. Securities and Exchange Commission
requires that public companies in the United States disclose their existence.
 Agencies are sometimes accused of being oligopolists, [9] because barriers to
market entry are high and rating agency business is itself reputation-based
(and the finance industry pays little attention to a rating that is not widely
recognized). Of the large agencies, only Moody's is a separate, publicly held
corporation that discloses its financial results without dilution by non-ratings
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businesses, and its high profit margins (which at times have been greater
than 50 percent of gross margin) can be construed as consistent with the type
of returns one might expect in an industry which has high barriers to entry.
 Credit Rating Agencies have made errors of judgment in rating
structured products, particularly in assigning AAA ratings to structured
debt, which in a large number of cases has subsequently been downgraded or
defaulted. The actual method by which Moody's rates CDOs has also come
under scrutiny. If default models are biased to include arbitrary default data
and "Ratings Factors are biased low compared to the true level of expected
defaults, the Moody’s [method] will not generate an appropriate level of
average defaults in its default distribution process. As a result, the perceived
default probability of rated tranches from a high yield CDO will be
incorrectly biased downward, providing a false sense of confidence to rating
agencies and investors."[10]. Little has been done by rating agencies to
address these shortcomings indicating a lack of incentive for quality ratings
of credit in the modern CRA industry. This has led to problems for several
banks whose capital requirements depend on the rating of the structured
assets they hold, as well as large losses in the banking industry.[11][12][13] AAA
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rated mortgage securities trading at only 80 cents on the dollar, implying a
greater than 20% chance of default, and 8.9% of AAA rated structured
CDOs are being considered for downgrade by Fitch, which expects most to
downgrade to an average of BBB to BB-. These levels of reassessment are
surprising for AAA rated bonds, which have the same rating class as US
government bonds.[14] [15]

. Most rating agencies do not draw a distinction
between AAA on structured finance and AAA on corporate or government
bonds (though their ratings releases typically describe the type of security
being rated). Many banks, such as AIG, made the mistake of not holding
enough capital in reserve in the event of downgrades to their CDO portfolio.
The structure of the Basel II agreements meant that CDOs capital
requirement rose 'exponentially'. This made CDO portfolios vulnerable to
multiple downgrades, essentially precipitating a large margin call. For
example under Basel II, a AAA rated securitization requires capital
allocation of only 0.6%, a BBB requires 4.8%, a BB requires 34%, whilst a
BB (-) securitization requires a 52% allocation. For a number of reasons
(frequently having to do with inadequate staff expertise and the costs that
risk management programs entail), many institutional investors relied solely
on the ratings agencies rather than conducting their own analysis of the risks
these instruments posed. (As an example of the complexity involved in
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analyzing some CDOs, the Aquarius CDO structure has 51 issues behind the
cash CDO component of the structure and another 129 issues that serve as
reference entities for $1.4 billion in CDS contracts for a total of 180. In a
sample of just 40 of these, they had on average 6500 loans at origination.
Projecting that number to all 180 issues implies that the Aquarius CDO has
exposure to about 1.2 million loans.)
 Ratings agencies, in particular Fitch, Moody's and Standard and Poors have
been implicitly allowed by the government to fill a quasi-regulatory role, but
because they are for-profit entities their incentives may be misaligned.
Conflicts of interest often arise because the rating agencies are paid by the
companies issuing the securities — an arrangement that has come under fire
as a disincentive for the agencies to be vigilant on behalf of investors. Many
market participants no longer rely on the credit agencies ratings systems,
even before the economic crisis of 2007-8, preferring instead to use credit
spreads to benchmarks like Treasuries or an index. However, since the
Federal Reserve requires that structured financial entities be rated by at least
two of the three credit agencies, they have a continued obligation.
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 Many of the structured financial products that they were responsible for
rating, consisted of lower quality 'BBB' rated loans, but were, when pooled
together into CDOs, assigned an AAA rating. The strength of the CDO was
not wholly dependent on the strength of the underlying loans, but in fact the
structure assigned to the CDO in question. CDOs are usually paid out in a
'waterfall' style fashion, where income received gets paid out first to the
highest tranches, with the remaining income flowing down to the lower
quality tranches i.e. <AAA. CDOs were typically structured such that AAA
tranches which were to receive first lien (claim) on the BBB rated loans cash
flows, and losses would trickle up from the lowest quality tranches first.
Cash flow was well insulated even against heavy levels of home owner
defaults. Credit rating agencies only accounted for a ~5% decline in national
housing prices at worst, allowing for a confidence in rating the many of
these CDOs that had poor underlying loan qualities as AAA. It did not help
that an incestuous relationship between financial institutions and the credit
agencies developed such that, banks began to leverage the credit ratings off
one another and 'shop' around amongst the three big credit agencies until
they found the best ratings for their CDOs. Often they would add and
remove loans of various quality until they met the minimum standards for a
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desired rating, usually, AAA rating. Often the fees on such ratings were
$300,000 - $500,000, but ran up to $1 million.
As part of the Sarbanes-Oxley Act of 2002, Congress ordered the U.S. SEC to
develop a report, titled Report on the Role and Function of Credit Rating Agencies
in the Operation of the Securities Markets detailing how credit ratings are used in
U.S. regulation and the policy issues this use raises. Partly as a result of this report,
in June 2003, the SEC published a "concept release" called Rating Agencies and
the Use of Credit Ratings under the Federal Securities Laws that sought public
comment on many of the issues raised in its report. Public comments on this
concept release have also been published on the SEC's website.
In December 2004, the International Organization of Securities
Commissions (IOSCO) published a Code of Conduct for CRAs that, among other
things, is designed to address the types of conflicts of interest that CRAs face. All
of the major CRAs have agreed to sign on to this Code of Conduct and it has been
praised by regulators ranging from the European Commission to the U.S.
Securities and Exchange Commission.
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CREDIT RATING IN INDIA
 Credit Rating Information Service of India was set up in 1987.
 Investment Information and Credit Rating Agency of India was promoted in
1991.
 Credit Analysis and Research Limited was floated in 1993.
Rating Methodology
The first analysis relates to the past performance of the company. The past
performance of the company & assessment of its prospects. The industry is studied
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by analyzing demand & supply growth, nature & basis of competition, govt. policy
for the company & the effect of change in govt. policy on the future of the
company. The position of the company within the industry is studied to understand
how the company would fare in the future.
In evaluating the ratings, crisil employs both qualitative & quantitative criteria.
CREDIT RATING AGENCIES IN INDIA
 Credit rating information service ltd. (CRISIL)
 Investment Information and credit rating Agency of India (ICRA)
 Credit Analysis and Research (CARE)
 Duff p helps credit rating pvt. ltd. (DCR India)
 Onida Individual Credit Rating Agency (ONICRA)
• Credit Rating Information Services of India Ltd (CRISIL)
CRISIL, the first credit agency was floated on jan-11998.

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It was started jointly by ICICI & UTI with an equity capital of Rs-4 cr. Each of
them holds 18% of the capital. Other contributions to the capital are as follows:
1. Asian Development bank 15%
2. LIC, GIC & SBI 5% each
3. HDFC 6.2%
4. Banks (Indian) 19.25%
5. Banks (Foreign) Balance
Objectives:
 To assist both individual & institutional investors in making investment
decisions in fixed income securities.
 To enable corporate to raise large amounts at fair cost from a wide
spectrum of investors.
 To enable intermediaries in placing their debt instruments with investors
by providing them
Process of Credit Rating:
Following factors are taken into account while assigning specific ratings to the
issues.
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a) Financial Analysis:
i. Quality of accounting such as profitability aspects, method
of income recognition, valuation of inventory, auditors’ comments etc.
ii. Adequate cash flows
iii. Financial flexibility.
b) Business Analysis:
i. Industry risk,
ii. Product demand,
iii. Locational advantages, availability of skilled labour,
transportation etc.
c) Management Competency: Philosophy, outlook, capacity, flexibility of
the management
d) Regulatory framework.
CRISIL Rating Symbols:
Pref. shares: “Pf”
Fixed Deposits: “F”
Short Term Instruments: “P”
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Debentures:
“AAA”: Highest safety of timely payment of interest and principal.
“AA”: Offer high safety of interest and principal. Differ in safety from
AAA only marginally.
“A”: Adequate safety; however changes in circumstances can affect
adversely more than those in higher rated categories.
“BBB”: Sufficient safety, however change in circumstances likely to lead a
weakened capacity.
“BB”: Inadequate safety but less susceptible to default than other
speculative grade debentures.
“B”: Greater susceptibility to default.
“C”: Vulnerable to default.
“D”: In default and in arrears of interest or principal or expected to
default on maturity.
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Additionally CRISIL also uses (+) or (-) signs to denote higher or lower
safety within the grade (AA+, AA- etc.).
AAA/AA are considered High Investment Grades.
A/BBB are considered Investment Grades.
BB/B/C/D are considered speculative grade.
In case of short term instruments CRISIL uses symbols as P1/P2/P3/P4/P5 to
denote various degrees attached to the instruments.
• Investment Information and Credit Rating Agency of India (IICRA):
The iicra was set up by industrial finance corporation of india on 16th jan 1991.it
is a public ltd company with an authorized share capital of Rs 101 cr. The initial
paid up capital of rs 3.50 cr. Is subscribed by IFC, UTI, LIC, GIC, SBI & 17 other
bank. IICRA started its operation from 15thmar. 1991. during 94-95 IICRA rated
212 debt instruments covering a debt volume
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of Rs. 5343 crores. Cumulative number of instruments covering a debt volume of
Rs 17,638 crores. ICRA was set up by ICICI and other leading investment
institutions and commercial banks and financial services companies.
Rating Scales:
Long Term (Debentures, Bonds, Pref. Shares):
L AAA Highest safety.
L AA+ }
L AAA } High safety
L AA- }
LA+ }
LA } Adequate safety
LA- }
L BBB+ }
L BBB } Moderate safety
L BBB- }
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L BB+ }
L BB } Inadequate safety
L BB- }
L B+ }
LB } Risk Prone
L B- }
L C+ }
LC } Substantial Risk
L C- }
LD Default- Extremely speculative.
Medium Term: (Cert. of Deposits & Fixed Deposits)
M AAA to M D.
Short Term: (Including Commercial Papers)
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A1+ / A1 / A2+ / A2 / A3+ / A3 / A4+ / A4 / A5
• Credit Analysis and Research Ltd. (CARE)
The CARE was promoted in1993 jointly with investment companies, banks &
finance companies. Services offered by CARE are –
(1).credit rating (ii) information service (iii)Equity research (iv)rating & parallel
market of LPG & kerosene. Since its inception till the end of march1995, CARE
has rated 249 debt instruments covering a total debt volume of Rs 9729 crores.
CARE was promoted by leading financial institutions, banks and private sector
finance companies. Care prefixes CARE to the ratings given to the issue e.g.
CARE AAA or CARE AA to the Debenture or Bond issue to indicate High
safety. Similarly in case of Fixed / Short Deposit issue the rating issued is
CARE AAA (FD) or CARE AA (SD) and so on.
CARE Rating Services
CARE provides rating services to the following debt instruments.
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 Debentures
 Certificate of deposits
 Commercial paper
 Fixed deposits.
USES OF RATINGS
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A credit rating agency (CRA) assigns credit ratings for issuers of certain types
of debt obligations as well as the debt instruments themselves. In some cases, the
servicers of the underlying debt are also given ratings. In most cases, the issuers
of securities are companies, special purpose entities, state and local
governments, non-profit organizations, or national governments issuing debt-like
securities (i.e., bonds) that can be traded on a secondary market. A credit rating for
an issuer takes into consideration the issuer's credit worthiness (i.e., its ability to
pay back a loan), and affects the interest rate applied to the particular security
being issued. (In contrast to CRAs, a company that issues credit scores for
individual credit-worthiness is generally called a credit bureau or consumer credit
reporting agency.) The value of such ratings has been widely questioned after the
2008 financial crisis. In 2003 the Securities and Exchange Commission submitted
a report to Congress detailing plans to launch an investigation into the anti-
competitive practices of credit rating agencies and issues including conflicts of
interest.
Credit ratings are used by investors, issuers, investment banks, broker-dealers, and
governments. For investors, credit rating agencies increase the range of investment
alternatives and provide independent, easy-to-use measurements of relative credit
risk; this generally increases the efficiency of the market, lowering costs for
both borrowers and lenders. This in turn increases the total supply of risk capital in
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the economy, leading to stronger growth. It also opens the capital markets to
categories of borrower who might otherwise be shut out altogether: small
governments, startup companies, hospitals, and universities.
Ratings use by bond issuers
Issuers rely on credit ratings as an independent verification of their own credit-
worthiness and the resultant value of the instruments they issue. In most cases, a
significant bond issuance must have at least one rating from a respected CRA for
the issuance to be successful (without such a rating, the issuance may be
undersubscribed or the price offered by investors too low for the issuer's purposes).
Studies by the Bond Market Association note that many institutional investors now
prefer that a debt issuance have at least three ratings.
Issuers also use credit ratings in certain structured finance transactions. For
example, a company with a very high credit rating wishing to undertake a
particularly risky research project could create a legally separate entity with certain
assets that would own and conduct the research work. This "special purpose entity"
would then assume all of the research risk and issue its own debt securities to
finance the research. The SPE's credit rating likely would be very low, and the
issuer would have to pay a high rate of return on the bonds issued. However, this
risk would not lower the parent company's overall credit rating because the SPE
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would be a legally separate entity. Conversely, a company with a low credit rating
might be able to borrow on better terms if it were to form an SPE and transfer
significant assets to that subsidiary and issue secured debt securities. That way, if
the venture were to fail, the lenders would have recourse to the assets owned by the
SPE. This would lower the interest rate the SPE would need to pay as part of the
debt offering.
The same issuer also may have different credit ratings for different bonds. This
difference results from the bond's structure, how it is secured, and the degree to
which the bond is subordinated to other debt. Many larger CRAs offer "credit
rating advisory services" that essentially advise an issuer on how to structure its
bond offerings and SPEs so as to achieve a given credit rating for a certain
debt tranche. This creates a potential conflict of interest, of course, as the CRA
may feel obligated to provide the issuer with that given rating if the issuer followed
its advice on structuring the offering. Some CRAs avoid this conflict by refusing to
rate debt offerings for which its advisory services were sought.
Ratings use by government regulators
Regulators use credit ratings as well, or permit ratings to be used for regulatory
purposes. For example, under the Basel II agreement of the Basel Committee on
Banking Supervision, banking regulators can allow banks to use credit ratings from
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certain approved CRAs (called "ECAIs", or "External Credit Assessment
Institutions") when calculating their net capital reserve requirements. In the United
States, the Securities and Exchange Commission (SEC) permits investment banks
and broker-dealers to use credit ratings from "Nationally Recognized Statistical
Rating Organizations" (or "NRSROs") for similar purposes. The idea is that banks
and other financial institutions should not need to keep in reserve the same amount
of capital to protect the institution against (for example) a run on the bank, if the
financial institution is heavily invested in highly liquid and very "safe" securities
(such as U.S. government bonds or short-term commercial paper from very stable
companies).
CRA ratings are also used for other regulatory purposes as well. The US SEC, for
example, permits certain bond issuers to use a shortened prospectus form when
issuing bonds if the issuer is older, has issued bonds before, and has a credit rating
above a certain level. SEC regulations also require that money market funds
(mutual funds that mimic the safety and liquidity of a bank savings deposit, but
without FDIC insurance) comprise only securities with a very high NRSRO rating.
Likewise, insurance regulators use credit ratings to ascertain the strength of the
reserves held by insurance companies.
Under both Basel II and SEC regulations, not just any CRA's ratings can be used
for regulatory purposes. (If this were the case, it would present an obvious moral
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hazard, since an issuer, insurance company, or investment bank would have a
strong incentive to seek out a CRA with the most lax standards, with potentially
dire consequences for overall financial stability.) Rather, there is a vetting process
of varying sorts. The Basel II guidelines (paragraph 91, et al.), for example,
describe certain criteria that bank regulators should look to when permitting the
ratings from a particular CRA to be used. These include "objectivity,"
"independence," "transparency," and others. Banking regulators from a number of
jurisdictions have since issued their own discussion papers on this subject, to
further define how these terms will be used in practice. (See The Committee of
European Banking Supervisors Discussion Paper, or the State Bank of Pakistan
ECAI Criteria.)
In the United States, since 1975, NRSRO recognition has been granted through a
"No Action Letter" sent by the SEC staff. Following this approach, if a CRA (or
investment bank or broker-dealer) were interested in using the ratings from a
particular CRA for regulatory purposes, the SEC staff would research the market to
determine whether ratings from that particular CRA are widely used and
considered "reliable and credible." If the SEC staff determines that this is the case,
it sends a letter to the CRA indicating that if a regulated entity were to rely on the
CRA's ratings, the SEC staff will not recommend enforcement action against that
entity. These "No Action" letters are made public and can be relied upon by other
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regulated entities, not just the entity making the original request. The SEC has
since sought to further define the criteria it uses when making this assessment, and
in March 2005 published a proposed regulation to this effect.
On September 29, 2006, US President George W. Bush signed into law the "Credit
Rating Reform Act of 2006".[2] This law requires the US Securities and Exchange
Commission to clarify how NRSRO recognition is granted, eliminates the "No
Action Letter" approach and makes NRSRO recognition a Commission (rather
than SEC staff) decision, and requires NRSROs to register with, and be regulated
by, the SEC.S & P protested the Act on the grounds that it is
an unconstitutional violation of freedom of speech.[2] In the Summer of 2007 the
SEC issued regulations implementing the act, requiring rating agencies to have
policies to prevent misuse of nonpublic information, disclosure of conflicts of
interest and prohibitions against "unfair practices".[3]
Recognizing CRAs' role in capital formation, some governments have attempted to
jump-start their domestic rating-agency businesses with various kinds of regulatory
relief or encouragement. This may, however, be counterproductive, if it dulls the
market mechanism by which agencies compete, subsidizing less-capable agencies
and penalizing agencies that devote resources to higher-quality opinions.
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Ratings use in structured finance
Credit rating agencies may also play a key role in structured financial transactions.
Unlike a "typical" loan or bond issuance, where a borrower offers to pay a certain
return on a loan, structured financial transactions may be viewed as either a series
of loans with different characteristics, or else a number of small loans of a similar
type packaged together into a series of "buckets" (with the "buckets" or different
loans called "tranches"). Credit ratings often determine the interest rate or price
ascribed to a particular tranche, based on the quality of loans or quality of assets
contained within that grouping.
Companies involved in structured financing arrangements often consult with credit
rating agencies to help them determine how to structure the individual tranches so
that each receives a desired credit rating. For example, a firm may wish to borrow
a large sum of money by issuing debt securities. However, the amount is so large
that the return investors may demand on a single issuance would be prohibitive.
Instead, it decides to issue three separate bonds, with three separate credit ratings
—A (medium low risk), BBB (medium risk), and BB (speculative) (using Standard
& Poor's rating system). The firm expects that the effective interest rate it pays on
the A-rated bonds will be much less than the rate it must pay on the BB-rated
bonds, but that, overall, the amount it must pay for the total capital it raises will be
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less than it would pay if the entire amount were raised from a single bond offering.
As this transaction is devised, the firm may consult with a credit rating agency to
see how it must structure each tranche—in other words, what types of assets must
be used to secure the debt in each tranche—in order for that tranche to receive the
desired rating when it is issued.
There has been criticism in the wake of large losses in the collateralized debt
obligation (CDO) market that occurred despite being assigned top ratings by the
CRAs. For instance, losses on $340.7 million worth of collateralized debt
obligations (CDO) issued by Credit Suisse Group added up to about $125 million,
despite being rated AAA or Aaa by Standard & Poor's, Moody's Investors Service
and Fitch Group.[4]
The rating agencies respond that their advice constitutes only a "point in time"
analysis, that they make clear that they never promise or guarantee a certain rating
to a tranche, and that they also make clear that any change in circumstance
regarding the risk factors of a particular tranche will invalidate their analysis and
result in a different credit rating. In addition, some CRAs do not rate bond
issuances upon which they have offered such advice.
Complicating matters, particularly where structured finance transactions are
concerned, the rating agencies state that their ratings are opinions (and as such, are
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protected free speech, granted to them by the "personhood" of corporations)
regarding the likelihood that a given debt security will fail to be serviced over a
given period of time, and not an opinion on the volatility of that security and
certainly not the wisdom of investing in that security. In the past, most highly rated
(AAA or Aaa) debt securities were characterized by low volatility and high
liquidity—in other words, the price of a highly rated bond did not fluctuate greatly
day-to-day, and sellers of such securities could easily find buyers. However,
structured transactions that involve the bundling of hundreds or thousands of
similar (and similarly rated) securities tend to concentrate similar risk in such a
way that even a slight change on a chance of default can have an enormous effect
on the price of the bundled security. This means that even though a rating agency
could be correct in its opinion that the chance of default of a structured product is
very low, even a slight change in the market's perception of the risk of that product
can have a disproportionate effect on the product's market price, with the result that
an ostensibly AAA or Aaa-rated security can collapse in price even without there
being any default (or significant chance of default). This possibility raises
significant regulatory issues because the use of ratings in securities and banking
regulation (as noted above) assumes that high ratings correspond with low
volatility and high liquidity.
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TAXABLE EVENTS AND SCOPE OF SERVCES
Taxable service provided to a client, by a credit rating agency in relation to credit
rating of any financial obligation, instrument or security. (Section 65(72)(x) of
Finance Act, 1994 as amended)
The credit rating agencies operating in India are registered with the Reserve Bank
of India. These agencies provide among others ratings in respect of corporate
bonds, commercial paper, fixed deposits, municipal debt, infrastructure bond,
utilities, asset backed securities, structured obligations, toll road bonds, mutual
funds, etc. All public issues of debt are statutorily required to be rated. These
ratings help individual and institutional investors frame their investment policies
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based on benchmark ratings.
The relevant date for determining the Service Tax liability would be the date when
rating has been assigned to a particular instrument. In the case of ongoing projects,
where rating has been assigned after the notified date i.e. 16th October, 1998, the
Service Tax would be payable. (Ministry’s F.No.B-11/3/98-TRU dt.07.10.1998)
Value of Taxable Service:
Value of taxable service shall be the gross amount charged by the service provider
for such service rendered by him. (Section 67 Finance Act, 1994 as amended)
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. The fees of the rating
agency are generally expressed as a percentage of the amount of debt sought to be
raised. The fees on any assignments are usually paid at the time of entering into an
agreement i.e. in advance. Such amount is kept as advance against rating fee and is
recognized as income only when the rating is assigned. After the rating is given, it
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is communicated to the client. The rating of any instrument remains under
surveillance until the entire debt is repaid. The surveillance is a mandatory exercise
for rating agencies. After surveillance, the client is billed as per the agreed fee
structure. Service Tax is payable both on the fee received for credit rating of the
debt instrument and the surveillance fee.
The amount received in advance for the service of rating to be provided to the
client, is only an advance and the services can only deemed to have been provided
only when the rating exercise has been completed and when rating of any
instrument has been assigned. In case rating is not done, for any reason and the
entire amount is returned back to the client, it cannot be said that services have
been rendered and hence Service Tax is not attracted. (Ministry’s F.No.B-11/3/98-
TRU dt. 07.10.1998)
Exemption and Exclusions
The information and advisory services, if any, rendered by credit rating agencies
would not attract Service Tax for the reason that taxable services in respect of
credit rating agency means service provided to a client only in relation to credit
rating of any financial obligation, instrument or security. Services of research and
information such as analysis of industries in specific sectors of financial and

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business aspects of a company, other customized services on say business houses
and capital markets, indexing services and information services such as
privatization policy for infrastructure projects, macro studies of infra-structure
sector, implication of government policy in respect of any sector, financial
modeling, bid evaluation, power purchase agreement, restructuring of state
electricity boards, etc are not services 'in relation to' the credit rating of any
financial obligation, instrument or security and are hence outside the gamut of
service as on the services of credit ratings. (Ministry’s F.No.B-11/3/98-TRU
dt.07.10.1998)
Exemptions
 Information and advisory services
 Analysis of industry in a specific sector
 Financial and business outlook of a company.
 Information services
 Research services
 Bid evaluation
 Implications of Govt. policy
 Indexing services
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 Services by a non-credit rating agency'
Person liable to pay: Credit Rating Agency.
Head of Account
Sl. Code SCCD

Minor-head 004400123 Credit Rating Agency Services 00440087
Sub-head 00440012301 Tax Collection 00440088 118
Sub-head 00440012302 Other Receipts 00440089 113
Sub-head 00440012303 Deduct Refunds 00440090 113
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LIST OF DATA REQUIREMENTS FOR CREDIT RATING
LGU Officials
1. List of elected officials (including the Sanggunian Members) for last three
elections that occurred in the LGU.
2. Bio-data of the present official of the LGU and their political party.
Recognition / Awards (for last five years)
1. List of Awards / recognition received by the LGU.
 Please indicate the name of project, operating income and expenses
(Broken down per year), total project cost and source of payment
2. List of major accomplishments and future projects (not socio-economic
projects)
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Properties
1. List of Government properties
 Please indicate the land area (in sq.m.) market value, assessed
value, and classification according to usage
Financials (for last five years)
1. COA audited financial statement
 Balance Sheet and Income Statement
2. Statement of Indebtedness (i.e. loans, contract payables, other liabilities)
 Please indicate the creditor (financial institution), amount of loan,
outstanding balance maturity date, repayment schedule, and terms
and conditions
3. Budget Operation Statement (please see format)
4. Average day’s maturity / aging of non-cash assets
5. Average day’s maturity / aging of current liabilities
6. Bank Dealing and references
7. National and local public works expenditures
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Taxes
1. Top 20 Taxpayers for the preceding year (for real property tax and business
tax)
 Please indicate the amount of tax paid and the total amount of tax
collected
2. Collection efficiency rate for the last five years (for both RPT and BT)
Socio Economic Data
1. Latest development plan.
The following items are supposedly included in the development plan.
However, if the data is nowhere to be found in the development plan,
Kindly give us a copy of said data:
2. Historical development of the LGU
3. Seaport and Airport location
4. Latest count of the registered voters
5. Latest population count
6. Latest per capital income

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7. Number of telephone installed
8. Number of business establishments
9. LGU organization structure
10.Project organization structure (per project-major only)
11.Does the LGU lie within the growth corridor? If yes, please cite the growth
corridor
12.Does the LGU have a Special Economic Zone? If yes, please cite the
economic growth zone
FUTURE OF CREDIT RATING IN INDIA
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At present, commercial paper, k bonds and debentures with maturities exceeding
18 months & fixed deposits of large non-banking companies registered with RBI
are required to be compulsorily rated. These are moves to make rating
compulsorily for other types of borrowings such as fixed deposit programme of
manufacturing companies. In addition, the rating agencies are expected to be called
upon to enlarge volumes of securitization of debt & structuring of customized
instruments to meet the needs of issuers or different class of investors. There are
number of areas where rating agencies will have to cover new grounds in the
coming years. The rating of municipal bonds, state govt. borrowings, commercial
banks & public sector
BENEFITS OF CREDIT RATING
 Low Cost Information

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 Quick Investment Decision
 Independent Investment Decision
 Investment Protection
Spending too much on credit risk research diminishes the return on investment. In
addition, unlike underwriters and main banks, credit rating agencies are valued for
their neutral viewpoint and expertise in credit risk analysis. For these reasons,
investors rely heavily on credit rating data.
Benefits to Rated Companies
• Sources of additional certification
• Attracting higher number of investors
• Forewarns risk
• Encourages financial discipline amongst the corporates and better financial
planning
• Merchant bankers job made easy
• Foreign collaboration made easy
• Low cost of borrowing
• Rating as a marketing tool
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• Competitive rates of interest
• Added investors’ confidence
• Ability to raise money from foreign markets at cheaper rates
• Helps to build reputation in the market.
Benefits for the investors
• Saves the time and energy in studying company’s financials,
• Strong indicator of company’s financial capacity,
• Ratings represent the informed opinion of a neutral third party.
• Identification of the risk involved in the debt instrument.
• Guidance in making an investment decision by being presented with a wide
variety of safe choices.
• Constant monitoring and surveillance by the agency on the debt instrument
leading to effective risk management strategies.
• Periodical evaluation of company’s financial capacity by rating agency helps
the investor to exit the investment, in case rating is downgraded
subsequently.
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Benefits for the issuer
• Expanded access to capital markets.
• Lower financing cost.
• Recognition to a first time and unknown issuer in order to establish
his market credibility.
• Enhancement of goodwill.
• Motivation for better performance.
Economic Benefits of Credit Reporting and Scoring
Credit scoring offers multiple benefits at every level of the economy. Credit scores
have enabled lenders to extend into historically underserved market segments. In
addition, decisions are now faster and more objective with the majority of
applicants receiving answers within minutes, rather than days.
Finally, by using credit scores to predict risk more effectively, lenders have been
able to reduce the cost of such vital services as mortgages, personal loans and
credit cards. Despite this expansion into traditionally underserved markets, moral
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hazard rates are actually lower with credit scores because lenders can more
proactively monitor risk and maintain it at more appropriate levels.
Credit scoring plays a vital role in economic growth by helping expand access to
credit markets, lowering the price of credit and reducing delinquencies and
defaults.
In the United States, credit scoring helps drive the American economy and makes
credit affordable.
For consumers, scoring is the key to homeownership and consumer credit. It
increases competition among lenders, which drives down prices. Decisions can be
made faster and cheaper and more consumers can be approved. It helps spread risk
more fairly so vital resources, such as insurance and mortgages, are priced more
fairly.
For businesses, especially small and medium-sized enterprises, credit scoring
increases access to financial resources, reduce costs and helps manage risk.
For the national economy, credit scoring helps smooth consumption during cyclical
periods of unemployment and reduces the swings of the business cycle. By
enabling loans and credit products to be bundled according to risk and sold as
securitized derivatives, credit scoring connects consumers to secondary capital
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markets and increases the amount of capital that is available to be extended or
invested in economic growth.
DISADVANTAGES OF CREDIT RATING
• Biased rating and misrepresentation,
• Static study,
• Concealment of material information,
• No guarantee for soundness of the company,
• Human bias,
• Reflection of temporary and adverse conditions,
• Present rating may change (down grade),
• Differences in rating of two agencies.
NEED AND IMPORTANCE OF CREDIT RATING
A wide range of industries take advantage of credit scores to improve fairness,
effectiveness and efficiency. Financial companies use credit scores to predict the
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risk of delinquencies and losses, which enables them to better allocate costs.
Insurance companies use specialized credit scores to make fairer underwriting
decisions. Credit scores even provide benefits at the macroeconomic level by
helping small enterprises attain the funds they need and by facilitating the
securitization and sale of financial products in the secondary markets, substantially
increasing the influx of capital into a country.
Importance of credit score
Credit rating is an indicator that reflects how well or badly you manage your
financial matters. By having a look at your credit rating, one can get much
information regarding your business organization and particularly the payments
made by your organization. There are several credit bureaus that compile this kind
of information and later on sale it to their clients.
It's very important to know your credit score and understand it completely, as it
helps you to get loans, mortgage and even a job. Credit report list personal
information such as name, address, date of birth, social security number, number of
family member, your employer etc. Financial situations like bankruptcies, tax
liens, foreclosure, late payment of your bill...etc, will also be listed in the report.
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Your credit score list plenty of information about your financial actions. Your loan
or credit account, and how you pay them, your current debts, type of debts...etc.
All these information are listed in the report. The creditors, lending agencies and
other companies will consider your credit score to determine if they can finance
you without a risk. Any doubtful record creates a negative impact and can affect
you in many ways. It's not only in case of sanctioning a loan but also determine the
rate of interest. Lower the score, higher will be the interest.
According to the data of Jean Chatzky (the financial editor for NBC's The Today
Show), in May 2006, to qualify for the best rates on a mortgage loan, home buyer
needed a credit score of 620 or higher. Just 2 year later in May 2008, you would
have asked for a credit score of 750 to qualify for those same rates. So it's
important to review your report once in a year, so that you are aware of your report
and know what the creditors say about you and also can work on improving your
score. Knowing your credit report will help you make important financial
decisions.
In the competitive market, rating gives an edge to the company when they place
their bond/debenture or other debt instruments in the market for subscription. The
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investor relies on the independent rating agency since he does not have the time,
expertise, analytical skills and the past data on the company’s performance
available with him. Comparison between 2 similar types of instruments is made
easier if rating of the issues is available. The investor who knows the risk he has
bargained for when he decides to take a decision to invest vis-a-vis his own risk
appetite and the rewards he could expect. Rating helps the issuing companies to
place their issues at competitive rates of interest and reduce the cost of funds to a
reasonable level keeping with their credit standing, reputation and ability to repay
the debts in time.
It should be noted that when a rating is attached to an issue, it by no means, reflects
the total financial capacity of the company. In other words, rating agencies carry
out the rating exercise for an issue of debt instrument and not a company as a
whole. A company may get highest rating for a particular size of an issue whereas
if size is increased beyond a particular level, same issue may be allotted a lower
rating if the company’s financial capacity is unable to sustain the servicing of the
issue. Also if after the issue is launched with a higher credit rating and company
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undertakes operations which are likely to put their financial capacity under strain,
the credit rating may be lowered by the rating agency anytime during the maturity
of the instrument before it becomes due for payment.
By adopting a universally accepted measure of credit risk, issuers of any
nationality can gain access to global capital markets. In addition, since the issuer's
credit risk is publicly announced, the issuer can obtain financing at an appropriate
interest rate and avoid unnecessary credit spreads that may arise from
misinformation or lack of recognition.
Often, issues are raised as to the creditability of credit rating agencies on account
of the fact that different credit rating agencies often come up with different ratings
for the same organization. Ratings are determined through a comprehensive
evaluation including quantitative factors (financial indicators such as operating
profit ratio, equity ratio, etc.), qualitative factors (business foundation including
industry trends, company characteristics, etc.), and factors specific to the bond
(issue conditions, bond type, etc.). Thus the differences in ratings emerge due to
the different stances of agencies toward each of these factors.
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Investment decisions can change considerably depending on which credit rating
data is used. Usually, investors use the lowest rating in their analysis. However,
this valuable source of information will be rendered useless unless applied with the
appropriate investment stance and investment criteria.
IMPORTANCE OF CREDIT RATING IN INDIA
establish a link between risk and return
to investors in making investment decisions
 credit rating shows the exact worth of the organization
In the Indian context it’s a sudden down gradation of ratings of an organization, by
three or more notches within a few months in spite of no visible fluctuations in the
market. The rating agencies justify it on the ground that they suffer from a lack of
adequate information, different agencies give different weightage to different
factors on account of there being no market regulatory body as such to lay down
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yardsticks or monitor their ratings. Thus, it is evident that the system is still in its
nascent stage in India and the SEBI guidelines indicate a step forward in
institutionalizing the process. The merit of the guidelines per se is of course, a
different issue that will be dealt with in a different chapter. As of now the issue is
merely concerned with ascertaining whether CRAs are here to stay and the answer
quite definitely seems to be in the affirmative.
PRACTICAL PROBLEMS WITH CREDIT RATING
 The widespread of branch net work of the rating agency may limit skills in
rating.
 Inexperienced, unskilled or overloaded staff may not do justice to their job &
the resulting ratings may not be perfect.
 The rating is not permanent but subject to changes & moreover the agencies
can not give any guarantee for the investors.
 The time factor greatly affects rating & gives misleading conclusions. a
company which adverse conditions temporarily will be given a low rating
judged on the basis of temporary phenomenon.

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 Since the rating agencies receive a sizable fee from the companies for
awarding ratings, a tendency to inflate the ratings may develop.
 Investment which have the same rating may not have identical investment
quality
However, the problems with the credit rating system are several, and it would be
unfair to say that these problems are to be found only in the Indian CRAs as they
plague CRAs all over the world. Some of them are listed below:
 There is often a possibility of biased ratings and misrepresentation on
account of the lack of accountability in the process and the close nexus
between the agency and the issuer (at least in the Indian context).
 Rating only represents the past and present performances of the company
and therefore future events may alter the nature of the rating.
 Rating is based on the material provided by the company and therefore, there
is always a risk of concealment of information on the part of the latter.

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 Rating of a debt instrument is not a guarantee as to the soundness of the
company.
 Ratings often on the debt instruments of different agencies.
 Small differences in degrees of risk are usually not indicated by CRAs. Thus
issues with the same rating may actually be of differing quality.
 Similarly, default probability need not be specifically predicted. Calculations
are usually done in relative terms.
 CRAs cannot be used as recommendations to buy, sell or hold securities as
they do not comment on the adequacy of market price, suitability of any
security for an investor or the taxability of the payments.
 The information is obtained from issuers, underwriters, etc. and is usually
not checked for accuracy or truth. Thus ratings may change on account of
non-availability of information or unavailability of adequate information.
 Changes in market considerations may result in loss that will not be reflected
in CRAs.
In India the chief problems in the context of CRAs arises on account of the fact
that they are not the independent and autonomous entities that their international
counterparts are. The three primary CRAs in India, viz., ICRA promoted by IFCI
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and other financial institutions and banks, CRISIL, promoted by ICICI, Asian
Development bank and others, and CARE promoted by IDBI are all promoted by
lending institutions. Further most corporate borrowers are clients of these
institutions in terms of borrowing. Further, institutions like ICICI, IDBI also have
stakes in such client companies. Thus it is very important for these agencies to
distance themselves from their promoters if they want to gain credibility.
Thus, needless to say, the system of CRAs needs some amount of relooking and
overhauling in order to make it effective and viable in the future. A positive step
has been taken in this regard by the SEBI (Credit rating Agencies) Regulations,
1999, which has attempted to resolve some of the aforesaid problems, but much
still remains to be done.
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INDIVIDUAL CREDIT RATING IN INDIA
A Primer for Individuals
When it comes to risk management in Banks, the risk that takes the priority is "the
credit risk". The credit risk by definition means, risk of loans disbursed to various
corporate and retail clients will be paid back or not. For layman's understanding, a
bank broadly has two main functions viz. Assets and Liabilities. The main job of
the liabilities side of a bank, is to channelize savings in the economy, designs
various instruments, by which, money can be collected from the economy. This
could be in the form of saving bank accounts, current accounts, FDs etc. The
money so collected, is a liability on the bank as it has to repay the same to its
customers with certain prevailing rate of interest and hence the function is called
Liability. Once money is collected from various sources, the same has to be
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deployed at a profitable rate of return. The deployment could be in the form of
corporate lending, investing in projects or simply retail lending in the form of
Personal Loans, Vehicle loans, home loans, SME lending etc.
The basic principle of managing Credit Risk, is diversification of portfolio. This
means, that lending to corporate borrowers is diversified in terms of different
industries and within an industry to different corporates. Lending is based on as per
the underwriting standards of the bank e.g. the repute of the company, past
financials of the company including profitability over last several years,
shareholding pattern, qualitative study of management, project feasibility of the
project to be funded, future cash lows etc. Although all banks into corporate
lending develop their own individual underwriting policies, they also depend on
the credit rating of a corporate by accredited Credit Rating Agencies like CRISIL,
ICRA and CARE. Even the Basel Committee on Banking Regulation has
accentuated on the importance of use of external credit ratings.
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The retail segment in India, however, has been devoid of external agencies, which
are into credit rating of individuals i.e. retail customers. The lending to retail
customers is done basis purely on the lending policy of the bank, which vary from
bank to bank, depending on the banks risk appetite. In the United States, there are
government funded repositories like Equifax, Trans-world, Trans Union, Dun &
Bradstreet etc, which act as credit rating agencies for retail borrowers. They
provide member banks/NBFCs with credit history of an individual in terms of
loans that he has paid in the past, loans that he is currently running, Credit Cards
that he has held or currently active with repayment history of the same. There are
other vital information that the agency report provide viz., if the borrower has ever
filed for bankruptcy or if there is any litigation, court case etc. pending against
him. Based on the overall credit history of the customer, he/she is given a credit
rating, more popularly called, FICO score. This may vary from agency to agency
but the variation may not be more than 10%.
However, the US system of credit rating individual could not be replicated in India
because of some practical difficulties. The most important being, absence of a
mechanism for identifying an individual. In the United States, each individual is
issued a Social Security Number or the SSN, when he/she is born. This SSN is a
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unique number and all information related an individual, including social history,
financial history, criminal history etc is linked to ones SSN and therefore,
collecting information about individual becomes much easier. This is further
facilitated by the presence of a system, which ensures that the information flows
freely between well coordinated government and public departments. Hence,
information related to individual can be stored at a common place and retrieved
when required. Also, there are proper laws in place, which requires all the
public/private entities like banks, NBFCs etc. to share their customer related data
with the credit rating agencies.
In India, the scenario has been different. The is no concept of Social Security
Number to identify an individual. The only way to identify a customer is through
name, address, Date of Birth (DoB) etc. However, with no sanctity of DoB proofs
or address proofs, it is very easy to fool the system. Till sometime bank, the only
way for a bank to know the credit history of a prospective customer was through its
collection or field verification agencies, which may or may not had information
about the customer. Besides, banks also did not pay any strict attention to the data
sanctity of the customer at their end. This is, particularly true to banks issuing
Credit Cards.
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With rising competition in the retail sector, there was a sharp rise in delinquency
level of banks. The need for Credit Rating Agency which could work like a
repository for credit information of individual, was widely felt. As a first attempt in
this direction, The Credit Information Bureau of India Ltd or the CIBIL was
incorporated in 2000. CIBIL was an effort of The Government of India and the
Reserve Bank of India. The first promoters and the member banks were the State
Bank of India (SBI) and HDFC. Necessary logistics and technology was provided
by internationally reputed credit rating agencies like Dun & Bradstreet and Trans-
union. However, the attempt was not efficacious initially, since most banks were
reluctant about sharing their customer data with other banks. This was further
aggravated by the fact that the banks were not under any legal obligation to share
their data. However, with RBI's efforts, more and more banks and NBFCs have
joined hand in providing customer data to CIBIL and in return get data on the
customers on payment of some fees from CIBIL. This initiative called CIBIL has
really been helpful in curbing delinquency and banks have starting weaving their
credit lending policy around CIBIL.
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The quality of CIBIL reports have further been helped by certain government
measures like introduction of PAN numbers and making the same mandatory for
availing most banking services. The PAN number may be considered as a very
crude form of a Social Security Number, since only tax paying individuals apply
for it i.e. people not falling in tax bracket or not wanting to pay tax, may or may
not have PAN no. But with regulators like RBI, Tax Departments etc making PAN
no. mandatory for availing banking and investment services, more and more
percentage of population (at least those wanting to avail credit) are now having a
valid PAN no., which to a large extent has done the same job what SSN does in the
United States.
Any technological advancement in future, which may lead to better networking
between banks, government agencies like judiciary, RBI and CIBIL will only
further improve the quality of CIBIL reporting. As of now, CIBIL has not
introduced any system of assigning any Credit Rating to individuals like the FICO
scoring as mentioned above. But this may be just round the corner. Also, a
competition in the credit rating field i.e. more set ups like CIBIL will not only see
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a further improvement in quality in terms of services being provided to the banks
and NBFCs but will also see cost rationalization.
Prior to CIBIL and along with CIBIL, there was information available in the
market but it was more scattered and specific. For example, Satyam Database,
more popularly known as MCNF database (Master Card Negative Feedback), is
available in the market. The MCNF database is the data of database of all
delinquent customers who have defaulted in their Master Card Credit Card. The
customer could belong to any bank which issues Master Card Credit Card. Besides
this, most of the verification agencies in any particular area, are a rich source of
credit information, specially derogatory. Since most of these verification agencies
are also invariably collection agencies for multiple banks, they have their own
database for derogatory customers.
There is a basic limitation to both MCNF database and data available with
verification agencies. One the data is very limited and does not cover sizable
proportion of the credit seeking population. MCNF covers only Master Card Credit
Card while verification agencies have data of their client banks only. Most of these
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verification agencies have their area of operation limited to only one city or couple
of cities in the same state but not beyond that. Second, the MCNF and Verification
Agencies have only derogatory data. So, if a match is found, then, the customer is a
bad credit or risky to lend, but if there is no match, it will not be prudent to assume
that the customer is a good credit or not risky to lend. CIBIL is however, a
balanced approach, as it contains all the credit history available for the customer,
both good and bad.
How Does It Impacts Individuals
With set ups like CIBIL, there is a free flow of credit information between banks.
All members have access to the CIBIL database. Hence, it is becoming,
increasingly difficult for chronic defaulters to obtain credit from the banks. As
mentioned before, most bank are weaving their credit policy around CIBIL, MCNF
and Verification Agency records, it is very important for individuals to be aware
and sensitive to their credit history.
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It is a common observation with the people of younger age group, that, they carry
multiple credit cards, more as a matter of style statement, than, having an actual
requirement of the same. This is coupled with over spending and in their juvenile
spirit, not paying. What they do not realize is that this derogatory information is
actually being stored against their name, add or PAN no. somewhere, and when,
later in their life, they are in actual need for credit, they do not get it. The above
given example is of a willful customer, but there are also common instances
service related issues with the banks, specially, credit card issuing banks e.g.
annual fee levied when free credit card promised or insurance premium charged
without customer's knowledge. Instances could be numerous, but unfortunately, it
is the individual, who is impacted negatively in such a situation. Often, after
charging multiple late fees, interests etc, the default amount reported to CIBIL or
Satyam database, is quite high. Lending institution, prima facie, do not investigate
in the derogatory information and decline a loan or a credit card application
upfront. Since, all banks are free to make their own credit policy, a bank with low
risk appetite and hence strict credit policy, is not likely to reconsider credit
application, even if, in reality, it was not customer's fault.
What to Do / What Not to Do
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The importance of a clean credit history is understood when emergency credit is
required, for example, a personal loan in order to meet immediate medical
expenses or a home loan and the same is denied because one did not bother to
repay his credit card debts or his auto loan EMI or resolve the dispute with a
financier in the past.
Since, most of us, specially in the middle class, salaried or businessmen, will
require a credit at some point of time either for a personal need, building a house or
for business purpose or a credit card, there are a few precautions that an individual
must take in his financial dealings. One must be very diligent and disciplined in
repaying his debts, EMIs, Credit Card payments etc. In rarity, if there is a delay in
payment, one should make sure, that, the payment with late payment charges if
any, should not cross 30 days past due. If late payment charges or any other
charges are waived off by the bank specifically in written, then only, such charges
are not to be paid. If there is a dispute in payment, specially in credit card related
payments, one should make sure that the dispute is resolved and he has a written
record of the same in his possession. Some people think, that settling an account
for something less that what is actual due is an easy way out. The settlement will
only give them a settlement letter, which is an indicator that they did not pay the
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full amount. Neither is their name or record taken off from the derogatory history
of the bank and hence CIBIL/Satyam records. In case, the bank is at a fault, which
it agrees on also, it is very important to acquire an apology letter from the bank,
clearly stating the issue and bank's apology on the same.
Most of us, keep getting calls from various Credit Card issuing bank's DSA (Direct
Selling Associates), which would make loads of promises and would request us to
at least keep the card for a year and then destroy the same after informing the bank
of your intention of not using the same. Such offers should be avoided, if one is
NOT in need of that credit card. Since, one does not need that card, it will be lying
dormant in his pocket for a year. He would even forget the date as to when the card
is to be blocked. Since the card is free for only the first year, next year beginning,
he would receive a statement with annual fees levied. He will dispute it, not pay it.
The bank will keep following up and levying late payment and other incidentals
charges, and report it as a derogatory card to the CIBIL. The bank cannot blamed
for the same, since, as per its terms and conditions, the card was free for first year
only and the customer did not bother to cancel it at the end of the year. So, why,
unnecessarily, call for a problem, when it can be easily avoided by politely
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declining to accept for the card in the first place. The principle is simple. Do NOT
avail a credit if you DON'T need it.
REGUALTORY FRAMEWORK
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Credit rating has been made mandatory in India for issuance of instruments.
Following are some of the important regulatory agencies connected with credit
rating.
SEBI: As per the regulations of SEBI, a public issue of debentures and bonds
convertible/redeemable beyond a period of 18 months, needs credit rating.
RBI: According to the guidelines of RBI, one of the conditions for issuance of
commercial paper in India is that the issue must have a rating not below the P2
grade from CRISIL/A2 grade from ICRA/PR2 from CARE.
Rating Framework
Credit rating at providing an opinion on the relative credit risk associated with an
instrument.
While assigning ratings, all the factors that have a bearing on future cash
generation, and claims that require servicing, are considered. The major factors
that determine the rating profile of a security issue are discussed below:
Business Factors
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 Nature of industry
 Market position
 Efficiency of operation.
 Project risk
 Protective factors
 Quality of management.
Financial Factors
 Financing Policies.
 Flexibility of financial structure.
 Past track record.
 Quality of accounting policy.
 Financial performance indicators.
• Profitability.
• Gearing.
• Coverage ratios.
• Liquidity.
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• Cash flow.
Advantages
To investors
 Information service.
 Systematic risk evaluation.
 Professional competency.
 Easy to understand.
 Low cost.
 Efficient portfolio management.
 Other benefits.
To Issuers
 Index of faith.
 Bench mark.
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 Wider investor base.
To Intermediaries
 Efficient practice.
 Effective monitoring
Drawbacks
 Guidance, not recommendation.
 Based on assumptions.
 Competitive ratings.
SEBI GUIDELINES
 No credit rating agencies shall rate a security issued by its promoters.
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 Dual rating is compulsory for public & rights issue of debt instrument of Rs
100 crore or more.
 The net worth of rating agencies has been fixed at Rs 5cr.
 Rating agencies can choose their methodology of operation but self
regulatory mechanism will give a better maturity status for agencies.
 Period of validity of registration shall be 3 years.
 Sebi has decided to incorporate a clause in the listing agreement of stock
exchanges requiring companies to corporate with agencies by providing
correct information. Refusal to do so many lead to breach of contract
between rating agency & client.
 It is also suggested that a penal clause be
Registration of Credit Rating Agency
2. Application for grant of certificate
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(1) Any person proposing to commence any activity as a credit rating agency on or
after the date of commencement of these regulations shall make an application to
the Board for the grant of a certificate of registration for the purpose.
(2) Any person, who was immediately before the said date carrying on any activity
as a credit rating agency, shall make an application to the Board for the grant of a
certificate within a period of three months from such date:
Provided that the Board may, where it is of the opinion that it is necessary to do so,
for reasons to be recorded in writing, extend the said period upto a maximum of six
months form such date.
(3) An application for the grant of a certificate under sub-regulation or sub-
regulation shall be made to the Board in Form A of the First Schedule and shall be
accompanied by a non–refundable application fee, as specified in Form A of the
second Schedule, to be paid in the manner specified in Part B thereof.
(4) Any person referred to in sub-regulation who fails to make an application for
the grant of a certificate within the period specified in that sub-regulation shall
cease to carry on rating activity.
3. Promoter of credit rating agency
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The Board shall not consider an application under regulation (3) unless the
applicant is promoted by a person belonging to any of the following categories,
namely:
(a) a public financial institution, as defined in section 4 A of the Companies Act,
1956 (1 of 1956);
(b) a scheduled commercial bank included for the time being in the second
schedule to the Reserve Bank of India Act, 1934 (2 of 1934);
(c) a foreign bank operating in India with the approval of the Reserve Bank of
India;
(d) a foreign credit rating agency recognized by or under any law for the time
being in force in the country of its incorporation, having at least five years
experience in rating securities;
(e) any company or a body corporate, having continuous net worth of minimum
rupees one hundred crores as per its audited annual accounts for the previous five
years prior to filing of the application with the Board for the grant of certificate
under these regulations.
4. Eligibility criteria
The Board shall not consider an application for the grant of a certificate under
regulation 3, unless the applicant satisfies the following conditions, namely:
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(a) the applicant is set up and registered as a company under the Companies Act,
1956;
(b) the applicant has, in its Memorandum of Association, specified rating activity
as one of its main objects;
(c) the applicant has a minimum net worth of rupees five crores.
Provided that a credit rating agency existing at the commencement of these
regulations, with a net worth of less than rupees five crores, shall be deemed to
have satisfied this condition, if it increases its net worth to the said minimum
within a period of three years of such commencement.
(d) the applicant has adequate infrastructure, to enable it to provide rating services
in accordance with the provisions of the Act and these regulations;
(e) the applicant and the promoters of the applicant, referred to in regulation 4 have
professional competence, financial soundness and general reputation of fairness
and integrity in business transactions, to the satisfaction of the Board;
(f) neither the applicant, nor its promoter, nor any director of the applicant or its
promoter, is involved in any legal proceeding connected with the securities market,
which may have an adverse impact on the interests of the investors;
(g) neither the applicant, nor its promoters, nor any director, of its promoter has at
any time in the past been convicted of any offence involving moral turpitude or
any economic offence;
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(h) the applicant has, in its employment, persons having adequate professional and
other relevant experience to the satisfaction of the Board;
(i) neither the applicant, nor any person directly or indirectly connected with the
applicant has in the past been –
(I) refused by the Board a certificate under these regulations or
(II) subjected to any proceedings for a contravention of the Act or of any
rules or regulations made under the Act.
Explanation: For the purpose of this clause, the expression "directly or indirectly
connected person" means any person who is an associate, subsidiary, inter-
connected or group company of the applicant or a company under the same
management as the applicant.
(j) the applicant, in all other respects, is a fit and proper person for the grant of a
certificate;
(k) grant of certificate to the applicant is in the interest of investors and the
securities market.
5. Applicability of Securities and Exchange Board of India (Criteria for Fit and
Proper Person) Regulations, 2004.
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The provisions of the Securities and Exchange Board of India (Criteria for Fit and
Proper Person) Regulations, 2004 shall, as far as may be, apply to all applicants or
the credit rating agencies under these regulations.
6. Application to conform to the requirements
Any application for a certificate, which is not complete in all respects or does not
conform to the requirement of regulation 5 or instructions specified in Form A
shall be rejected by the Board:
Provided that, before rejecting any such application, the applicant shall be given an
opportunity to remove, within thirty days of the date of receipt of relevant
communication, from the Board such objections as may be indicated by the Board.
Provided further, that the Board may, on sufficient reason being shown, extend the
time for removal of objections by such further time, not exceeding thirty days, as
the Board may consider fit to enable the applicant to remove such objections.
7. Furnishing of information, clarification and personal representation
(1) The Board may require the applicant to furnish such further information or
clarification as the Board may consider necessary, for the purpose of processing of
the application.
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1 Inserted by SEBI (Criteria for Fit and Proper Person) Regulations, 2004, w.e.f.
10.3.2004.
(2) The Board, if it so desires, may ask the applicant or its authorised
representative to appear before the Board, for personal representation in connection
with the grant of a certificate.
8. Grant of Certificate
(1) The Board, on being satisfied that the applicant is eligible for the grant of a
certificate of registration, shall grant a certificate in Form ‘B’.
(2) The grant of certificate of registration shall be subject to the payment of the
registration fee specified in Part A of the Second Schedule, , in the manner
prescribed in Part B thereof.
9. Conditions of certificate and validity period
(1) The certificate granted under regulation 8 shall be, subject to the following
conditions, namely:
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(a) the credit rating agency shall comply with the provisions of the Act, the
regulations made there under and the guidelines, directives, circulars and
instructions issued by the Board from time to time on the subject of credit rating.
(b) (1) where any information or particulars furnished to the Board by a credit
rating agency:
(i) is found to be false or misleading in any material particular ; or
(ii) has undergone change subsequently to its furnishing at the time of the
application for a certificate; the credit rating agency shall forthwith inform
the Board in writing.
(2) the period of validity of certificate of registration shall be three years.
10. Renewal of certificate
(1) A credit rating agency, if it desires renewal of the certificate granted to it, shall
make to the Board an application for the renewal of the certificate of registration.
1(1A) An application for renewal of certificate of registration made under sub-
regulation
(1) shall be accompanied by a non refundable application fee as specified in
the Second Schedule.
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(2) Such application shall be made not less than three months before expiry
of the period of validity of the certificate, specified in sub-regulation(2) of
regulation 9..
(3) The application for renewal made under sub-regulation (1)- –
(a) shall be accompanied by a renewal fee as specified in the second
schedule and 1 Inserted by SEBI (Credit Rating Agencies)
(Amendment) Regulations, 2006,w.e.f. 7-9-2006
(b) as far as may be, shall be dealt with in the same manner as if it were
an application for the grant of a fresh certificate under regulation 3.
11. Procedure where certificate is not granted
(1) If, after considering an application made under regulation 3 or regulation 10 as
the case may be, the Board is of the opinion that a certificate should not be granted
or renewed, as the case may be, it may, after giving the applicant a reasonable
opportunity of being heard, reject the application.
(2) The decision of the Board, not to grant or not to renew the certificate under
sub-regulation (1) shall be communicated by the Board to the applicant within a
period of thirty days of such decision, stating the grounds of the decision.
(3) Any applicant aggrieved by the decision of the Board rejecting his application
under sub-regulation (1) may, within a period of thirty days from the date of
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receipt by him of the communication referred to in sub-regulation (2) apply to the
Board in writing for reconsideration of such decision.
(4) Where an application for re-consideration is made under sub-regulation (3) the
Board shall consider the application and communicate to the applicant its decision
in writing, as soon as may be.
12. Effect of refusal to grant certificate
(1) An applicant referred to in sub-regulation (1) of regulation 11 whose
application for the grant of a certificate has been rejected under regulation 11, shall
not undertake any rating activity.
(2) An applicant referred to in sub-regulation (2) of regulation 3, whose application
for the grant of a certificate has been rejected by the Board under regulation 11,
shall, on and from the date of the receipt of the communication under sub-
regulation (2) of regulation 11, cease to carry on any rating activity.
(3) If the Board is satisfied that it is in the interest of the investors, it may permit
the credit rating agency referred to under sub-regulation (1) or (2) to complete the
rating assignments already entered into by it, during the pendency of the
application or period of validity of the certificate.
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(4) The Board may, in order to protect the interests of investors, issue directions
with regard to the transfer of records, documents or reports relating to the activities
of a credit rating agency, whose application for the grant or renewal of a certificate
has been rejected.
(5) The Board may, in order to protect the interests of investors, appoint any
person to take charge of the records, documents or reports relating to the rating
activities of a credit rating agency referred to in sub-regulation (4) and for this
purpose also determine the terms and conditions of such appointment.
GENERAL OBLIGATIONS OF CREDIT RATING AGENCIES
13. Code of Conduct
Every credit rating agency shall abide by the Code of Conduct contained in the
Third Schedule.
14. Agreement with the client
Every credit rating agency shall enter into a written agreement with each client
whose securities it proposes to rate, and every such agreement shall include the
following provisions, namely:-
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(a) the rights and liabilities of each party in respect of the rating of securities shall
be defined;
(b) the fee to be charged by the credit rating agency shall be specified;
(c) the client shall agree to a periodic review of the rating by the credit rating
agency during the tenure of the rated instrument;
(d) the client shall agree to co-operate with the credit rating agency in order to
enable the latter to arrive at, and maintain, a true and accurate rating of the clients
securities and shall in particular provide to the latter, true, adequate and timely
information for the purpose.
(e) the credit rating agency shall disclose to the client the rating assigned to the
securities of the latter through regular methods of dissemination, irrespective of
whether the rating is or is not accepted by the client;
(f) The client shall agree to disclose, in the offer document;-
(i) the rating assigned to the client’s listed securities by any credit rating agency
during the last three years and
(ii) any rating given in respect of the client’s securities by any other credit rating
agency, which has not been accepted by the client.
(g) the client shall agree to obtain a rating from at least two different rating
agencies for any issue of debt securities whose size is equal to or exceeds, rupees
one hundred crores.
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15. Monitoring of ratings
(1) Every credit rating agency shall, during the lifetime of securities rated by it
continuously monitor the rating of such securities.
(2) Every credit rating agency shall disseminate information regarding newly
assigned ratings, and changes in earlier rating promptly through press releases and
websites, and, in the case of securities issued by listed companies, such
information shall also be provided simultaneously to the concerned regional stock
exchange and to all the stock exchanges where the said securities are listed.
16. Procedure for review of rating
(1) Every credit rating agency shall carry out periodic reviews of all published
ratings during the lifetime of the securities.
(2) If the client does not co-operate with the credit rating agency so as to enable the
credit rating agency to comply with its obligations under regulation 15 of this
regulation, the credit rating agency shall carry out the review on the basis of the
best available information.
Provided that if owing to such lack of co-operation, a rating has been based on the
best available information, the credit rating agency shall disclose to the investors
the fact that the rating is so based.
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(3) A credit rating agency shall not withdraw a rating so long as the obligations
under the security rated by it are outstanding, except where the company whose
security is rated is wound up or merged or amalgamated with another company.
17. Internal procedures to be framed
Every credit rating agency shall frame appropriate procedures and systems for
monitoring the trading of securities by its employees in the securities of its clients,
in order to prevent contravention of –
(a) the Securities and Exchange Board of India (Insider Trading) Regulations,
1992;
(b) the Securities and Exchange Board of India (Prohibition of Fraudulent and
Unfair Trade Practices relating to the Securities Market) Regulations, 1995; and
(c) other laws relevant to trading of securities.
18. Disclosure of Rating Definitions and Rationale
(1) Every credit rating agency –
(a) shall make public the definitions of the concerned rating, along with the symbol
and,
(b) shall also state that the ratings do not constitute recommendations to buy, hold
or sell any securities
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(2) Every credit rating agency shall make available to the general public
information relating to the rationale of the ratings, which shall cover an analysis of
the various factors justifying a favourable assessment, as well as factors
constituting a risk.
19. Submission of information to the Board
(1) Where any information is called for by the Board from a credit rating agency
for the purposes of these regulations, including any report relating to its activities,
the credit rating agency shall furnish such information to the Board –
(a) within a period specified by the Board or
(b) if no such period is specified, then within a reasonable time.
(2) Every credit rating agency shall, at the close of each accounting period, furnish
to the Board copies of its balance sheet and profit and loss account.
20. Compliance with circulars etc., issued by the Board
Every credit rating agency shall comply with such guidelines, directives, circulars
and instructions as may be issued by the Board from time to time, on the subject of
credit rating.
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120A. Appointment of Compliance Officer
(1.) Every credit rating agency shall appoint a compliance officer who shall be
responsible for monitoring the compliance of the Act, rules and regulations,
notifications, guidelines, instructions etc issued by the Board or the Central
Government.
(2.) The compliance officer shall immediately and independently report to the
Board any noncompliance observed by him.]
21. Maintenance of Books of Accounts records, etc.
Every credit rating agency shall keep and maintain, for a minimum period of five
years, the following books of accounts, records and documents, namely:
(a) copy of its balance sheet, as on the end of each accounting period;
(b) a copy of its profit and loss account for each accounting period;
(c) a copy of the auditor’s report on its accounts for each accounting period.
(d) a copy of the agreement entered into, with each client;
(e) information supplied by each of the clients;
(f) correspondence with each client;
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(g) ratings assigned to various securities including upgradation and down gradation
(if any) of the ratings so assigned.
1 Inserted by SEBI (Investment Advice by Intermediaries) (Amendment)
Regulations, 2001, w.e.f.29-5-2001.
(h) rating notes considered by the rating committee;
(i) record of decisions of the rating committee;
(j) letter assigning rating;
(k) particulars of fees charged for rating and such other records as the Board may
specify from time to time.
(2) Every credit rating agency shall intimate to the Board the place where the
books of account, records and documents required to be maintained under these
regulations are being maintained.
22. Steps on auditor’s report
Every credit rating agency shall, within two month’s from the date of the auditor’s
report, take steps to rectify the deficiencies if any, made out in the auditor’s report,
insofar as they relate to the activity of rating of securities.
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23. Confidentiality
Every credit rating agency shall treat, as confidential, information supplied to it by
the client and no credit rating agency shall disclose the same to any other person,
except where such disclosure is required or permitted by under or any law for the
time being in force.
24. Rating process
(1) Every credit rating agency shall –
(a) specify the rating process;
(b) file a copy of the same with the Board for record; and file with the Board
any modifications or additions made therein from time to time.
(2) Every credit rating agency shall, in all cases, follow a proper rating process.
(3) Every credit rating agency shall have professional rating committees,
comprising members who are adequately qualified and knowledgeable to assign a
rating.
(4) All rating decisions, including the decisions regarding changes in rating, shall
be taken by the rating committee.
(5) Every credit rating agency shall be staffed by analysts qualified to carry out a
rating assignment.
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(6) Every credit rating agency shall inform the Board about new rating instruments
or symbols introduced by it.
(7) Every credit rating agency, shall, while rating a security, exercise due diligence
in order to ensure that the rating given by the credit rating agency is fair and
appropriate.
(8) A credit rating agency shall not rate securities issued by it.
(9) Rating definition, as well as the structure for a particular rating product, shall
not be changed by a credit rating agency, without prior information to the Board.
(10) A credit rating agency shall disclose to the concerned stock exchange through
press release and websites for general investors, the rating assigned to the
securities of a client, after periodic review, including changes in rating, if any.
RESTRICTION ON RATING OF SECURITIES ISSUED BY PROMOTERS
OR BY CERTAIN OTHER PERSONS
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25. Definitions
In this Chapter, unless the context otherwise requires;-
(a) "associate" , in relation to a promoter, includes a body corporate in which the
promoter holds ten percent or more, of the share capital;
(b) "promoter" means a person who holds ten percent or more, of the shares of the
credit rating agency.
26. Securities issued by promoter
(1) No credit rating agency shall rate a security issued by its promoter.
(2) In case promoter is a lending institution, it’s Chairman, director or employee
shall not be a Chairman, director or employee of credit rating agency or its rating
committee.
Provided that sub-regulation (2) shall come into force within three months from
commencement of these regulations.
27. Securities issued by certain entities, connected with a promoter, or rating
agency not to be rated
(1) No credit rating agency shall, rate a security issued by an entity, which is;-
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(a) a borrower of its promoter; or
(b) a subsidiary of its promoter; or
(c) an associate of its promoter, if
(i) there are common Chairman, Directors between credit rating
agency and these entities.
(ii) there are common employees.
(iii) there are common Chairman, Directors, Employees on the rating
committee.
(2) No credit rating agency shall rate a security issued by its associate or
subsidiary, if the credit rating agency or its rating committee has a Chairman,
director or employee who is also a Chairman, director or employee of any such
entity
1Provided that the Credit Rating Agency may, subject to the provisions of sub-
regulations (1), rate a security issued by its associate having a common
independent director with it or rating committee if,-
(i) such an independent director does not participate in the discussion on
rating decisions, and
(ii) the Credit Rating Agency makes a disclosure in the rating announcement
of such associate (about the existence of common independent director) on
its Board or of its rating committee, and that the common independent
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director did not participate in the rating process or in the meeting of its
Board of Directors or in the meeting of the rating committee, when the
securities rating of such associate was discussed.
Explanation: - (1) For the purposes of this sub-regulation the expression
‘independent director’ means a director who, apart from receiving remuneration as
a director, does not have any other material pecuniary relationship or transactions
with the company, its promoters, its management or its subsidiaries, which in the
judgment of the board of the company, may affect the independence of the
judgment of such director.
28. Securities already rated
Nothing in this Chapter shall apply to securities whose rating has been already
done by a credit rating agency before the commencement of these regulations, and
such securities may, subject to the provisions of the other Chapters of these
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regulations, continue to be rated, without the need to comply with the restrictions
imposed by the regulations contained in this chapter.
PROCEDURE FOR INSPECTION AND INVESTIGATION
29. Board’s right to inspect
(1) The Board may appoint one or more persons as inspecting officers, to
undertake inspection or investigation of the books of account, records and
documents of the credit rating agencies, for any of the purposes specified in sub-
regulation (2).
(2) The purposes referred to in sub-regulation (1) shall be the following, namely:
(a) to ascertain whether the books of account, records and documents are
being maintained properly;
1 Inserted by the SEBI (Credit Rating Agencies)(Amendment)Regulations,
2003, w.e.f. 19-2-2003
(b) to ascertain whether the provisions of the Act and these regulations are
being complied with;
(c) to investigate into complaints received from investors, clients or any
other person on any matter having a bearing on activities of the credit rating
agency;
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(d) in the interest of the securities market or in the interest of investors.
(3) The inspections ordered by the Board under sub-regulation (1) shall not
ordinarily go into an examination of the appropriateness of the assigned ratings on
the merits.
(4) Inspections to judge the appropriateness of the ratings may be ordered by the
Board, only in case of complaints which are serious in nature.
(5) Inspections referred to in sub-regulation (4) shall be carried out either by the
officers of the Board or independent experts, with relevant experience or
combination of both.
30. Notice before inspection or investigation
(1) Before ordering an inspection or investigation under regulation 29, the Board
shall give not less than ten days written notice to the credit rating agency for that
purpose.
(2) Notwithstanding anything contained in sub-regulation (1) where the Board is
satisfied that in the interest of the investors, no such notice should be given, it may,
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by an order in writing, direct that the inspection or investigation of the affairs of
the credit rating agency be taken up without such notice.
(3) During the course of an inspection or investigation, the credit rating agency
against whom the inspection or investigation is being carried out shall be bound to
discharge all its obligations as provided in regulation 31
31. Obligations of credit rating agency on inspection or investigation by the Board
(1) It shall be the duty of every credit rating agency whose affairs are being
inspected or investigated, and of every director, officer or employee thereof, to
produce to the inspecting or investigating officer such books, accounts and other
documents in its or his custody or control and furnish him with such statements
and information relating to its rating activities, as the inspecting officer may
require within such reasonable period as may be specified by the said officer.
(2) The credit rating agency shall –
(a) allow the inspecting officer to have reasonable access to the premises
occupied by such credit rating agency or by any other person on its behalf;
(b) extend to the inspecting officer reasonable facility for examining any
books, records, documents and computer data in the possession of the credit
rating agency; and
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(c) provide copies of documents or other materials which, in the opinion of
the inspecting officer, are relevant for the purposes of the inspection or
investigation, as the case may be.
(3) The inspecting officer, in the course of inspection or investigation, shall be
entitled to examine, or record the statements, of any officer, director or employee
of the credit rating agency for the purposes connected with the inspection or
investigation.
(4) Every director, officer or employee of the credit rating agency shall be bound to
render to the inspecting officer all assistance in connection with the inspection or
investigation which the inspecting officer may reasonably require.
32. Submission of Report to the Board
The inspecting officer shall, as soon as possible, on completion of the inspection or
investigation, submit a report to the Board. Provided that if directed to do so by the
Board, he may submit an interim report.
133 Action on inspection or investigation report
The Board or the Chairman shall after consideration of inspection or investigation
report take such action as the Board or Chairman may deem fit and appropriate
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including action under the Securities and Exchange Board of India (Procedure for
Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002
PROCEDURE FOR ACTION IN CASE OF DEFAULT
2Liability for action in case of default
1 Substituted by SEBI (Procedure For Holding Enquiry by Enquiry officer and
Imposing Penalty) Regulation, 2002 w.e.f. 27-9-2002. Prior to its substitution it
read as follows.
33. Communication of Findings etc. to the Credit Rating Agency
(1) The Board shall, after consideration of the inspection report or the interim
report referred to in regulation 32, communicate the findings of the inspecting
officer to the credit rating agency and give it a reasonable opportunity of being
heard in the matter.
(2) On receipt of the explanation, if any, from the credit rating agency, the Board
may call upon the credit rating agency to take such measures as the Board may
deem fit in the interest of the securities market and for due compliance with the
provisions of the Act and these regulations.
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2 Substituted by the SEBI (Procedure for Holding Enquiry by Enquiry Officer and
Imposing penalty) Regulations, 2002.w.e.f.27-9-2002.Prior to its substitution it
read as follows.
34. Liability for action in case of default
(1) A credit rating agency which: -
(a) fails to comply with any condition subject to which a certificate has been
granted;
(b) contravenes any of the provisions of the Act or these regulations or any
other regulations made under the Act; shall be dealt with in the manner
provided under the Securities and Exchange Board of India
(Procedure for holding Enquiry by Enquiry officer and Imposing penalty)
Regulations, 2002.
135 to 42 (omitted)
(1) contravenes any of the provisions of the Act or these regulations or any other
regulations made under the Act; shall be liable to either of the penalties specified
in sub-regulation (2).
(2) The penalties referred to in sub-regulation (1) are:-
(a) suspension of registration; or
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(b) cancellation of registration.
1 Substituted by SEBI (Procedure for Holding Enquiry by Enquiry officer and
Imposing Penalty) Regulation, 2002 w.e.f. 27-9-2002. Prior to its omission,
regulation 42 was amended by SEBI (Appeal to Securities Appellate Tribunal)
(Amendment) Regulations, 2000, w.e.f. 28.03.2000. Prior to omission regulation
35 to 42 read as follows.
35. Suspension of registration
A penalty of suspension of the certificate of registration of a credit rating agency
may be imposed by the Board, if the case falls under sub-regulation (1) of
regulation 34.
35. Cancellation of Registration
(1) A penalty of cancellation of certificate of registration of a credit rating agency
may be imposed by the Board, if:
(a) the credit rating agency is guilty of fraud, or has been convicted of an
offence involving moral turpitude or an economic offence; or
(b) in case of repeated defaults of the nature mentioned in sub-regulation (1)
of regulation 34.
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(c) the credit rating agency is declared insolvent or wound up;
(2) The Board shall furnish to the credit rating agency reasons in writing for
cancellation of registration.
37. Manner of Making Order of Suspension and Cancellation
No order of suspension or of cancellation of the certificate of registration, shall be
passed by the Board, except after holding an enquiry in accordance with the
procedure specified in regulation 38.
Provided that the holding of such an enquiry shall not be necessary in cases where:
(a) the credit rating agency is declared insolvent or is wound up; or
(b) the credit rating agency fails to pay to the Board registration fees or renewal fee
as per these regulations.
Provided further that an opportunity of hearing shall be given before any action
against the credit rating agency is taken.
38. Manner of Holding enquiry before Suspension or Cancellation
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(1) For the purpose of holding an enquiry under regulation 37, the Board may
appoint one or more enquiry officers.
(2) The enquiry officer shall issue to the credit rating agency a notice at the
registered office or the principal place of business of the credit rating agency,
setting out the grounds on which action is proposed to be taken against it and
calling upon it to show cause against such action within a period of fourteen days
from the date of receipt of such notice.
(3) The credit rating agency, may, within fourteen days from the date of receipt of
such notice, furnish to the enquiry officer a written reply, together with copies of
documentary or other evidence relied on by it or sought by the Board from the
(4) The enquiry officer shall give a reasonable opportunity of hearing to the credit
rating agency, to enable it to make its submission in support of its reply made
under sub-regulation (3).
(5) Before the enquiry officer, the credit rating agency may either appear in person
or through any person duly authorised on this behalf.
Provided that no lawyer or advocate shall be permitted to represent the credit rating
agency at the enquiry;
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Provided further that where a lawyer or an advocate has been appointed by the
board as a presenting officer under sub-regulation (6), it shall be lawful for the
credit rating agency to present his case through a lawyer or advocate.
(6) If it is considered necessary, the enquiry officer may request the Board to
appoint a presenting officer to present its case.
(7) The enquiry officer shall, after taking into account all relevant facts and
submissions made by the credit rating agency, submit a report to the Board and
recommend the penalty, if any to be imposed upon the credit rating agency as also
the grounds on the basis of which the proposed penalty is justified.
39. Show-cause notice and order
(1) On receipt of the report from the enquiry officer, the Board shall consider the
same and issue a show-cause notice to the credit rating agency, as to why the
penalty as proposed by the enquiry officer should not be imposed.
(2) The credit rating agency shall, within fourteen days of the date of receipt of the
show-cause notice, send a reply to the Board.
(3) The Board, after considering the reply of the credit rating agency to the show-
cause notice, shall as soon as possible pass such order as it deems fit.
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(4) Every order passed by the Board under sub-regulation (3) shall be self-
contained and shall give reasons for the conclusions stated therein, including
justification of the penalty if any imposed by that order.
(5) The Board shall send to the credit rating agency a copy of the order passed
under sub-regulation (3).
40. Effect of suspension and cancellation of registration of credit rating agency
(1) On and from the date of suspension of the certificate of registration, the credit
rating agency shall cease to carry on any rating activity during the period of
suspension and shall be subject to such directions of the Board with regard to any
records, documents securities or reports that may be connected with in its rating
activities, as the Board may specify.
(2) On and from the date of cancellation of the certificate of registration, the credit
rating agency shall: -
(a) cease to carry in any rating activity and
(b) shall be subject to such directions of the Board with regard to the transfer
of records, documents, securities or reports connected with its rating
activities which may be in its custody or control as the Board may specify.
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(3) Notwithstanding the suspension or cancellation of certificate of a credit rating
agency, if the Board is satisfied that it is in the interest of the investors to grant
such permission, the Board may grant to the credit rating agency permission to
carry on such activities relating its assignments undertaken prior to such
suspension or cancellation, as the Board may specify.
41. Publication of Order of Suspension or Cancellation
The order of suspension or cancellation of certificate of registration, passed under
sub-regulation (3) of regulation (39) shall be published by the Board in at least two
daily newspapers.
42. Appeal to the Securities Appellate Tribunal
Any person aggrieved by an order of the Board made, on and after the
commencement of the Securities
Laws (Second Amendment) Act, 1999, (i.e., after 16th December 1999), under
these regulations may prefer an appeal to a Securities Appellate Tribunal having
jurisdiction in the matter
[Prior to amendment 28.3.2000 it read as follows:
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43. Appeal to the Central Government
Any person aggrieved by an order of the Board under these Regulations;
(a) Suspending a certificate of registration;
(b) Cancelling certificate of registration, may prefer an appeal to the Central
Government against such order, in accordance with the Securities and
Exchange Board of India (Appeal to Central Government) Rules, 1993]
FIRST SCHEDULE - FORM A
SECURITIES AND EXCHANGE BOARD OF INDIA (CREDIT RATING
AGENCIES) REGULATIONS, 1999 [REGULATION 3(3)]
APPLICATION FOR GRANT OF CERTIFICATE / RENEWAL OF
CERTIFICATE
NAME OF APPLICANT
CONTACT NAME :
TELEPHONE NO:
FAX NO:
INSTRUCTIONS FOR FILLING UP FORM -
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1. Applicants must submit to the Board a completed application form together with
appropriate supporting documents. Supporting documents should be attested as
true by a notary public.
2. This application form should be filled in accordance with the regulations.
3. Application for registration will be considered, only if it is complete in all
respects.
4. All answers must be typed.
5. Information which needs to be supplied in more detail may be given on separate
sheets which should be attached to the application form.
6. All signatures on the application must be original.
7. Every page of the form as well as every additional sheet must be initialed by the
authorised signatory of the applicant.
1.0 PARTICULARS OF THE APPLICANT
1.1 Name, address of the registered office, address for correspondence, telephone
number(s), fax number(s) and name of the contact person of the company. Address
of branch offices, if any.
1.2 Date of incorporation of the Applicant company (enclose certificate of
incorporation and memorandum and articles of association). Specify the following:
(a) Objects (Main & Ancillary) of the Applicant company
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(b) Authorised, issued, subscribed and paid up capital
1.3 Category to which the Applicant company belongs to:]
(a) Limited company - Private/Public.
(b) Unlimited company.
If listed, names of Stock Exchanges and latest share price to be given.
1.4 Category to which the Applicant company belongs to (refer regulation 3)
(a) Company already in the business of undertaking rating activities
(b) Company proposing to undertake rating activities for the first time.
2.0 ELIGIBILITY CRITERIA
2.1 Category to which the promoter (s) of the Applicant company belong to (refer
regulation 4).
2.2 Name the promoters and indicate their shareholding in the company.
2.3 Enclose a Chartered Accountant’s certificate certifying the continuous net
worth of Rs.100 crores for five years, in case the promoter referred to in regulation
4(e).
2.4 Net worth of the company as per the last audited accounts not earlier than three
months from the date of application [refer regulation 5 (c)]. Enclose a Chartered
Accountant’s certificate certifying the same.
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3.0 PARTICULARS OF DIRECTORS/KEY PERSONNEL
3.1 Particulars of Directors of the company, which shall include name,
qualification, experience, shareholding in the company and directorship in other
companies.
3.2 Particulars of Key Personnel of the company, which shall include name,
designation in the company, qualification, previous positions held, experience, date
of appointment in the company and functional areas
4.0 INFRASTRUCTURE
4.1 Details of infrastructure including computing facilities, facilities for research
and database available with the company and whether the existing infrastructure is
adequate to carry on the rating activities proposed to be undertaken by the
company. Any further plan for additional/ improved infrastructure to be indicated.
5.0 MAJOR SHAREHOLDERS
5.1 List of major shareholders (holding 5% and above of applicant directly or
along with associates)
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Shareholding as on : ______________________________
Name of shareholder No .of Shares held % age of total paid up capital of the
company
6.0 ASSOCIATE CONCERNS
6.1 Particulars of associate companies/concerns which shall include name, address,
type of activity handled, nature of interest of the Applicant company in the
associate, nature of interest of promoter(s) of the applicant in the associate.
6.2 Whether the Board has granted/ refused registration as credit rating agency to
any associate of the applicant. Give the details like date of application, date of
refusal/ registration, reasons for refusal etc.
7.0 BUSINESS INFORMATION OF THE COMPANY
7.1 History, major events and present activities. Details of Experience in Credit
Rating activities and other related activities
7.2 If the company is proposing to engage in credit rating activities for the first
time, business plan of the company with projected volume of activities and income
for which registration is sought to be specifically given.
7.3 Securities Rating activities handled during the last three years as per the table
below Name of Client Type of security Size of issue Year of Issue Security/
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Instrument rated listed / unlisted
7.4 Details of other rating activities undertaken during last three years.
7.5 Any other information considered relevant to the nature of services rendered by
the applicant.
8.0 FINANCIAL INFORMATION ABOUT THE APPLICANT
8.1 Net worth (Rs. In Lacs)
Items Year prior to the preceding year of the current year
Preceding year
Current year
(a) Paid-up capital
(b) Free reserves (excluding revaluation reserves)
Total (a) + (b)
(c) Accumulated losses
(d)Deferred revenue expenditure not written off
Net worth (a)+(b)-(c)-(d)
8.2 Please enclose audited annual accounts for the last three years. Where
unaudited reports are submitted, give reasons. If minimum networth requirement
has been met after last audited annual accounts, audited statement of accounts of a
later date also be submitted.
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8.3 Name and Address of the Principal bankers of the Applicant company .
8.4 Name and address of the Auditors.
9.0 OTHER INFORMATION
9.1 Details of all pending litigations against the applicant company, directors and
employees:
Nature of dispute Name of the party Status
9.2 Indictment or involvement in any fraud or economic offences by the applicant
or any of its Directors, or key managerial Personnel, in the last three years.
10.0 DECLARATION
10.1 Give the following declarations signed by two directors:
I/We hereby apply for registration.
I/We warrant that I/We have truthfully and fully answered the questions above and
provided all the information which might reasonably be considered relevant for the
purposes of my registration.
I/We declare that the information supplied in the application form is complete and
correct For and on behalf of
____________________________________________________
(Name of Applicant)
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____________________________________________________
Director
Name in Block Letters
Date
FORM B
SECURITIES AND EXCHANGE BOARD OF INDIA
(CREDIT RATING AGENCIES) REGULATIONS, 1999
[REGULATION 8 (1)]
CERTIFICATE OF REGISTRATION
I. In exercise of the powers conferred by sub-section (1) of section 12 of the
Securities and Exchange Board of India Act, 1992, read with the rules and
regulations made there under the Board hereby grants a certificate of registration to
____________________________as a credit rating agency in accordance with and
subject to the conditions in the regulations to carry out the activity of the credit
rating agency:-
II. Registration Code for the credit rating agency is CRA/ / /
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III. This certificate shall be valid from _____________ to _________ and may be
renewed as specified in regulation 10 of Securities and Exchange Board of India
(Credit Rating Agencies) Regulations, 1999.
Place:
Date
By Order
Sd/-
For and on behalf of
Securities and Exchange Board of India
1SECOND SCHEDULE
1 Substituted by SEBI (Credit Rating Agencies) (Amendment) Regulations, 2006
Earlier it read as follows:
Application fee (Rs) 25, 000/-
Registration fee for grant of certificate (Rs) 5, 00, 000/-
Renewal fee (Rs.) 3, 00, 000/-
(CREDIT RATING AGENCY) REGULATIONS, 1999
[REGULATION 3 (3), 8(2), 10(3)]
FEES
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PART A
Amount to be paid as fees
Application fee (Rs) 50, 000/-
Registration fee for grant of certificate (Rs) 5, 00, 000/-
Renewal fee (Rs.) 10, 00, 000/-
PART B
1 The fees specified above shall be paid by way of a bank draft in favour of
"Securities and Exchange Board of India" payable at Mumbai.
1THIRD SCHEDULE
1 Substituted by the SEBI (Credit Rating Agencies)(Second Amendment)
Regulation, 2003 w.e.f 1-10- 2003. Earlier it was amended by the SEBI
(Investment Advise by Intermediaries) (Amendment) Regulations 2001, w.e.f.29-
5-2001.
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THIRD SCHEDULE
CODE OF CONDUCT FOR CREDIT RATING AGENCIES
(REGULATION 13)
(1) A credit rating agency in the conduct of its business shall observe high
standards of integrity and fairness in all its dealings with its clients.
(2) A credit rating agency shall fulfil its obligations in an ethical manner.
(3) A credit rating agency shall render at all times high standards of service,
exercise due diligence, ensure proper care and exercise independent professional
judgement. It shall wherever necessary, disclose to the clients, possible sources of
conflict of duties and interests, while providing unbiased services.
(4) The credit rating agency shall avoid any conflict of interest of any member of
its rating committee participating in the rating analysis. Any potential conflict of
interest shall be disclosed to the client.
(5) A credit rating agency shall not indulge in unfair competition nor shall they
wean away client of any other rating agency on assurance of higher rating.
(6) A credit rating agency shall not make any exaggerated statement, whether oral
or written, to the client either about its qualification or its capability to render
certain services or its achievements in regard to services rendered to other clients.
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(7) A credit rating agency shall always endeavor to ensure that all professional
dealings are effected in a prompt and efficient manner.
(8) A credit rating agency shall not divulge to other clients, press or any other party
any confidential information about its client, which has come to its knowledge,
without making disclosure to the concerned person of the rated company / client.
(9) A credit rating agency shall not make untrue statement or suppress any material
fact in any documents, reports, papers or information furnished to the Board or to
public or to stock exchange.
(10) A credit rating agency shall not generally and particularly in respect of issue
of securities rated by it be party to -
(a) creation of false market;
(b) passing of price sensitive information to brokers, members of the stock
exchanges, other players in the capital market or to any other person or take
any other action which is unethical or unfair to the investors.
(11) A credit rating agency shall maintain an arm’s length relationship between its
credit rating activity and any other activity.
(12) A credit rating agency shall abide by the provisions of the Act, regulations and
circulars which may be applicable and relevant to the activities carried on by the
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[Inserted on 25-9-2001 (11 A) (a) A credit rating agency or any of his employees
shall not render, directly or indirectly any investment advice about any security in
the publicly accessible media, whether real – time or non- real time, unless a
disclosure of his interest including long or short position in the said security has
been made, while rendering such advice.
SECURITIES AND EXCHANGE BOARD OF INDIA (CREDIT RATING
AGENCIES) REGULATIONS, 1999
[Regulation 13]
CODE OF CONDUCT
1. A credit rating agency shall make all efforts to protect the interests of investors.
2. A credit rating agency, in the conduct of its business, shall observe high
standards of integrity, dignity and fairness in the conduct of its business.
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3. A credit rating agency shall fulfill its obligations in a prompt, ethical and
professional manner.
4. A credit rating agency shall at all times exercise due diligence, ensure proper
care and exercise independent professional judgment in order to achieve and
maintain objectivity and independence in the rating process.
5. A credit rating agency shall have a reasonable and adequate basis for performing
rating evaluations, with the support of appropriate and in depth rating researches. It
shall also maintain records to support its decisions.
6. A credit rating agency shall have in place a rating process that reflects consistent
and international rating standards.
7. A credit rating agency shall not indulge in any unfair competition nor shall it
wean away the clients of any other rating agency on assurance of higher rating.
8. A credit rating agency shall keep track of all important changes relating to the
client companies and shall develop efficient and responsive systems to yield timely
and accurate ratings. Further a credit rating agency shall also monitor closely all
relevant factors that might affect the creditworthiness of the issuers.
9. A credit rating agency shall disclose its rating methodology to clients, users and
the public.
10. A credit rating agency shall, wherever necessary, disclose to the clients,
possible sources of conflict of duties and interests, which could impair its ability to
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make fair, objective and unbiased ratings. Further it shall ensure that no conflict of
interest exists between any member of its rating committee participating in the
rating analysis, and that of its client.
11. A credit rating agency shall not make any exaggerated statement, whether oral
or written, to the client either about its qualification or its capability to render
certain services or its achievements with regard to the services rendered to other
clients.
12. A credit rating agency shall not make any untrue statement, suppress any
material fact or make any misrepresentation in any documents, reports, papers or
information furnished to the board, stock exchange or public at large.
13. A credit rating agency shall ensure that the Board is promptly informed about
any action, legal proceedings etc., initiated against it alleging any material breach
or non-compliance by it, of any law, rules, regulations and directions of the Board
or of any other regulatory body.
(b) In case an employee of the credit rating agency is rendering such advice, he
shall also disclose the interest of is dependent family members and the employer
including their long or short position in the said security, while rendering such
advice.]
14. A credit rating agency shall maintain an appropriate level of knowledge and
competence and abide by the provisions of the Act, regulations and circulars,
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which may be applicable and relevant to the activities carried on by the credit
rating agency. The credit rating agency shall also comply with award of the
Ombudsman passed under the Securities and Exchange Board of India
(Ombudsman) Regulations, 2003.
15. A credit rating agency shall ensure that there is no misuse of any privileged
information including prior knowledge of rating decisions or changes.
16. (a) A credit rating agency or any of his employees shall not render, directly or
indirectly any investment advice about any security in the publicly accessible
media.
(b) A credit rating agency shall not offer fee-based services to the rated entities,
beyond credit ratings and research.
17. A credit rating agency shall ensure that any change in registration status/any
penal action taken by board or any material change in financials which may
adversely affect the interests of clients/investors is promptly informed to the clients
and any business remaining outstanding is transferred to another registered person
in accordance with any instructions of the affected clients/investors.
18. A credit rating agency shall maintain an arm’s length relationship between its
credit rating activity and any other activity.
19. A credit rating agency shall develop its own internal code of conduct for
governing its internal operations and laying down its standards of appropriate
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conduct for its employees and officers in the carrying out of their duties within the
credit rating agency and as a part of the industry. Such a code may extend to the
maintenance of professional excellence and standards, integrity, confidentiality,
objectivity, avoidance of conflict of interests, disclosure of shareholdings and
interests, etc. Such a code shall also provide for procedures and guidelines in
relation to the establishment and conduct of rating committees and duties of the
officers and employees serving on such committees.
20. A credit rating agency shall provide adequate freedom and powers to its
compliance officer for the effective discharge of his duties.
21. A credit rating agency shall ensure that the senior management, particularly
decision makers have access to all relevant information about the business on a
timely basis.
22. A credit rating agency shall ensure that good corporate policies and corporate
governance are in place.
23. A credit rating agency shall not, generally and particularly in respect of issue of
securities rated by it, be party to or instrumental for—
(a) creation of false market;
(b) price rigging or manipulation; or
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(c) dissemination of any unpublished price sensitive information in respect
of securities which are listed and proposed to be listed in any stock
exchange, unless required, as part of rationale for the rating accorded.
IPO GRADING/RATING
When the Securities and Exchange Board of India (SEBI) decided to scrap
discretionary allotment for qualified institutional buyers (QIBs) and switch to the
more transparent proportionate allotment system, it became the first regulator to
stand up to the powerful investment banking community anywhere in the world.
Once the decision was taken, it was evident that the exaggerated outrage and
predictions that large institutional investors would shun IPOs were completely
baseless.
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That decision recognized the specific needs of the Indian capital market and was
the result of pressure from investor groups. The path to mandatory grading of IPOs
has been rocky, with enormous opposition from companies, investment bankers,
fund managers, market experts and SEBI board members. We learn that the final
decision came about in the face of strong opposition by certain board members
(apparently not full-time) and that too only, with a twist in the tail, which dilutes
the original proposal.
The alleged opposition of the regulator’s board members raises an interesting
question. All board-level discussions must, indeed, remain confidential in order to
ensure free and frank expression, but what is the fiduciary responsibility of board
members of a watchdog organization, who have no knowledge, training or
expertise about capital markets, when they choose to oppose recommendations of
the Primary Market Advisory Committee that are endorsed by the regulator? It is
also important to remember that investor groups have been pressing for IPO
grading for several years; first with the Investor Education and Protection Fund
(attached to the ministry of company affairs), which developed cold feet and
dropped even its plans for a pilot project and later with the capital market
regulator.
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Over the years, those opposed to IPO grading have constructed several elegant
arguments to rubbish its utility, but from an investor standpoint, the logic is simple.
The disclosure-based model adopted by the regulator, leads to a bulky, jargon-
filled prospectus that can neither be read nor understood by the average investor;
consequently, a simple, one-page evaluation of disclosures by an expert agency,
which also helpfully condenses its findings into a single numerical grade on a scale
of five, is clearly a blessing. The offer price of the IPO will remain an important
factor in the final investment decision—after all, even the best companies can be
bad investments at the wrong price. But that is a reasonable decision to leave to the
investor.
Introduction
 IPO grading is the grade assigned by a Credit Rating Agency registered with
SEBI, to the initial public offering (IPO) of equity shares or any other
security which may be converted into or exchanged with equity shares at a
later date. The grade represents a relative assessment of the fundamentals of
that issue in relation to the other listed equity securities in India. Such
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grading is generally assigned on a five-point point scale with a higher score
indicating stronger fundamentals and vice versa as below.
IPO grade 1: Poor fundamentals
IPO grade 2: Below-average fundamentals
IPO grade 3: Average fundamentals
IPO grade 4: Above-average fundamentals
IPO grade 5: Strong fundamentals
 IPO grading has been introduced as an endeavor to make additional
information available for the investors in order to facilitate their assessment
of equity issues offered through an IPO.
 IPO grading can be done either before filing the draft offer documents with
SEBI or thereafter. However, the Prospectus/Red Herring Prospectus, as the
case may be, must contain the grade/s given to the IPO by all CRAs
approached by the company for grading such IPO.
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 The company desirous of making the IPO is required to bear the expenses
incurred for grading such IPO.
 IPO grading is not optional. A company which has filed the draft offer
document for its IPO with SEBI, on or after 1st May, 2007, is required to
obtain a grade for the IPO from at least one CRA.
 IPO grade/s cannot be rejected. Irrespective of whether the issuer finds the
grade given by the rating agency acceptable or not, the grade has to be
disclosed as required under the DIP Guidelines. However the issuer has the
option of opting for another grading by a different agency. In such an event
all grades obtained for the IPO will have to be disclosed in the offer
documents, advertisements etc.
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 IPO grading is intended to run parallel to the filing of offer document with
SEBI and the consequent issuance of observations. Since issuance of
observation by SEBI and the grading process, function independently, IPO
grading is not expected to delay the issue process.
 The IPO grading process is expected to take into account the prospects of the
industry in which the company operates, the competitive strengths of the
company that would allow it to address the risks inherent in the business(es)
and capitalise on the opportunities available, as well as the company’s
financial position.
 While the actual factors considered for grading may not be identical or
limited to the following, the areas listed below are generally looked into by
the rating agencies, while arriving at an IPO grade
• Business Prospects and Competitive Position
i. Industry Prospects
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ii. Company Prospects
• Financial Position
• Management Quality
• Corporate Governance Practices
• Compliance and Litigation History
• New Projects—Risks and Prospects
 It may be noted that the above is only indicative of some of the factors
considered in the IPO grading process and may vary on a case to case basis.
 .IPO grading is done without taking into account the price at which
the security is offered in the IPO. Since IPO grading does not consider the
issue price, the investor needs to make an independent judgment regarding
the price at which to bid for/subscribe to the shares offered through the IPO.
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 IPO Grading is intended to provide the investor with an informed and
objective opinion expressed by a professional rating agency after analyzing
factors like business and financial prospects, management quality and
corporate governance practices etc. However, irrespective of the grade
obtained by the issuer, the investor needs to make his/her own independent
decision regarding investing in any issue after studying the contents of the
prospectus including risk factors carefully.
 As on date the following four credit rating agencies are registered
with SEBI.
a) Credit Analysis & Research Ltd (CARE)
b) ICRA Limited
c) CRISIL
d) FITCH Ratings
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BOND RATING
Bond Rating Variability and Methodology:
Evidence from the Indian Bond Market
Credit rating is an indicator of the current opinion on the capability of capital to
service its debt obligations in a timely fashion. It is a useful source of information
for investors, companies, banks and other financial intermediaries. While the
various bond rating areas have been extensively evaluated for mature markets,
similar evidence for emerging markets such as India is limited. In particular, the
issues relating to bond rating variability over time and the consistency of bond
rating methodology have been ignored.
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In an attempt to fill this lacuna, Sanjay Sehgal and Mamta Arora conduct a two-
part study. In the first part, which deals with bond rating variability over time, the
time-series variability of bond ratings has been analysed. The issue is also
addressed sector-wise and industry-wise. A separate analysis has been carried out
for the two leading bond rating agencies - CRISIL and ICRA. The second part
relates to consistency in bond rating methodology adopted by rating agencies.
The results indicate that bond ratings are becoming extremely variable over time
and the majority of these rating changes are on the downside, with price risk
implications for investors. While bond rating variability is high for both the
manufacturing and the financial sectors, the figures are relatively higher for the
latter. Rating changes also seem to have an industry pattern with a greater
concentration in industries more affected by economic slowdown and global
competition. The findings for consistency of bond rating methodology are also not
encouraging. While the key financial ratios do not vary for companies belonging to
the same rating class, they also do not vary across companies belonging to
different rating classes. This points at probable weaknesses in rating methodology
as the important financial factors fail to discriminate across rating classes. Perhaps
the subjective judgments of rating analysts taint the relationship between bond
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ratings and key financial factors. Inconsistency in bond rating methodology may
partly explain the increasing bond rating variability over time.
Introduction
In investment, the bond credit rating assesses the credit worthiness of a
corporation's debt issues. It is analogous to credit ratings for individuals and
countries. The credit rating is a financial indicator to potential investors of debt
securities such as bonds. These are assigned by credit rating agencies such as
Moody's, Standard & Poor's, and Fitch to have letter designations (such as AAA,
B, CC) which represent the quality of a bond. Bond ratings below BBB/Baa are
called junk bonds
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Moody's S&P Fitch
Long Short Long Short Long Short
Term Term Term Term Term Term
Aaa P-1 AAA A-1+ AAA A1+ Prime
Aa1 AA+ AA+ High grade
Aa2 AA AA
Aa3 AA- AA-
A1 A+ A-1 A+ A1 Upper medium
grade
A2 A A
A3 P-2 A- A-2 A- A2
Baa1 BBB+ BBB+ Lower medium
grade
Baa2 P-3 BBB A-3 BBB A3
Baa3 BBB- BBB-
Ba1 Not BB+ B BB+ B Non Investment

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Prime grade
speculative
Ba2 BB BB
Ba3 BB- BB-
B1 B+ B+ Highly
Speculative
B2 B B
B3 B- B-
Caa1 CCC+ C CCC C Substantial risks
Caa2 CCC Extremely
speculative
Caa3 CCC- In default with
little
Ca CC
prospect for
recovery
/ D / DDD / In default
/ DD
/ D
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Credit Rating Tiers
Moody's assigns bond credit ratings of Aaa, Aa, A, Baa, Ba, B, Caa, Ca, C, with
WR and NR as withdrawn and not rated.[1] Standard & Poor's and Fitch assign
bond credit ratings of AAA, AA, A, BBB, BB, B, CCC, CC, C, D.
As of October 16, 2009, there were 4 companies rated AAA by S&P:[2]
 Automatic Data Processing (NYSE:ADP)
 Johnson & Johnson (NYSE:JNJ)
 Microsoft (NASDAQ:MSFT)
 ExxonMobil (NYSE:XOM)
Moody's, S&P and Fitch will all also assign intermediate ratings at levels between
AA and CCC (e.g., BBB+, BBB and BBB-), and may also choose to offer
guidance (termed a "credit watch") as to whether it is likely to be upgraded
(positive), downgraded (negative) or uncertain (neutral).
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Moody's Standard Credit worthiness
& Poor's
Aaa AAA Triple A = Credit risk almost zero
Aa1 AA+ Safe investment, low risk of failure
Aa2 AA "
Aa3 AA- "
A1 A+ Safe investment, unless unforeseen events should occur in
the economy at large or in that particular field of business
A2 A "
A3 A- "
Baa1 BBB+ Medium safe investment. Occurs often when economy has
deteriorated. Problems may arise
Baa2 BBB "
Baa3 BBB- "
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Ba1 BB+ Speculative investment. Occurs often in deteriorated
circumstances, usually problematic to predict future
development
Ba2 BB "
Ba3 BB- "
B1 B+ Speculative investment. -Deteriorating situation expected
B2 B "
B3 B- "
Caa CCC High likelihood of bankruptcy or other business interruption
Ca CC "
C C "
D Bankruptcy or lasting inability to make payments most
likely
WR Rating withdrawn[1]
NR Not rated[1]
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Criticism
Until the early 1970s, bond credit ratings agencies were paid for their work by
investors who wanted impartial information on the credit worthiness of securities
issuers and their particular offerings. Starting in the early 1970s, the "Big Three"
ratings agencies (S&P, Moody's, and Fitch) began to receive payment for their
work by the securities issuers for whom they issue those ratings, which has led to
charges that these ratings agencies can no longer always be impartial when issuing
ratings for those securities issuers. Securities issuers have been accused of
"shopping" for the best ratings from these three ratings agencies, in order to attract
investors, until at least one of the agencies delivers favorable ratings. This
arrangement has been cited as one of the primary causes of the subprime mortgage
crisis (which began in 2007), when some securities, particularly mortgage backed
securities (MBSs) and collateralized debt obligations (CDOs) rated highly by the
credit ratings agencies, and thus heavily invested in by many organizations and
individuals, were rapidly and vastly devalued due to defaults, and fear of defaults,
on some of the individual components of those securities, such as home loans and
credit card accounts.

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Municipal Bonds
Municipal bonds, instruments issued by local, state, or federal governments in the
United States, have a separate naming/classification system which mirrors the tiers
for corporate debt.
Default Rates
The historical default rate for municipal bonds is lower than that of corporate
bonds. The Municipal Bond Fairness Act (HR 6308)[3], introduced September 9,
2008, included the following table giving bond default rates up to 2007 for
municipal versus corporate bonds by rating and rating agency.
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Cumulative Historic Default Rates (in percent)
------------------------------------------------------------------------
Moody's S&P
Rating categories ---------------------------------------
Muni Corp Muni Corp
------------------------------------------------------------------------
Aaa/AAA......................... 0.00 0.52 0.00 0.60
Aa/AA........................... 0.06 0.52 0.00 1.50
A/A............................. 0.03 1.29 0.23 2.91
Baa/BBB......................... 0.13 4.64 0.32 10.29
Ba/BB........................... 2.65 19.12 1.74 29.93
B/B............................. 11.86 43.34 8.48 53.72
Caa-C/CCC-C..................... 16.58 69.18 44.81 69.19
Investment Grade................ 0.07 2.09 0.20 4.14
Non-Invest Grade................ 4.29 31.37 7.37 42.35
All............................. 0.10 9.70 0.29 12.98
------------------------------------------------------------------------
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CRISIL SME RATINGS:
Background
Recent years have seen rapid growth in the Small and Medium Enterprises (SME)
sector, and an enhanced appreciation of this sector's critical role in driving
economic growth. However, authentic and independent credit research in this
sector has so far been minimal. With many private and public sector banks
directing resources and focus towards SME lending, the need has arisen for
independent credit opinions. CRISIL offers its rating services to SMEs to meet this
need. SME ratings are offered on an exclusive rating scale, distinct from regular
ratings offered to large corporations, banks and government entities.
Credit evaluation in the SME sector needs a specialized approach, as the issues and
drivers of credit quality are different from those applicable for large companies.
The weightages assigned to various parameters of evaluation therefore need to be
different. There has to be a good understanding of the particular cluster or area
where the SME is operating.
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When Lalchand Nathalal Gandhi was approached by Crisil three years ago to get a
credit rating exercise done for his companies, LN Chemicals and Modera
Chemicals, he was skeptical but decided to go ahead anyway. The experiment
worked. While Gandhi’s businesses already had a good relationship with Saraswat
Bank for years, the rating helped them get an additional 0.5% interest rate
reduction on their bank borrowings. “We were also noticed by other companies
and new enquiries began to flow in,” says Gandhi, whose firms—with a combined
turnover of Rs 40 crore—make chemicals that are used in textile processing, and
soap, paper and paint manufacture.
Now, as Gandhi looks to expand his business, he’s already being approached by
other banks to fund his expansion plans. “This could be due to the rating we got
from Crisil over the past three years,” he says. Cultivating healthy relationships
with banks may have helped small companies tide over credit access issues to an
extent.
However, banks’ reluctance to lend to MSMEs often stems from lack of
information, and the fact that evaluating risk in such firms is often a difficult and
time consuming process. Credit rating could be the solution. A rating report
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provided by an independent agency like Crisil, ICRA or CARE offers deep insights
into a company’s operations.
It can reveal the creditworthiness of the company in relation to its peers in the
sector, and an assessment of its strengths and weaknesses based on its financial
condition. “Anyone who sees the report is instantly appraised of the health of the
company,” says Yogesh Dixit, head-SME Ratings at Crisil. Large corporates have
been getting themselves rated for many years now, but in the world of small
business this is a relatively recent and emerging trend.
Four years ago, the National Small Industries Corporation (NSIC) launched a
programme where a micro or small enterprise (with a maximum investment of Rs 5
crore in plant and machinery) would receive a 75% subsidy on rating fees (around
Rs 50,000) charged by any of the six empanelled rating agencies–Crisil, ICRA,
D&B , SMERA, Fitch and CARE. This has had a positive effect with around 5,000
units getting rated last year, and NSIC expects that at least another 7,000 will
follow suit this year.
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Under the new Basel II norms that came into effect from April 1 this year, rating is
mandatory for businesses with investments over Rs 10 crore. For those firms that
are below the Rs 10-crore level, rating is also beneficial, especially when it comes
to dealing with customers. “For a small business, a rating by a recognized agency
helps it command better terms with its buyers,” says HP Kumar, chairman and
managing director of NSIC.
A robust rating process includes a visit to the factories and warehouses to
authenticate information provided by the company, verifying if the insurance of
assets is in order and also taking feedback from suppliers, customers and bankers
of the firm, among other aspects.
The NSIC rating scale takes into account two factors—performance capability and
financial strength. For example, a company with moderate performance capability
and high financial strength will be rated SE3A, while one with weak performance
capability and moderate financial strength will be rated SE4B.
On the basis of rating reports, banks are able to take faster decisions on project
loans as well as on renewing and increasing credit limits for those clients. Every
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bank has its own internal guidelines on lending but Dixit says ratings are useful
since information about small companies is not readily available. “It is an
independent thirdparty assessment of the overall condition of the SME,” he says.
In that sense, ratings bring credibility and a better image to a sector that’s
fragmented and often opaque about the financial health of its companies. “Ratings
can be revealed to vendors and customers without furnishing all financial data,”
says Rajesh Dubey, executive director, ICRA Online.
Take the case of Inmarco Industries, which makes high-tech industrial sealing
products. The Rs 25-crore (turnover) firm has been getting rated by Crisil every
year for the past four years and has managed to obtain the highest level of SE1A
each time. “We have been able to establish JVs and partnerships with the help of
the rating,” says Chetan Doshi, executive director, Inmarco, adding that it’s a
calibration tool for his business that could come handy when he decides to go for
an IPO later. “It helps us in self-analysis as we expand.” Many companies have
been leveraging ratings to enhance their brand image and acquire new clients.
For instance, Gandhi says his firms’ rating is displayed prominently on the
company stationery and website. “It gives us an identity in new markets and with
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new customers,” he says. Moreover some supply tender notices insist the applying
companies be rated. Rating is also bringing a shift in thinking among SMEs in
terms of self-regulation . “Rated companies today understand that good corporate
governance, transparency and a sound accounting policy are all important in this
changing world,” says Dixit.
That doesn’t mean ratings have become fully accepted among small companies and
their bankers. There have been cases reported where banks have not honoured
ratings done by external agencies, and have relied only on their own due diligence.
Rajeev Karwal, CEO, Milagrow Business and Knowledge Solutions, a small
business advisory firm says, “Banks should accept it. Only if they give loans on the
basis of the rating will it have any meaning.” At Meerut-based Kanohar Electricals,
managing director Dinesh Singhal contends that mandatory rating due to Basel II
adds to his cost and provides no additional value. “These rating agencies are not
fully equipped to rate according to Basel II.
They prepare reports after just looking at the balance sheets,” he says. While the
maximum benefit to a company getting rated is an interest reduction of 0.5%, the
cost of rating works out to be higher than the savings, he says. There are other
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limitations to the ratings system as well, says Anil Bhardwaj, secretary general of
the Federation of Indian Micro and Small & Medium Enterprises (FISME). “Most
banks have a tacit understanding with one or two rating agencies and they do not
accept ratings by other agencies. Therefore, a serious re-look is required in the
models and the mandatory nature of ratings. Secondly, the field must be opened up
to more credit rating players to bring in greater competition and customer service
orientation,” he says.
FINDINGS
 Ratings are not a guarantee against loss.
 Credit ratings are assigned to companies through Credit rating agency.
 The rating given by the agency is very important for:
Investor
Issuer
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Financial Intermediaries
Business Counter-parties
Regulators
 These days people refer to 3 different credit ratings agencies in order
to make correct decision of investment.
 Issuer can Appeal to the credit rating agency if they would not satisfy
with the ratings
Converting a Bad Credit Rating into Good Credit Rating
Even if past mistakes have brought your company to the despair and the credit
rating is very poor, you always have the chances to improve. However, to rebuild
the credit rating, your financial management team should have all the relevant
information with it.
There are several computer software programs available in the market that help a
lot in this regard. Law also permits to convert the bad credit rating in to good credit
rating and repairing the damage done by poor credit rating. According to latest
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regulations, credit bureaus have to wipe out negative remarks from your
organizations' credit report after a certain period of time. You can argue with them
regarding any information that you feel objectionable. They have to delete it if they
cannot verify such information.
Know the common myths related to your credit report
Today the consumers have been really informed and vast majority of them are also
aware about the credit report system or even their own credit scores. However it is
astonishing to know that the there are some myths that people believe in
connection to their credit reports. Some of the common ones are mentioned below:
Checking your credit report hurts your credit score
Often it has been believed that checking your own credit report and credit score
will put a negative impact on your credit score. However the fact is that a soft
inquiry does not go against your score. On the other hand, if anyone else like a
lender or credit card company is checking your credit report, then this is
considered as a hard inquiry and normally it take off about 5 credit points from
your score. Moreover one should know that multiple inquiries in a 14 days period
174 | P a g e
are just treated as just one inquiry in the credit score rating system. Also the system
ignores all inquiries made within 30 days before the day when the credit score is
computed. Therefore if you want to minimize the damage on your credit score
through credit inquiries then try shopping for a loan within 14 days period.
Closing old accounts and canceling credit cards improves your credit report score
This is a very common myth because sometimes even your lenders tell you to close
your old and inactive accounts in order to improve your credit scores. But closing
old accounts and canceling credit cards may actually have an opposite effect with
the current credit score rating system. It may leave a negative impact as it will
make your credit history appear shorter and thereby lower your credit score.
Credit counseling causes harm to your score
Attending a debt management program will not cause any harm to credit score.
The current FICO credit score rating system take no notice of any reference to
credit counseling that may be mentioned in your file. The researchers have found
that people who have opted for credit counseling have not defaulted on their debts
and therefore it is not taken into consideration while tabulating credit score.
175 | P a g e
However late payments can hurt your credit report and credit counseling can hurt
your ability to avail a loan because you probably have had trouble paying creditors.
All credit reports are the same
Most people believe that credit reports from all the three credit rating agencies is
same but it is not so. These days, most creditors across the country do report their
information to all three major agencies – Equifax, Experian, TransUnion – and as
they are separate firms, the method and the pace in which they update records may
not necessarily be the same. So make sure you get your credit reports from all three
major credit reporting bureaus before you apply for a big loan.
176 | P a g e
SOME MORE QUESTIONS
Which Companies Are Affected by Ratings?
Every company or country that has a rating will be affected in its borrowing costs,
at least in public markets. A higher ranking means lower interest rates for the
borrower and vice versa. The price of credit is set not only by relative credit ratings
but also by the general supply of money and the specifics of an individual
borrowing. A low-rated borrower, for example, can sometimes borrow more
cheaply by securing the bond with a claim on specific assets, or by paying a third-
party to insure the bond. Conversely, a highly-rated borrower may choose a
structure that attracts a lower rating because of special characteristics of the issue,
including its standing in the borrower's capital structure or the jurisdiction in which
it is issued.
How do I Improve the Credit Rating of My Organization?
177 | P a g e
To improve the credit rating of any corporation you need to increase the credit
score. If the persons who are managing your financial matters are cautious enough
to pay all the bills on time, they are doing the best thing to achieve higher credit
rating. On the contrary, if they make payments late, not only it adversely affects
your company's credit rating but also the added interest makes your organization
indebted for a longer period for time. However, if they are finding it difficult to
pay according to present schedule, ask them to sit with the creditors and reschedule
payment dates.
Whatever efforts you make to increase the credit rating of your business
organization will not go in the vain. Whenever you need extra money in the future,
you will be able to get it. Furthermore, you will get the money at lower interest
rates as compared to those organizations that have a bad credit rating. Similarly,
getting mortgage loans or car loans also become easier to the companies with good
credit rating.
Is Service tax payable on Information and Advisory services rendered by
Credit Rating Agencies?
178 | P a g e
No, the information and advisory services, if any, rendered by credit rating
agencies would not attract service tax for the reason that taxable services in respect
of credit rating agency means service provided to a client only in relation to credit
rating of any financial obligation, instrument or security. Services of research and
information such as analysis of industries in specific sectors of financial and
business aspects of a company, other customised services on say business houses
and capital markets, indexing services and information services such as
privatisation policy for infrastructure projects, macro studies of infra-structure
sector, implication of government policy in respect of any sector, financial
modelling, bid evaluation, power purchase agreement, restructuring of state
electricity boards, etc are not services 'in relation to' the credit rating of any
financial obligation, instrument or security and are hence outside the ambit of
service.
Is the Service tax payable on money received by Credit rating Agency for the
purpose of Credit Rating assignment, but returned to the client due to any
reason subsequently?
No. The amount received in advance for the service of rating to be provided to the
client, is only an advance and the services can be deemed to have been provided
179 | P a g e
only when the rating exercise has been completed and when such rating has been
assigned. In case rating is not done, for any reason and the entire amount is
returned back to the client,. it cannot be said that services have been rendered and
hence service tax is not attracted.
What would be the relevant date for determining the liability for payment of
Service Tax?
The relevant date for determining the service tax liability would be the date when
rating has been assigned to a particular instrument. In the case of ongoing projects,
where rating has been assigned after the notified date i.e. 16th October, 1998, the
service tax would be payable.
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CONCLUSION
The credit market turmoil that began in the U.S. in the summer of 2007 has been
amplified in recent months by dramatic slowing of broader economic activity.
What began as a significant, but relatively isolated, deterioration in the
performance of sub-prime housing loans has led to a wave of negative events that
have reverberated across a highly-leveraged, interconnected and, at times, opaque
global financial system. More importantly, a credit crisis has transformed into a
much wider and deeper crisis of confidence in the global markets. Credit rating
agencies have an opportunity to help restore confidence in markets by restoring
confidence in our industry.
Many necessary actions can and have been undertaken at the individual firm and
industry level and we are committed to continuing along that path. Nonetheless, a
few key actions and reforms as I have described above require help from the
broader market and oversight authorities. For 2009, the description of credit is
identical to the “way forward” for credit markets: confidence. The rebuilding
process will be far more protracted than the events that necessitated it – which is
all the more reason to get on with the task with energy, tenacity and coordination.
181 | P a g e
QUESTIONARIES
Ques. 1 Area of work
(a) Abohar
(b) Fazilka
(c) Jalalabad
(d) Guruharshai
(e) Zira
(f) Ferozpur
Ques. 2 Area of business
(a) Food processing

(b) Chemical & allied products
(c) Cotton gin. &Pressing
(d) Rice Sheller
(e) And others
Ques. 3 Do you know about credit rating?
(a) Yes
(b) No
Ques.4 If, yes than to, which you have heard about?
(a) Crisil
(b) Icra
(c) Care
(d) Fitch
(e) Onicra
(f) Smera
Ques. 5 Have you got your company rated by any rating agency?
(a) Yes
(b) No
182 | P a g e
Ques .6 To, with which bank your credit limit is?
(a) SBI
(b) OBC
(c) PNB
(d) SBOP
(e) CBI
(f) And others
Ques.7 How much would be your credit limit with the banks? (In rupees)
(a) Less than 10 lakh

(b) 10 to 30 lakh
(c) 30 to 50 lakh
(d) 50 to 75 lakh
(e) 75 to 1 crore and above
Ques.8 How much would be approximate annual sales turnover? (In rupees)
(a) Less 40 lakh

(b) 40 lakh to 70 lakh
(c) 70 lakh to1 crore
(d) 1 crore to 2 crore
(e) 2 crore and above
Ques.9 How much of your products are actually exported? (In percentage)
(a) No exports
(b) Up to 5%
(c) Between 5% - 10%
(d) 10% and over
Ques.10 Do you intend to expand the overall capacity in the future?
If yes, to what extent of present overall capacity do you plan to increase? (In
percentage)
183 | P a g e
(a) 0-5%
(b) 5-10%
(c) 10-30%
(d) Above 30%
Ques.11 Do you avail loans for managing business? Facilities including non-fund
based.
If yes, purpose of funds
(a) Working Capital
(b) Expansion
(c) Diversification
(d) Machinery Maintenance
(e) Machinery Purchase
Ques.12 How much interest do you pay against your loan from banks? (In
percentage)
(a) Below 9%
(b) 9-11%
(c) 11-14%
(d) Above 14%
Ques.13 Has your company acquired any certification for adopting quality
standards? (Multiple Option possible)
(a) ISO 9000

(b) ISO 14000
(c) Any other (Specify)
(d) No Having
Ques.14 Do you use services of professional expert?
(a) Yes
(b) No
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Ques.15How is prospect of the industry in near future for the small & medium
units?
(a) Excellent
(b) Moderate
(c) Bad
(d) Good
(e) Not good
BIBLIOGRAPHY
www.wekipedia.com
www.smera.in
185 | P a g e
www.nsic.com
www.crisil.com
www.icra.in
www.sebi.com
186 | P a g e

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A PROJECT REPORT

SIGNIFICANCE OF CREDIT RATING IN INDIA

SHEEL KUMAR HANS

(A division of NIS Sparta, a Reliance ADA Group company)

CERTIFICATE OF PROJECT COMPLETION

Institute of Management, Indore has completed the project title

“SINGNIFICANCE OF CREDIT RATING IN INDIA”. The Project was

undertaken in degree of Master in Applied Management under University of

Annamalai during the academic year 2008-2010.

found to be satisfactory in all respects. He duly acknowledged the source of

We wish him all the best for his future endeavors.

Mr. Feroz Banglowala Prof. Abhishek Kumar Jain

(Director) (Project guide)

me directly or indirectly to complete my project successfully.

me an approval to undertake this project, my sincere thanks to Mr. Gajendra

Rathor, for their invaluable guidance and support.

Date: Sheel Kumar Hans

Place: Indore MBA 2nd year

I hereby declare that the project entitled “ Significance of Credit Rating in

India” submitted for the degree of business administration in Applied

Date: Signature of the Student

Enrolment no: 4740800891

Concept of credit rating and features

• ORIGIN OF CREDIT RATING 11

• THE CREDIT RATING SYSTEM 13

• CREDIT RATING AGENCY 18

Reasons for the origin of the credit rating agencies

Functions and the way of working.

• GROWTH OF CREDIT RATING AGENCIESG 22

• CRITISISM FOR CREDIT RATING AGENCIES 30

• CREDIT RATING IN INDIA 39

Credit rating agencies in India and working procedures.

• TAXABLE EVENTS AND SCOPE OF SERVICES 59

Value of Taxable Service, Exemption and Exclusion

•LIST OF DATA REQUIREMENTS FOR CREDIT RATING 64

•FUTURE OF CRIDIT RATING IN INDIA 68

•BENIFITS AND DRAWBACKS OF CREDIT RATING 69

•NEED AND IMPORTANCE OF CREDIT RATING 74

•PRACTICAL PROBLEMS WITH CREDIT RATING 80

•INDIVIDUAL CREDIT RATING 84

•IPO RATING 154

• BOND RATING 162

•SME RATINGS BY NSIC – CRISIL 175

Concept of Credit ratings

trust a certain borrower, whether the borrower is an individual, a corporation, or a

also reflects the persons spending and saving patterns.

monetary loss, should a default occur.

Acc to Standard & poor’s, “it helps investors by providing

An easily recognizable, simple tool that couples a possibly

Unknown issuer with an informative and meaningful symbol of credit quality.

According to ICRA, “Credit ratings are opinions on the relative capability of

timely servicing of corporate debt and obligations.

completeness of the information guaranteed.

Features of Credit ratings

 Quantitative and Qualitative.

Function of credit ratings

 Low cost information

 Basis for proper risk- return trade off

 Healthy discipline on corporate borrowers

 Formulation of public policy guidelines on institutional investment

Credit is a part of everyday life. It enables people to buy everything from

necessities to luxuries. However, if you do not exercise responsibility in managing

do not allow yourself to go in debt.