CHAPTER 1 CONCEPTUAL FRAMEWORK

1.1 Introduction

The report of the project on Impact of Activities of CRAs on the investment decision mainly focused on the following areas:

1.1.1 Background
Credit Rating Agencies first emerged in 1940s following the financial crisis of 1937 in New York. Louis Tappan established the first mercantile credit agency in New York in 1841. The agency rated the ability of merchants to pay their financial obligations. It was subsequently acquired by Robert Kun and its first rating guide was published in 1859.Another similar agency was set up by John Bradstreet in 1849, which published a rating book in 1857. These two agencies were merged together to form Dun and Bradstreet in 1933, which became the owner of Moodys Investors Service in 1962. The history of Moodys itself goes back about 100 years. In 1900 Joyn Moody founded Moodys Investors Service, and in 1909 published his Manual of Railroad Securities. This was followed by the rating of utility and industrial bonds in 1914, and the rating of bonds issued by U.S. cities and other municipalities in the early 1920s. Further expansion of the credit rating industry took place in 1919, when the Poors Publishing Company published its first rating followed by the Standard Statistics Company in 1922, and Fitch Publishing Company in 1924. The Standard Statistics Company merged in 1941 to form standard and poors which was subsequently taken

over by McGraw Hill in 1966. For almost 50 years, since the setting up of Fitch Publishing in 1924, there were no major new entrants in the field of credit rating and then in the 1970s, a number of credit rating agencies commenced operations all over the world. These included the Canadian Bond Rating Service (1972), Thomson Bank watch (1974), Japanese Bond Rating Institute (1975), Dominican Bond Rating Service (1997), IBCA Limited (1978), and Duff and Phelps Credit Rating Company (1980).There are credit rating agencies in operation in many other countries such as Malaysia, Philippins, Mexico, Indonesia, Pakistan, Cyprus, Korea, Thailand and Australia. In India, the concept of Credit rating came up when Credit rating and information Services of India Ltd. (CRISIL) was set up as the first rating agency in 1987, As the scope of credit rating widened ICRA (formerly known as Investment Information and Credit Rating Agency of India Limited) was set up in 1991, and Credit Analysis and Research Ltd. (CARE) was set up in 1994. The ownership pattern of all the three agencies is institutional. The first private sector credit rating institution was Duff and Phelps credit rating India Pvt. Ltd. Formed in 1995(After merger with DCR its known as Fitch India Ltd. John Knowles Fitch founded the Fitch Publishing Company in 1913. Fitch published financial statistics for use in the investment industry via "The Fitch Stock and Bond Manual" and "The Fitch Bond Book." In 1924, Fitch introduced the AAA through D rating system that has become the basis for ratings throughout the industry.1

Credit Rating Agencies (CRAs)

Credit rating is a simple and easy to understand symbolic indicator of the opinion of a credit rating agency about the risk involved in a borrowing programme of an issuer with reference to the capability of the issuer to repay the debt as per terms of the issue. This is neither a general purpose evaluation of the company nor a recommendation to buy, hold or sell a debt instrument. Credit rating is an opinion expressed by an independent professional organization, after making a detailed study of all relevant factors. Such an opinion will be of great
1

VK Bhalla (2001), Investment Management, S. Chand and Co. Ltd., New Delhi, 8th edition, p 132-133

assistance to investors in making investment decisions. It also helps the issuers of debt instrument to price their issue correctly and to reach out to new investors. Regulators like Reserve Bank of India (RBI) and Securities & Exchange Board of India (SEBI) often use credit rating to determine eligibility criteria for some instruments. In general, credit rating is expected to improve quality consciousness in the market and establish over a period of time, a more meaningful relationship between the quality of debt and the yield from it. Credit rating is also a valuable input in establishing business relationships of various types.2 Credit rating, however is neither a general purpose evaluation of a corporate entity nor an overall assessment of the credit risk likely to be involved in all the debts/financial instruments contracted/to be contracted by such issuers. A rating is specific to a debt/financial instrument and is intended to grade different and specific instruments in terms of the credit risk associated with the particular instruments. Although it is an opinion expressed by an independent professional organization, on the basis of a detailed study of all the relevant factors, the rating does not amount to any recommendation to buy, hold or sell an instrument as it does not take into consideration factors such as market prices, personal risk preferences of an investor and such other considerations, which may influence an investment decision. As a fee based financial advisory service, credit rating is, obviously, extremely useful to investors, corporate (borrowers), banks, and financial institutions. For the investors, it is an indicator expressing the underlying credit quality of an (debt) issue program. The investor is fully informed about the company as any effect of changes in business/economic conditions on the company is evaluated and published regularly by the rating agencies. The corporate borrower can raise funds at a cheaper rate, with a good rating. It minimizes the role of name recognition and lesser-known companies can also approach the market on the basis of their rating. Fund ratings are useful to the banks and other financial institutions when they decide on lending and investment strategies.
2

Chopra Monika and Gupta NK(2008), Introduction Ch. Credit Rating quoted from book Financial

markets Institutions and Services, Ane Books India, New Delhi, p 237

A prospective investor who is going to invest his earned money in securities (more specific debt securities) would naturally like an assessment of risk associated with the securities enabling him for the proper evaluation of risk-return trade-off. But, factors such as lack of time, lack of knowledge of security evaluation, lack of reliability etc. could leave any investor looking for an agency, which would provide an unbiased judgment of risk associated with the security. Thus, the assessment of risk associated with particular security/financial instrument regarding timely repayments of interest and principal is termed as credit rating. A rating is specific to a debt/instrument. Thus, a rating is a general-purpose evaluation neither of the company or issuer, nor an overall assessment of the credit risk likely to be involved in all the debts contracted or to be contracted by such issues. Although it is an opinion expressed by an independent credit rating agency, on the basis of a detailed study of all the relevant factors, the rating does not make any recommendations to buy, hold or sell an instrument as it does not take into consideration another factors such as market prices, personal risk preferences of an investor and such other considerations, which may influence an investment decision.3

Definitions: According to the Moodys, A rating on the future ability and legal obligation of the issuer to make timely payments of Principal and interest on a specific fixed income security. The rating measures the probability that the issuer will default on the security over its life, which depending on the instrument of the expected monetary loss, should a default occur.
3

Desai Vasant(1997), CREDIT RATING: AN INTRODUCTION, The Indian Financial System,

Himalaya Publication House Delhi, p375-378

 According to the Standard & poors, it helps investors by providing an easily recognizable, simple tool that couples a possibly unknown issuer with an informative and meaningful symbol of credit quality. According to the CRISIL, Credit Rating is an unbiased, objective and independent opinion as to an issuers capacity to meet financial obligations. According to the ICRA, Credit Rating is a simple and easy to understand symbolic indicator of the opinion of the credit rating agency about the risk involved in a borrowing programme of an issuer with reference to the capability of the issuer to repay the debt as per terms of issue. This is neither a general purpose evaluation of a company nor a recommendation to hold, buy or sell a debt instrument.

1.1.3 The Determinants of Rating

The default-risk assessment and quality rating assigned to an issue are primarily determined by three factors: i) The issuers ability to pay. ii) The strength of the security owners claim on the issue, and iii) The economic significance of the industry and market place of the issuer. Ratio analysis is used to analyze the present and future earning power of the issuing corporation and to get the insight into the strengths and weaknesses of the firm. Bond rating agencies have suggested guidelines about what value each ratio should have within a particular quality rating. Different ratios are favored by rating agencies. For any given set of ratios, different values are appropriate for each industry. Moreover, the values of every firms ratios vary in a cyclical fashion through the ups and downs of the business cycle.

To assess the strength of security owners claim, the protective in the indenture (legal instruments specifying bond owners rights), designed to ensure the safety of bond holders investment, are considered in detail. The factors considered in regard to the economic significance and size of issuer includes: nature of industry in which issuer is operating (specifically issues like position in the economy, life cycle of the industry, labour situation, supply factors, volatility, major vulnerabilities, etc.), and the competition faced by the issuer (market share, technological leadership, production efficiency, financial structure etc.).4

1.1.4 Regulatory Framework for CRAs

1.1.4.1SEBI guidelines for Credit Rating Agencies General Obligations of Credit Rating Agencies Code of Conduct Every credit rating agency shall abide by the Code of Conduct contained in the Third Schedule. Agreement with the client Every credit rating agency shall enter into a written agreement with each client whose securities it proposes to rate, and every such agreement shall include the following provisions, namely:(a) The rights and liabilities of each party in respect of the rating of securities shall be defined; (b) The fee to be charged by the credit rating agency shall be specified;

Mehta

VK

and

Prasad

Narayan(2008),

Credit

rating

Agencies

in

India,

www.egyankosh.ac.in/bitstream/123456789/25902/1/Unit13.pdf

(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 clients listed securities by any credit rating agency during the last three years and (ii) Any rating given in respect of the clients securities by any other credit rating agency, which has not been accepted by the client. (g) The client shall agree to obtain a rating from at least two different rating agencies for any issue of debt securities whose size is equal to or exceeds, rupees one hundred crores. Monitoring of ratings 3. (1) Every credit rating agency shall, during the lifetime of securities rated by it continuously monitor the rating of such securities. (2) Every credit rating agency shall disseminate information regarding newly assigned ratings, and changes in earlier rating promptly through press releases and websites, and, in the case of securities issued by listed companies, such information shall also be provided simultaneously to the concerned regional stock exchange and to all the stock exchanges where the said securities are listed.

Procedure for review of rating 4. (1) Every credit rating agency shall carry out periodic reviews of all published ratings during the lifetime of the securities. (2) If the client does not co-operate with the credit rating agency so as to enable the credit rating agency to comply with its obligations under regulation 15 of this regulation, the credit rating agency shall carry out the review on the basis of the best available information. Provided that if owing to such lack of co-operation, a rating has been based on the best available information, the credit rating agency shall disclose to the investors the fact that the rating is so based. (3) A credit rating agency shall not withdraw a rating so long as the obligations under the security rated by it are outstanding, except where the company whose security is rated is wound up or merged or amalgamated with another company. Internal procedures to be framed 5. Every credit rating agency shall frame appropriate procedures and systems for monitoring the trading of securities by its employees in the securities of its clients, in order to prevent contravention of (a) The Securities and Exchange Board of India (Insider Trading) Regulations, 1992; (b) The Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to the Securities Market) Regulations, 1995; and (c) Other laws relevant to trading of securities. Disclosure of Rating Definitions and Rationale 6. (1) every credit rating agency (a) Shall make public the definitions of the concerned rating, along with the symbol and, (b) Shall also state that the ratings do not constitute recommendations to buy, hold or sell any Securities.

(2) Every credit rating agency shall make available to the general public information relating to the rationale of the ratings, which shall cover an analysis of the various factors justifying a favourable assessment, as well as factors constituting a risk. Submission of information to the Board 7. (1) where any information is called for by the Board from a credit rating agency for the purposes of these regulations, including any report relating to its activities, the credit rating agency shall furnish such information to the Board (a) Within a period specified by the Board or (b) If no such period is specified, then within a reasonable time. (2) Every credit rating agency shall, at the close of each accounting period, furnish to the Board copies of its balance sheet and profit and loss account. Compliance with circulars etc., issued by the Board 8. Every credit rating agency shall comply with such guidelines, directives, circulars and instructions as may be issued by the Board from time to time, on the subject of credit rating. 8A. Appointment of Compliance Officer (1) Every credit rating agency shall appoint a compliance officer who shall be responsible for monitoring the compliance of the Act, rules and regulations, notifications, guidelines, instructions etc issued by the Board or the Central Government. (2) The compliance officer shall immediately and independently report to the Board any noncompliance observed by him. Maintenance of Books of Accounts records, etc. 9. Every credit rating agency shall keep and maintain, for a minimum period of five years, the following books of accounts, records and documents, namely: (a) Copy of its balance sheet, as on the end of each accounting period;

(b) A copy of its profit and loss account for each accounting period; (c) A copy of the auditors report on its accounts for each accounting period. (d) A copy of the agreement entered into, with each client; (e) Information supplied by each of the clients; (f) Correspondence with each client; (g) Ratings assigned to various securities including up-gradation and down gradation (if any) of the ratings so assigned. (h) Rating notes considered by the rating committee; (i) Record of decisions of the rating committee; (i) Letter assigning rating; (k) Particulars of fees charged for rating and such other records as the Board may specify from time to time. (2) Every credit rating agency shall intimate to the Board the place where the books of account, records and documents required to be maintained under these regulations are being maintained. Steps on auditors report 10. Every credit rating agency shall, within two months from the date of the auditors report, take steps to rectify the deficiencies if any, made out in the auditors report, insofar as they relate to the activity of rating of securities. Confidentiality 11. Every credit rating agency shall treat, as confidential, information supplied to it by the client and no credit rating agency shall disclose the same to any other person, except where such disclosure is required or permitted by under or any law for the time being in force.

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Rating process 12. (1) Every credit rating agency shall (a) Specify the rating process; (b) File a copy of the same with the Board for record; and file with the Board any modifications or additions made therein from time to time. (2) Every credit rating agency shall, in all cases, follow a proper rating process. (3) Every credit rating agency shall have professional rating committees, comprising members who are adequately qualified and knowledgeable to assign a rating. (4) All rating decisions, including the decisions regarding changes in rating, shall be taken by the rating committee. (5) Every credit rating agency shall be staffed by analysts qualified to carry out a rating assignment. (6) Every credit rating agency shall inform the Board about new rating instruments or symbols introduced by it. (7) Every credit rating agency, shall, while rating a security, exercise due diligence in order to ensure that the rating given by the credit rating agency is fair and appropriate. (8) A credit rating agency shall not rate securities issued by it. (9) Rating definition, as well as the structure for a particular rating product, shall not be changed by a credit rating agency, without prior information to the Board. (10) A credit rating agency shall disclose to the concerned stock exchange through press release and websites for general investors, the rating assigned to the securities of a client, after periodic review, including changes in rating, if any. Code of conduct for Credit Rating Agencies (1) A credit rating agency in the conduct of its business shall observe high standards of integrity and fairness in all its dealings with its clients.

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(2) A credit rating agency shall fulfill its obligations in an ethical manner. (3) A credit rating agency shall render at all times high standards of service, exercise due diligence, ensure proper care and exercise independent professional judgement. It shall wherever necessary, disclose to the clients, possible sources of conflict of duties and interests, while providing unbiased services. (4) The credit rating agency shall avoid any conflict of interest of any member of its rating committee participating in the rating analysis. Any potential conflict of interest shall be disclosed to the client. (5) A credit rating agency shall not indulge in unfair competition nor shall they wean away client of any other rating agency on assurance of higher rating. (6) A credit rating agency shall not make any exaggerated statement, whether oral or written, to the client either about its qualification or its capability to render certain services or its achievements in regard to services rendered to other clients. (7) A credit rating agency shall always endeavor to ensure that all professional dealings are affected in a prompt and efficient manner. (8) A credit rating agency shall not divulge to other clients, press or any other party any confidential information about its client, which has come to its knowledge, without making disclosure to the concerned person of the rated company / client. (9) A credit rating agency shall not make untrue statement or suppress any material fact in any documents, reports, papers or information furnished to the Board or to public or to stock exchange. (10) A credit rating agency shall not generally and particularly in respect of issue of securities rated by it be party to (a) Creation of false market;

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(b) passing of price sensitive information to brokers, members of the stock exchanges, other players in the capital market or to any other person or take any other action which is unethical or unfair to the investors. (11) A credit rating agency shall maintain an arms length relationship between its credit rating activity and any other activity. (12) A credit rating agency shall abide by the provisions of the Act, regulations and circulars which may be applicable and relevant to the activities carried on by the credit rating agency. [Inserted on 25-9-2001 (11 A) (a) A credit rating agency or any of his employees shall not render, directly or indirectly any investment advice about any security in the publicly accessible media, whether real time or non- real time, unless a disclosure of his interest including long or short position in the said security has been made, while rendering such advice.5

1.1.5 Types of Credit Rating

There are various types of credit rating. The most common forms of credit ratings are: Long Term Instrument Rating. Equity Rating. Short Term Instrument Rating. Customers/Borrowers Rating. Sovereign Rating. Individual Rating. Compulsory Rating.

www.icraindia.com/services/inves/sebi.htm, SEBI Guidelines for Rating Agency

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Credit Ratings

Financial Instruments Rating

Customer Rating Sovereign Rating

Borrowers Rating
Compulsory Rating

Individuals Rating

Long Term Instrument Rating

Short Term Instrument Rating

Equity Rating

Figure 1.1: These common forms of credit ratings are shown in the following diagram:6 1. Long Terms Instruments Rating : Long-term instrument rating refers to the rating of bonds, debentures and another long-term debt securities issued by a government or quasi-governmental body. 2. Equity Rating: Equity rating refers to the rating of equity issued in the capital market. The concept of equity rating is still not adopted by the rating agencies in India. 3. Short term Instrument Rating : In this kind of rating we include the rating of commercial papers, short-term public deposits etc. 4. Customer or Borrower Ratings:

Customer/Borrowers rating require the assessment credit worthiness of the customers to whom the credit sale is being made or grant of loan is under consideration. 5.
6

Sovereign Rating:

Bhalla VK(2001), Investment Management S. Chand and Co. Ltd., New Delhi, 8th edition, p137.

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Sovereign rating refers to evaluation of credit worthiness of a country in which investment by a foreign body (foreign Govt. or corporate body) is envisaged or to which a loan is to be given. This kind of rating is generally done by the international rating agencies. The international rating agency standard and poor has improved its outlook on India foreign currency rating to positive from stable but retained the sovereign rating at junk grade due to high public debt and serious fiscal inflexibility. S&P said the revision reflects Indias improving external liquidity and better prospects for the governments debt burden to stabilize. S&P had last revised Indias foreign currency outlook from negative to stable in December 2003 on account of improved external finance.7 6. Individuals Rating:

Rating of individuals is called as individuals credit rating. 7. Compulsory Rating:

The rating at which the government bound the obligation is called the compulsory rating like commercial papers etc. Following on the rating change, criticism of ratings per se has been in some evidence. One, that sovereign ratings have not been a good predictor of currency crisis, basically a reference to Asian difficulties in 1997-98. The principal problem of the Asian miracle was regulatory weakness, with large gaps in what the central banks knew about the external liabilities of their domestic banks, and rating agencies were affected by the same information lapses. Second, till this crisis, mainstream economic theory, had oversimplified the process by which capital flows occur. The received wisdom in the mid-nineties had little space for the singularity of large currency crises and contagion.8

Chaudhary Sumitra(2003), Sovereign Rating , Fiscal Stress And Rating Views, Financial Express Editors views Compulsory Rating Titled outlook a notch up The economic times India Mumbai bureau

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1.1.6 Importance of Credit Rating

In todays changing scenario where corporates are increasingly dependent on the public credit rating, which provides an unbiased judgment to the general public has emerged as a critical element in the functioning of Indian financial market. A rating published by a rating agency provides superior information to various groups, which is not publicity available. Credit rating provides several benefits to different sections of people that are summarized as follow: 1. Benefits to the Investors: - Provides cost-effective and reliable information. - Investor can evaluate risk-return trade off on the basis of rating. - Provides investor with an insight of risk involved in an investment. 2. Benefits to the company: - A company with high credit rating can mobilize large amount of funds. - High credit rating indicates less associated with security. So, the company with high credit rating can lower its cost of borrowing. - High credit rating helps companies to build its image among customers, lenders and creditors. 3. Benefits to brokers and financial intermediaries: - Brokers can convince clients to put money in investments with high credit rating. -Financial intermediaries such as banks can be assured of their investing company.8 in a

1.1.7 Approaches of Credit Rating Agencies

Rating related products and activities CRAs in India rate a large number of financial products:

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1. Bonds/ debentures- [the main product]. 2. Commercial paper. 3. Structured finance products. 4. Bank loans. 5. Fixed deposits and bank certificate of deposits. 6. Mutual fund debt schemes. 7. Initial Public Offers (IPOs). CRAs also undertake customized credit research of a number of borrowers in a credit portfolio, for the use of the lender. CRAs use their understanding of companies business and operations and their expertise in building frameworks for relative evaluation, which are then applied to arrive at performance grading. For example, developer gradings are carried out to assess the ability of the developers to execute projects on a timely basis and promised quality while maritime institute gradings are carried out to assess quality of education imparted to the students vis a vis DGS (Directorate General of Shipping) objectives. Non-rating related activities CRAs often undertake a variety of non rating related activities. These include the following: 1. Economy and Company Research: Some Indian CRAs have set up research arms to complement their rating activities. These arms carry out research on the economy, industries and specific companies, and make the same available to external subscribers for a fee. In addition, they disseminate opinions on the performance of the economy or specific industries, available through releases to the media. The research would also be used internally by the rating agencies for arriving at their rating opinions. SEBI permits CRAs to carry out this activity subject to relevant firewalls.

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2. Risk consulting: There is considerable demand for tools and products that will allow banks to compute their capital adequacy ratios under the revised guidelines. The risk consulting groups of credit rating agencies would leverage the agencies understanding of credit risk to develop and provide the tools and data that banks would require. The products in this area include tools for internal ratings, operational risk evaluation, and overall capital calculation. 3. Funds research: Some CRAs have diversified from mutual fund ratings into mutual fund research. The services that are available under this head include fund rankings, performance attribution tools (to help users understand the reasons for funds performance), desktop tools, and fixed income research. 4. Advisory services: CRAs offer various kinds of advisory services, usually through dedicated advisory arms. Most of this is in the nature of developing policy frameworks, bid process management, public private partnership consulting, and creating an enabling environment for business in India and globally. 5. Knowledge Process Outsourcing: Some Indian CRAs (CRISIL and ICRA) have KPO arms that leverage their analytical skills and other process and manpower capabilities. These arms provide services to the CRAs affiliates in developed markets, and also to other clients outside India.9

1.1.8 Credit Rating Agencies in India

In India, the credit rating agencies are governed by the SEBI Regulations, 1999 and the SEBI (Amendment) Regulations, 2003. Accordingly, anybody corporate that is engaged in or proposes to be engaged in the business of rating of securities has to obtain a certificate of registration from the SEBI and comply with the provisions of the Act.
9

Ministry of Finance Capital market division, p17-18

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Further, according to the SEBI (Disclosure and Investor Protection) Guidelines, 2000, a company offering convertible/non-convertible debt instruments through an offer document must comply with the requirements of credit rating. The provisions are as follows: No public or rights issue of debt instruments including convertible instruments in respect of their maturity or conversion period shall be made unless credit rating agency has been obtained and disclosed in the offer document. For a public/rights issue of debt security greater than or to Rs 1 billion, two ratings from two different credit rating agencies shall be obtained. In cases where credit rating is obtained from more than one credit rating agency, all the credit rating/s, including the unaccepted credit ratings, shall be disclosed. All the credit ratings obtained during the three years preceding the public or rights issue of debt instrument (including convertible instruments) for any listed security of the issuer company shall be disclosed in the offer document. The progressive liberalization of economic policies, which led to the establishment of new projects and corporate sectors increasing dependence on primary market for raising funds, highlighted the need for setting up a credit rating agency in India. During this period primary as well as secondary market witnessed a phenomenal growth. So in order to provide unbiased assessment of the credit worthiness of companies issuing debt instrument. The first credit rating agency (CRISIL) was established in1987 and it started its operations in 1888. In response to the ever-increasing role of credit rating, two more agencies were not up in 1990 (ICRA) and 1993 (CARE) respectively.10 Today, following are the credit rating agencies functioning in India: 1. Credit Rating Information Service of India Ltd. (CRISIL) 2. Investment Information and Credit Rating Agency. (ICRA)
10

Bhalla VK(2001), Investment Management S. Chand and Co. Ltd., New Delhi, 8th edition, p 133-134

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3. Credit Analysis and Research Ltd. (CARE) 4. Duff and Phelps Credit rating Pvt. Ltd. 5. Brickwork Ratings. 1.1.8.1 Credit Rating and Information services of India Limited (CRISIL) The Credit Rating Information Service of India Ltd. (CRISIL) was established in 1987 jointly by the ICICI Ltd and the UTI. Other shareholders include the Asian Development Bank Life Insurance Corporation of India, HDFC Ltd., General Insurance Corporation of India and several foreign and India banks. CRISIL is Indias premier credit rating agency and ranks amongst the top five in the world. It commenced its operation in January 1998. In 1996 CRISIL forged a strategic business alliance with Standard and Poor with purpose to drive benefits such as international experience revamping of operating systems, introduction of value added methodologies in new areas and assist the client-companies in raising funds across the country. CRISILs core competencies are in the areas of risk identification, classification and assessment.

Credit Rating and Information Services of India Ltd (CRISIL) is one of the country's top research, rating, risk and Policy Advisory Company Known for its analytical rigor and credibility, CRISIL aims to enable the market function in a better way. It also helps its customers and clients with managing their financial risks and business properly. Major shares of the company are held by Standard & Poor, a division of the McGraw-Hill Companies. Standard & Poor is, indeed, the world's first company to provide financial market intelligence. On 14th August 2008 in Mumbai, CRISIL ascribed ratings to several bank services such as cash credit, term loan, bill discounting and bank guarantee of Global Coal and Mining Private Limited (GCMPL) as 'A/Stable/P2+'. It expects that company

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would maintain healthy credits on the basis of sound cash accruals. Besides, on the same day, CRISIL also allotted a rating of 'AAA(so)' to the receiver's payout in business dealing with Cholamandalam DBS Finance Ltd. CRISIL was set up with a basic purpose to rate debt obligations, which would guide investors as to the risk of timely payment of interest and principle. At present, functions performed by CRISIL fall under three board categories:1. Credit Rating Services. 2. Advisory Services. 3. Research and Information Services. 4. CRISIL.com Ltd. 5. Credibility First (CF). 6. Global Data Services. 7. CRISIL Training Services. 8. CRIS. 1. Credit Rating Services: The principle function of CRISIL is to rate mandated debt obligations of Indian Companies, chit funds, real estate developers, non-banking finance companies, and Indian States and so on. It is the core business of CRISIL while new business has begun to make a moderate contribution, which is about 80% to the revenue. Being a pioneer in credit rating business in India, the rating agency ranks amongst the top five in the world. A CRISIL rating reflects CRISIL's current opinion on the relative likelihood of timely payment of interest and principal on the rated obligation. It is an unbiased, objective, and independent opinion as to the issuer's capacity to meet its financial obligations. So far, CRISIL has rated 30,000 debt instruments, covering the entire debt market. The debt obligations rated by CRISIL include: Non-convertible debentures/bonds/preference shares.

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 Commercial papers/certificates of deposits/short-term debt. Fixed deposits. Loans. Structured debt.

CRISIL Ratings' clientele includes all the industry majors - 23 of the BSE Sensex constituent companies and 39 of the NSE Nifty constituent companies, accounting for 80 per cent of the equity market capitalization, are CRISIL's clients. Following functions has been included in the rating services by CRISIL: -Rating the debt obligations -Rating of structural obligations ` -Rating of real estate developers projects -bond fund rating -Rating of collective investment schemes. CRISIL Advisory Service: CRISIL Advisory Services for consultancy services to various state Government, Disinvestments Commission on disinvestments plan for public sector enterprise, major port authorities, and state Electricity Boards and so on. Other clients availing of advisory services from CRISIL are the Public sector enterprises, banks and financial institutions and instigating risk. It also formulates and executes strategies for that. CRISIL Infrastructure Advisory: It provides policy, regulatory and transaction level advice to governments and leading organizations across sectors.

Investment and Risk Management Services: CRISIL Risk Solutions offers integrated risk management solutions and advice to Banks and Corporate by leveraging the experience and skills of CRISIL in the areas of credit and market risk. 2. CRISIL Research and Information Services: -

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CRISIL Research and Information Services include value-added research activities and customized studies in following areas: -Indian Capital Market. -Indian Industries, and -Indian Corporate Sector. Following are the services, which are included in CRISIL: A. CRISIL Sector Wise. B. CRISIL View. C. International Information Vending. D. CRISIL Index Services.11

3. CRISIL.com Ltd.:The internets ability to inform, educate, interact and customize is unlimited. CRISIL has recognized this medium as opportunity to widen and deepen its customer reach in its existing and new segments, create value added content and deliver it to new market segments. CRISIL has transferred its internet business to CRISIL.com a wholly owned subsidiary in order to give it the required focus. CRISIL.com leverages CRISILs existing competencies, resources and credibility and positions itself as an important resource center for authentic information and a valuable decision support system. It works for increased penetration, exclusive and superior content and increased market exposure. The CPR rankings and popularity index are covered each quarter. CRISIL.com is also pursuing strategic Alliances/ tie-ups for creating rich contents and value added products aimed at meeting the research and information needs of business and investment decision makers.
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Khan MY(2003), CRISIL Ch. Credit Rating, Financial services Tata McGraw Hill Publishing Company

Limited New Delhi, p16.7-16.16

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4.

Credibility-First (CF):Credibility First provides rating and evaluation services across the cross-section

of the Indian economy. While, CRISILs rating division focuses on top-ended corporate, especially in the small sized sector, where information is not easily available. CF provides its services to banks, financial institutions, B2B exchanges, yellow page directories and business counterparts. CF provides the following services: 1. Verification Services. 2. Certification Services. 3. Rating Services. CF verification services are a pre-requisite for corporate to list on some major B2B exchanges. CF is positioning this service as a national standard for listing on any domestic exchange. CF Certification Services help merchants to communicate their business strength to the potential buyers. These certifications would help buyers short-list suppliers from a number of similar suppliers. CF Rating Services are aimed at corporate to help them establish credibility in trade and financial transactions. These ratings facilitate the corporate business transactions and financial transactions. 5. Global Data Services:The Global Data Services of India Ltd. is a 100% subsidiary of CRISIL. It has been formed with a view to using the existing strengths and resources of CRISIL to provide high quality, reliable and timely financial analysis of Indian corporate, covering more than 1500 of the largest companies listed on the Indian stock exchanges. This list is gradually expanded. The data is provided both, online and offline

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It also provides data entry services and offers to maintain financial updates of credit and investment portfolios of clients. This service is especially useful to institutional investors, capital market intermediateries, banks and financial institutions, mutual funds, provident funds and high net worth individual investors including NRIs. 6. CRISIL Training Services:CRISIL provides a wide spectrum of training programmes, including the tailormade ones, to meet the specific needs of various agencies and individuals connected with credit as well as investments. Programmes are specially designed for professionals whose business necessitates assessment of credit and investment risk. The programmes are especially useful for credit analysts, lending and investment officers of banks and financial institutions, portfolio managers and debt market traders, corporate treasurers and finance managers. Other training programme have been designed for business strategists including entrepreneurs and company executives, faculty of educational institutions individual investors and students. At present, all training programme are available only offline, in various cities of India.12 CRISIL Rating Symbols CRISIL assigns ratings only to rupee denominated debt instruments. These symbols are symbolic expression of opinion/assessment of the credit rating agency. Here is a brief summary of CRISILs rating symbols used for the rating of: 1. Debenture. 2. Fixed Deposits. 3. Short Term Instruments. 4. Structured Obligations. 5. Foreign Structured Obligations. 6. Instrument Carrying Non-credit Risk. 7. Financial Strength ratings of insurance companies. 8. Debt Fund Portfolio
12

Gurusamy S(2006), Range of Services, Ch. Credit rating and Information Services of India Limited

(CRISIL), Financial Markets and Institutions, Thomson Business Information India Pvt. Ltd., P288-290.

25

9. Real Estate Projects. 10. Government and Creation Ratings Table No. 1.1: CRISILs Rating Symbols Chart
Instruments High Investment Grade Highest High Safety Safety AAA FAAA P1 AAA(So) AA FAA P2 AA(So) Investment Grade Adequate Moderate Safety Safety A FA P3 A(So) BBB(So) BBB Speculative Grade Inadequate High Safety Risk BB FB P4 BB(So) B(So) C(So) B FC Substantial Risk C Default D FD P5 D(So)

Debentures Fixed Deposits Short Term Instrument Structured Obligations Foreign Structured Obligations Debt Funds Portfolio Instrument Carrying Non Credit Risk Rating of Insurance Companies Debt Fund Portfolio Real Estate Projects

AAA(FSo)

AA(FSo)

A(FSo)

BBB(FSo)

BB(FSo)

B(FSo)

C(FSo)

D(Fso)

AAAf AAAr

AAf AAr

Af Ar

BBBf BBBr

BBf BBr Br

Cf Cr Dr

AAA

AA

BBB

BB

AAAf PA1

AAf PA2

Af PA3

BBBf

BBf

Cf

Source: Credit Rating Information Service of India

26

Note:-CRISIL may apply +or -signs for ratings with rating symbols to reflect comparative standing within the category.13 CRISIL places ratings of MFIs on Rating watch with negative Implications CRISIL has placed its outstanding ratings on the debt instruments of 12 microfinance institutions (MFIs) on Rating watch with negative implications. Six of these MFIs have ratings that are in the BB category or below. The implementation of the Andhra Pradesh (Andhra) ordinance has triggered a chain of events that can permanently damage the business models of MFIs, by impairing their growth, asset quality, profitability and capital raising ability. The Rs. 250 billion (as on 31st March 2010) microfinance plays an important role in extending formal financial services to 28 million of Indias under-served rural poor; with the decline of the sector, the flow of credit to this segment of the population will be curtailed. The Andhra ordinance has been highly unfavorable for the industry resulting in a precipitous drop in the collection efficiency and profitability of MFIs, especially those operating in Andhra. Further, the flow of funding to the entire sector from the banking system has been severely constrained. Consequently, the liquidity position and growth prospects of many MFIs, including those operating outside Andhra Pradesh have been affected. Structurally, the regulatory jurisdiction and framework for MFIs remain unclear, with actions by multiple authorities increasing the challenges for the industry. Unless urgent steps, including regulatory intervention, are taken to address these issues, these developments have a potential to materially weaken the business and financial risk profiles of MFIs and result in rating downgrades. The impact on the credit worthiness of the individual entities will differ depending to their exposure to Andhra, their liquidity and their ability to raise the capital from alternate sources. CRISIL will actively monitor the developments in the sector and take appropriate rating actions.

13

Khan MY(2003), CRISIL Rating Symbols Ch. Credit Rating, Financial services Tata McGraw Hill

Publishing Company Limited, New Delhi, p16.31-16.38.

27

Another risk is that other states may initiate state- level legislation similar to the Andhra ordinance. Moreover, the regulatory environment for the sector could evolve further after the decision of Andhra Pradesh High Court, recommendations of the Malegam committee instituted by the Reserve Bank of India (RBI), any potential changes in RBI norms related to priority sector funding to the sector, and provisions of the microfinance bill proposed by the Ministry of Finance. CRISIL has consistently highlighted that as an emerging sector, the MFI industry is exposed to the risk of changes in the political, legislative, and regulatory environment. Some of these risks are now becoming evident. Collections in Andhra have plummeted below 20 per cent, from nearly 99 per cent prior to the ordinance, with MFIs finding it difficult to make contact with borrower groups, and having to move to a monthly repayment cycle in line with the ordinance. Fresh disbursements in Andhra have been negligible over the past few weeks. CRISIL believes that this would lead to a sharp increase in delinquencies for MFIs that have significant Andhra exposure. So far, MFIs with limited or no Andhra presence have maintained good collection levels, though their disbursement growth has reduced sharply. MFIs ability to raise external funding is correctly significantly constrained. Access to fresh loans from banks and institutions, which form a significantly proportion of the sectors total funding, has dropped materially. Reduced access to funding not only affects MFIs liquidity- and, consequently, their ability to service debt- but also limits their fresh disbursements, which can have a cascading effect on their growth and asset quality in the near term. It is possible that bank funding to the sector will resume later, but the timing and extent of such funding are uncertain. In addition, the quality of the banks exposure to this sector could weaken from the current strong levels. CRISIL also rates nine securitization transactions originated by MFIs. Only two of these transactions have some exposure to loans originated in Andhra Pradesh. The collection performance of all rated pools remained strong until recently. The credit enhancements and the structural features currently protect investor payouts from any

28

potential increase in delinquencies, and are consistent with the outstanding ratings. CRISIL will continue to monitor the performance of these pools regularly, and will take appropriate rating actions in case collections drop significantly.14 Table No. 1.2: CRISILs Ratings of MFIs on Rating watch with negative Implications Name
Asmitha Microfin Limited Bhartiya Samruddhi Finance Limited Digamber Capfin Limited Equitas Micro Finance India Private Limited Grameen Financial Services Private Limited Sanghamithra Rural Financial Services Shri Kshetra Dharmasthala Rural Development Project (R.) SKS Microfinance Limited South Sundarban Janakalyan Sangha Spandana Sphoorty Financial Limited Ujjiven Financial Services Private Limited Vedika Credit Capital Limited

Rating Action
BBB(Placed on Rating Watch with Negative implications) BBB (Placed on Rating Watch with Negative implications) B+(Placed on Rating Watch with Negative implications) BBB(Placed on Rating Watch with Negative implications) P4+(Placed on Rating Watch with Negative implications) BB(Placed on Rating Watch with Negative implications) BB+(Placed on Rating Watch with Negative implications) P1+(Placed on Rating Watch with Negative implications) B+(Placed on Rating Watch with Negative implications) A-/P1(Placed on Rating Watch with Negative implications) BBB-(Placed on Rating Watch with Negative implications) B+(Placed on Rating Watch with Negative

implications) Source: Credit rating and information services of India ltd.

1.1.8.2 Investment Information and Credit Rating Agency of India Limited (ICRA) Established in 1991, ICRA limited is a leading provider of investment information and credit rating services in India. Promoted by the countrys leading financial
14

CRISIL Ratings press release 22nd November 2010, Mumbai.

29

institutions, banks and financial services companies, ICRA has, so far, completed nearly 1,800 assignments including credit ratings, equity ratings, customized research and needbased advisory assignments. It has a team of over 100 analysts across nine locations in India, and is a prominent player in the financial services sector. Committed to the development of the financial market in India, ICRA is focusing on developing innovative concepts and products in a dynamic market environment, generating wider investor education, and enhancing the efficiency and transparency of the financial markets. Completing its rating and advisory functions, ICRAs Research and information services are directed towards the efficient dissemination of information, thus ensuring the highest standards of quality and credibility. The growth and globalization of Indian capital markets has led to an exponential surge in demand for a professional credit risk analysis. ICRA has actively responded to this need by executing assignments including credit ratings, equity grading and mandated studies spanning diverse industrial sectors. In addition to being a leading credit rating agency with expertise in virtually every sector of the Indian economy, ICRA has broadened its services to the corporate and financial sectors, both in India and overseas. ICRA presently offers its services under these banners namely Information services, grading services, rating services and advisory services. 1. Information Services: The ICRA, in a way, is a culmination of the efforts of ICRA Information services; a division that has evolved out of the core strengths of ICRA Limited in business and financial analysis to service the unique information needs of investors and the capital markets community. ICRAs Information Services endeavors to constantly upgrade its products and introduce new ones in cognizance of the dynamic and evolving nature of the Indian business environment. This is done for the purpose of helping sustain its pre - eminence

30

as a quality provider of credible, value-added information services, to market participants, both Indian and Foreign. ICRA Information Services has built up a diverse portfolio of publications in response to the increasing market requirements for value-added information and analysis. These include: 1. ICRA corporate review (ICR): This is designed to serve as a first level information resource for the market community. 2. Corporate reports: This is designed to present extensive information along with an analysis on selected India corporate entities. The critic in the corporate reports incorporates business, industry, market and financial and operational analysis. 3. Industry and sector research reports: These focuses on specific industries like steel, cement, tea and cotton yarn. These reports are targeted at institutional investors, practitioners in the area of financial services and decision makers in corporate world. 4. Money and finance bulletin: Complementing the research on industrial sectors is another ICRA research team engaged in the analysis of contemporary developments that characterizes the Indian money and finance sector. The product of this exercise is the quarterly publication titled money and finance bulletin. This bulletin is directed towards individuals interested in delving into the reasons underlying economic and fiscal policy initiative and outcome. 5. Rating profile: The standard reference material for all players in the Indian credit market is the rating profile, currently a quarterly brought out by ICRA Information Services, is a compilation of the rationale of that ratings awarded by ICRA. The rating profile contains

31

the ratings that are in use, the rationales for the ratings assigned, as well as the rating symbols and their implications. 6. Customized studies: The customized studies, which also belong to the portfolio of ICRA Information Services, cover due diligence studies, equity assessments, group assessments, industry analysis and market studies. Such studies, the rising demand for which are being driven by increasing cross-border activities, complexity and volatility, are conducted on an assignment basis, and provide need-based information in the areas mentioned. Needless to say, they go a long way in enhancing investment decision. 2. Grading Services: ICRAs grading services are structured to provide authentic information on relating quality of equity in diverse corporates. The relating quality of equity of company, its growth, stability and composition of earnings are assessed, by analyzing the underlying fundamentals that will affect the companys future performance over the medium term. A complex combination of variables is examined including, industrial outlook, quality of management, financial strength, corporate operations, competitive strength and outlook. The range of grading services include: equity grading, equity assessment and Earning Prospects and Risk Analysis (EPRA) 3. Rating Services: As an early entrant in the credit rating business, ICRA is one of the most experienced credit rating agencies in India today. ICRA rates rupee dominated debt instruments such as: 1. Bonds and debentures (long-term). 2. Fixed deposit programme (medium-term). 3. Commercial papers and certificates of deposit (short-term). 4. Structured obligations and sector specific debt obligations (issued by infrastructure companies).

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The ICRA rating is a symbolic indicator of the current opinion of the relative capability of timely servicing of debts and obligation by the corporate entity with reference to the instrument being rated. The rating is based on an objective analysis of the information and clarifications obtained from the enterprises and also other sources, which are considered by ICRA to be reliable. The independence and professional approach of ICRA ensures reliable, consistent and unbiased ratings. Ratings facilitate investors to factor credit risk in their investment decision. ICRA rates long-term, medium-term and short-term debt instruments. ICRA offers its rating services to wide range of issuers including: 1. Manufacturing Companies. 2. Banks and financial institutions. 3. Power companies. 4. Service companies. 5. Construction companies. 6. Insurance companies. 7. Municipal and other local bodies. 8. Non-banking financial service companies. 9. Telecom companies. 10. Companies involved in infrastructure such as ports, dams, roads and highways. 4. Advisory Services: ICRAs foray into advisory services represents an organic growth of the cumulative expertise built by ICRA in different industries and sector. The main drive for ICRAs advisory services has been the growing needs in India for an unbiased and professional view on adopting the best business practices, against the backdrop of economic deregulation and increasing competition. With its extensive knowledge, bank of business and management practices spanning the major sectors of the Indian economy and as a repository of high quality analytical talent, ICRA is well positioned to extend advisory services to different Indian

33

organizations, regulatory authorities and other organizations having business interest in India. ICRA advisory services offers independent, objective and high quality consulting services to organizations with an interest in India, with the fundamental aim of improving the quality of decision making. It is active in the following areas: 1. Strategic Consultancy. 2. Risk Management. 3. Inputs for Policy Formulation.15 Strategy Consulting: This comprises the following: Assisting in the goal setting process. Improving competitiveness. Mergers, Acquisitions and growth strategies. Improving organizational capabilities. Organizational Restructuring. Financial Strategy and systems.

Risk management: This comprising the following: Assisting project risks for investors/developers/lenders. Project structuring and financial modeling. Structuring payment mechanisms. Building organizational skills in credit risk management for banks and lenders. Risk audit studies.

Policy Formulation: This includes the following:

15

Deregulation and privatization studies.

Gurusamy S(2006), Range of Services, Ch. Investment Information and Credit Rating Agency of India

Ltd. from the book titled Financial Markets and Institutions published by Thomson Business Information India Pvt. Ltd., P298-301.

34

Pricing of public goods. Subsidies Concessions. Guarantees management. Fiscal studies. Preparation of license agreements and documents for large projects.

ICRA Rating Symbols The ICRA rating is a symbolic indicator of the current opinion of the relative capability of timely servicing of the debt obligations. ICRA rates long term, medium term and short-term debt instruments. Following is a brief summary of the rating symbols used by ICRA for the following: Long Term Instruments (Debentures Bonds, Preference Shares) Collative Investment Schemes. Rating of Insurance Companies. Corp. Governance Rating.

35

Table 1.3: ICRAs Rating Symbols Chart

Instruments Highest Safety Long Term Instruments LAAA Medium Term Debt MAAA High Safety LAA MAA A2 CS1 Adequate Safety LA MA A3 CS2 CS3 CS4 CS5 SYMBOLS Moderate Inadequate Safety Safety LBBB LBB MB High Risk LB Substantia l Risk LC MC A4 Default

LD MD A5 CARE5

Short Term Instruments A1 Collective Instrument Schemes Insurance Companies Corporate Governance iAAA CGR1

iAA CGR2

iA CGR3

iBBB CGR4

iBB CGR5 CGR6

iB

iC

Source: Investment Information and Credit Rating Agency of India Limited.

Note: - The Suffix of + or -may be used with rating symbols to indicate the comparative position within the group covered by the symbols.16 Knowledge Process Outsourcing and Online Software ICRA Online Limited (ICRON) is a wholly-owned subsidiary of ICRA Limited. ICRON was incorporated in January 1999 and has over the period since then established itself as an independent and credible source of authentic information, software and outsourcing solutions provider.

16

Khan MY(2003), ICRA Rating Symbols Credit rating, Financial services Tata McGraw Hill Publishing

Company Limited New Delhi sixth edition 2003.p16.39-16.47

36

ICRON caters for some of the biggest names in the financial services sector in India and abroad, which is a testimony to its product quality, commitment and credibility. ICRON has two Strategic Business Units (SBUs) with a list of reputed global and domestic clients: The Knowledge Process Outsourcing Division (KPO Division); and The Information Services and Technology Solutions Division (MFI Division). Encouraged by the emerging dynamics of the outsourcing business, ICRON diversified into the Knowledge Process Outsourcing (KPO) business in April 2004, with focus on the Banking, Financial Services and Insurance (BFSI) vertical as well as other verticals like Retail, Healthcare and Pharmaceuticals. The KPO Division of ICRON offers Knowledge Process Outsourcing services that combine advanced analytical abilities and deep domain expertise to deliver value by translating data and information into structured business inputs. It provides back-end analytical services support to its clients in the areas of Data Extraction, Aggregation, Validation and Analysis, Accounting and Finance, Research, Report Preparation and Modeling. The Division has attained ISO 27001 certification through rigorous adherence to data security policies and practices. The MFI Division serves the Mutual Fund Industry through Research, Analytics and Mutual Fund Ranking. Besides, it leverages its domain expertise to deliver high quality technology solutions, in the form of products, to a large number of Banks, Mutual Funds, Financial Institutions, Third Party Products Distributors, Insurance Companies, Investment Advisors, Portfolio Managers, Stock Brokers, Treasury Managers, and Academic Institutions, among others. The Company has developed several innovative products to meet the varied needs of its clients. The products are customized to meet specific client requirements, enabling them in research, analysis and decision making while also helping them achieve automation in business operations.

37

ICRON has a wholly-owned subsidiary M-Serve Business Solutions Private Limited, a KPO Services Company headquartered in Kolkata, India. ICRA assigns equity grading to Havells India Limited ICRA online has assigned the fundamental 4 and the valuation grade B to Havells India Limited (Havells). The fundamental grade 4 assigned to Havells implies that the company has strong fundamentals to other listed securities in India. The grade factors in Havells diversified product portfolio with core focus on the fast growing consumer goods sector, its effective marketing and distribution reach that supports premium pricing, and the significant growth potential of its subsidiary, Sylvania. The grade also takes note of the intense competition that Havells faces across the segments it operates in. The valuation Grade B assigned to Havells implies that the company is moderately undervalued on a relative basis (as on the date of the grading assigned). An ICRA Equity Research assessment, while not specifying any target price for the shares evaluated, captures two key factors: fundamental earning quality (fundamental grade) and relative valuation (valuation grade)- that influence the price behaviour of equity shares of companies over the medium and long term. The fundamental grades are on five- point scale, with 5 being the highest grade and 1 the lowest. Similarly, valuation grades are also on five-point scale, wherein A being the significantly undervalued and E the significantly overvalued.17 1.1.8.3 Credit analysis and research Ltd (CARE) Credit analysis and research Ltd. was promoted by IDBI jointly with financial institution, banks and private finance companies. It started its operation in 1993 and now it offers a wide range of products and services in the field of credit information and equity research. CARE Ratings is well equipped to rate all types of debt instruments like Commercial Paper, Fixed Deposit, Bonds, Debentures, Hybrid instruments, Structured
17

www.icra.com , Investment information and credit rating agency of India ltd

38

Obligations, Preference Shares, Loans, Asset Backed Securities(ABS), Residential Mortgage Backed securities (RMBS) etc .

CARE Ratings has been recognized by statutory authorities and other agencies in India for rating services. The authorities/agencies include: Securities and Exchange Board of India (SEBI), Reserve Bank of India (RBI), Director General, Shipping and Ministry of Petroleum and Natural Gas (MOPNG), Government of India (GOI), National Housing Bank (NHB), National Bank for Agriculture and Rural development (NABARD), National Small Scale Industries Commission (NSIC). CARE Ratings has also been recognized by RBI as an Eligible Credit Rating Agency (ECRA) for Basel II implementation in India .

CARE Ratings has significant presence in all sectors including Banks / FIs, Corporate, Public finance. Coverage of CARE Ratings has extended to more than 2811 entities over the past decade and is widely accepted by investors, issuers and other market participants. CARE Ratings have evolved into a valuable tool for credit risk assessment for institutional and other investors, and over the years CARE has increasingly become a preferred rating agency .

CAREs Credit Rating is an opinion on the relative ability and willingness of an issuer to make timely payments on specific debt or related obligations over the life of the instrument. CARE rates rupee denominated debt of Indian companies and Indian subsidiaries of multinational companies. CARE ratings are not recommendations to buy/sell or hold any security. These services are categorized into the following categories:i. ii. iii. Credit Rating Services. Information Services. Equity Research.

39

i.

Credit Rating Services:CARE rates all types of debt instruments including long term. It is the core

business of this rating agency. ii. Information Services:Like CRISIL and ICRA. It also provides information services to various players in the financial market. It provides information on any company, industry or sector to individuals, mutual funds, and investment companies. So that they can take well informed investment decision. iii. Equity Research:Equity Research involves extensive study of the shares listed or which are going to be listed on stock exchange and forecasts Potential looser and winner on the basis of this study. For this purpose, it analyzes all the fundamentals affecting the industry, market share, management capabilities etc. Apart from basic services, CARE also provides some other services like: CARE Loan Rating Credit Analysis Rating etc.

Table 1.4: Rating Experience: (As at March 2010) Total Assignments Completed Total Instruments Rated Total Volume of Debt Rated Total Issuers Rated
Source: Credit Analysis and Research Ltd.

8488 7989 Rs.26609 billion 3071

40

Table 1.5: CAREs Rating Symbols Chart

Source: Credit Analysis and Research Limited

Instrume nts Highest Safety Long Term& Medium Term Instrume nts Short Term Instrume nts Credit Analysis Rating Long Term Loans Short Term Loans Collective Investme nt Schemes High Safety Adequate Safety

SYMBOLS Moderate Safety Inadequate Safety High Risk Substantial Risk Default

CAREAA A

CAREA A

CAREA

CAREBBB

CAREBB

CAREB

CAREC

CARED

PR1

PR2

PR3

PR4

PR5

CARE1

CARE2

CARE3

CAREBBB (L)

CARE4

CAREB (L)

CAREC (L)

CARE5

CAREAA A (L) PL1

CAREA A (L) PL2

CAREA (L)

CAREBB (L)

CAREC (L)

PL3

PL4

PL5

CARE1 (CIS)

CARE2 (CIS)

CARE3 (CIS)

CARE4 (CIS)

CARE5 (CIS)

NOTE: CARE may assign + or -signs after the assigned rating, where necessary, to indicate the relative position within the brand covered by the symbol.18

18

Khan MY(2003), Care Ch. Credit rating , Financial services Tata McGraw Hill Publishing Company

Limited New Delhi sixth edition 2003.p16.24-16.25.

41

1.1.8.4 Duff and Phelps Pvt. Ltd. Duff & Phelps was founded in 1932 to provide high quality investment research services focused on the utility industry. Over the decades, it evolved into a diversified financial services firm that provides financial advisory, investment banking, credit rating and investment management services. The investment management and credit rating businesses were acquired by Virtus Investment Partners and Fitch, respectively. The firms current management team acquired Duff & Phelps financial advisory and investment banking business in 2004. The following year, Duff & Phelps strengthened its valuation capabilities with the acquisition of Standard & Poor's Corporate Value Consulting business. Since then, Duff & Phelps has continued to expand and develop its core services. In 2006, it acquired specialty investment bank Chanin Capital Partners, LLC. The following year, it formed a strategic alliance with Tokyo-based Shinsei Bank, Ltd. and added property tax management services through the acquisition of Rash and Associates, LP to complement its tax business. In 2008, it grew its dispute and legal management consulting services with the acquisitions of Dubinsky & Company, P.C. and Lumin Expert Group. It also enhanced its valuation offerings by acquiring Kane Reece Associates, Inc., a valuation consulting firm that specializes in the communications, entertainment and media industries. In 2010, Duff & Phelps established a presence in Canada and continued to expand its dispute consulting, valuation and corporate advisory services with the acquisition of Cole & Partners, a Toronto-based independent financial advisory practice. Key Facts:

NYSE-listed company since 2007. Headquartered in New York City. Offices in North America, Europe and Asia. Primary services are valuation, investment banking, transaction advisory, dispute, legal management consulting and tax.19

19

http://www.duffandphelps.com/aboutus/Pages/AboutDuffPhelps.aspx

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1.1.8.5 Brickwork Ratings

Brickwork Ratings is a Bangalore-based company incorporated in 2007 with the mission of providing unbiased information to Indian investors for making better investment decisions. Mr. Balasubramanian, Mr. Vivek Kulkarni and Mr. Ravishankar are the founder directors of Brickwork Ratings. Mr. Balasubramanian is the former Chairman of SIDBI and a pioneer in the banking industry. He was instrumental in setting up of SMERA an SME rating agency. He has tremendous credit experience with the Bank of Baroda. Mr. Ravishankar is a financial professional with a rich experience of over 25 years in BFSI segment. He was Managing Director of Asia-Pacific Risk Solutions business of Standard and Poor's .

The initial concept of Brickwork Ratings was conceived by Mr. Vivek Kulkarni after the success of providing high-end financial services to the global market through Brickwork India Pvt. Ltd. a knowledge process outsourcing company. Brickwork Ratings, a SEBI licensed credit rating agency, founded by bankers, credit rating professionals, former regulators as well as professors, is committed to promoting Financial Literacy, having its corporate office in Bangalore and branches at New Delhi, Mumbai, Chennai, Hyderabad and Pune. While Indian financial markets have been liberalized in the past two decades, useful information is still scarce. Complex structures, inadequacy of information and below-average disclosures make it difficult for retail investors to make sense of financial markets. No wonder small investors always lose money in every market crash. Brickwork's proprietary models in credit risk customized for large corporates, SMEs, banks, financial institutions, state and local governments, help investors understand the complexity of the investment world. Brickwork Rating Symbols

43

1) Brickwork Rating Symbols for Long Term debt instruments The long-term debt instruments includes Bonds, Non Convertible Debentures, Certificate of Deposits, Fixed Deposits, Convertible Preference Shares, Redeemable Preference Shares and Structured Obligations, all with original maturity exceeding one year. 1. Investment Grade Ratings: BWR AAA (BWR Triple A) Instruments with AAA rating are considered to offer the Best credit quality, in terms of timely servicing of debt obligations.

BWR AA Instruments with AA rating are considered to offer High credit quality. (BWR Double A) BWR A BWR BBB (BWR Triple B) Instruments with A rating are considered to offer Adequate credit quality. Instruments with this rating are considered to offer Moderate credit quality.

2. Speculative grade: BWR BB Instruments with this rating are considered to offer Inadequate credit (BWR Double B) quality. BWR B BWR C BWR D Instruments with this rating are considered to offer Low credit quality. Instruments with this rating are considered to offer Very Low credit quality. Instruments with this rating are in Default or expected to Default.

2) Brickwork Rating Symbols for Short Term debt instruments Short Term Instruments Rating Scale The Short Term debt instruments with original maturity up to one year.

BWR P1 BWR P2 BWR P3

Instruments with this rating are considered to offer Excellent credit quality Instruments with this rating are considered to offer High credit quality Instruments with this rating are considered to offer Moderate credit quality 44

BWR P4 BWR P5

Instruments with this rating are considered to offer Low credit quality Instruments with this rating are in Default or expected to Default

3) Brickwork Rating Symbols for issuer rating BWR AAA (BWR Triple A) Issuer with AAA rating is considered to offer the BEST credit worthiness.

BWR AA Issuer with AA rating is considered to offer High credit worthiness. (BWR Double A) BWR A BWR BBB (BWR Triple B) Issuer with A rating is considered to offer Adequate credit worthiness. Issuer with this rating is considered to offer Moderate credit worthiness.

BWR BB Issuer with this rating is considered to offer Inadequate credit worthiness. (BWR Double B) BWR B BWR C BWR D Issuer with this rating is considered to offer Low credit worthiness. Issuer with this rating is considered to offer Very Low credit worthiness. Issuer with this rating is in Default or expected to Default.

4) Brickwork Rating Symbols for IPO Grading BWR IPO Grade Strong fundamentals 5: BWR IPO Grade Above-average fundamentals 4: BWR IPO Grade Average fundamentals 3: BWR IPO Grade Below-average fundamentals 2: BWR IPO Grade Poor fundamentals 1:

45

5) Brickwork Rating Symbols for Fixed Deposit Ratings a) Investment grade: BWR FAAA (BWR F Triple A) Deposits with this rating are considered to offer the BEST safety, in terms of timely servicing of interest & principal

BWR FAA Deposits with this rating are considered to offer a High safety, in terms of (BWR F Double timely servicing of interest & principal A) BWR FA Deposits with this rating are considered to offer Adequate safety in terms of timely servicing of interest & principal

b) Speculative grade: BWR FB Deposits with this rating are considered to offer Low safety, in terms of timely servicing of interest & principal Deposits with this rating are considered to offer Very Low safety, in terms of timely servicing of interest & principal Deposits with this rating are in Default or expected to Default

BWR FC

BWR FD

6) Brickwork Rating Symbols for Corporate Governance BWR CG 1 BWR CG 2 BWR CG 3 BWR CG 4 BWR CG 5 BWR CG 6 BWR CG 7 Quality of Corporate Governance is The BEST Quality of Corporate Governance is EXCELLENT Quality of Corporate Governance is HIGH Quality of Corporate Governance is ADEQUATE Quality of Corporate Governance is MODERATE Quality of Corporate Governance is INADEQUATE Quality of Corporate Governance is LOW

46

BWR CG 8

Quality of Corporate Governance is The LOWEST

7) Brickwork Rating Symbols for SME rating BWR aaa (BWR Triple a) SME with aaa rating is considered to offer the Best credit worthiness in relation to other SMEs.

BWR aa SME with aa rating is considered to offer High credit worthiness in (BWR Double a) relation to other SMEs. BWR a BWR bbb (BWR Triple b) SME with a rating is considered to offer Adequate credit worthiness in relation to other SMEs. SME with bbb rating is considered to offer Moderate credit worthiness in relation to other SMEs.

BWR bb SME with bb rating is considered to offer Inadequate credit worthiness in (BWR Double b) relation to other SMEs. BWR b SME with b rating is considered to offer Low credit worthiness in relation to other SMEs. SME with c rating is considered to offer Very Low credit worthiness in relation to other SMEs. SME with d rating is in Default or expected to Default

BWR c BWR d

8) Brickwork Rating Symbols for Security Receipts Ratings BW RR1+ Recovery Value of the Underlying Assets is greater than 150% of SR Face Value. Recovery Value of the underlying assets in the range of over 100% - 150% of SR Face Value. Recovery Value of the underlying assets in the range of over 75% - 100% of SR Face Value. Recovery Value of the underlying assets in the range of over 50% - 75% of SR Face Value.

BW RR1

BW RR2

BW RR3

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BW RR4 BW RR5

Recovery Value of the underlying assets in the range of 25% - 50% of SR Face Value. Recovery Value of the underlying assets less than 25% of SR Face Value.

9) Brickwork Rating Symbols for Insurance Companies BWR In AAA BWR In AA BWR In A BWR In BBB BWR In BB BWR In B BWR In C BWR In D BEST financial capability to meet policyholders obligations HIGH financial capability to meet policyholders obligations ADEQUATE financial capability to meet policyholders obligations MODERATE financial capability to meet policyholders obligations INADEQUATE financial capability to meet policyholders obligations LOW financial capability to meet policyholders obligations VERY LOW financial capability to meet policyholders obligations DEFAULT on current policy holder obligations

10) Brickwork Rating Symbols for Mutual Fund BWR MF AAA BWR MF AA BWR MF A BWR MF BBB BWR MF BB BWR MF B BWR MF C BEST credit quality of underlying Debt portfolio HIGH credit quality of underlying Debt portfolio ADEQUATE credit quality of underlying Debt portfolio MODERATE credit quality of underlying Debt portfolio INADEQUATE credit quality of underlying Debt portfolio LOW credit quality of underlying Debt portfolio VERY LOW credit quality of underlying Debt portfolio

11) Brickwork Rating Symbols for Real Estate Project 48

BWR RP 1+ BWR RP 1 BWR RP 2 BWR RP 3 BWR RP 4 BWR RP 5

BEST project implementation EXCELLENT project implementation ADEQUATE project implementation MODERATE project implementation INADEQUATE project implementation LOW project implementation

12) Brickwork Rating Symbols for Real Estate Developer BWR RD 1+ BWR RD 1 BWR RD 2 BWR RD 3 BWR RD 4 BWR RD 5
20

BEST project implementation capability EXCELLENT project implementation capability ADEQUATE project implementation capability MODERATE project implementation capability INADEQUATE project implementation capability LOW project implementation capability

1.1.9 Rating Process

In India all the three credit rating agencies adopt almost a similar rating process for rating new debt issues and reviewing the rating of existing instruments. The steps generally taken by the rating agencies in rating process are shown as under: -

20

http://www.brickworkratings.com/scale.html

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1. Rating Request: The purpose of the rating starts with the rating request made by the issuer of the instrument issues a letter to the rating agency and signed an agreement with the agency. 2. Assignment of Analytical Team: On the basis of rating request credit rating agencies assign an analytical team comprising two or more analysts. These analysts would be the experts in the relevant business area. It is a very detailed process. Normally, two-three persons with the required technical skills team up for investigations (due diligence) for about three weeks.

Issuer request for rating

CRISIL Assigns an analytical team

Analytical team collects and analyses information

Meets Companys management and resolves Questions Interaction with back up team for industrial formation

Findings presented to a rating committe e

Rating committee decides the rating

Notification of rating to issuer

r ue ss to si oe ants al D w pe ap Yes

No

Rating is released

Additional data provided is reviewed and rating revised if necessary 50

Figure 1.2: Rating Process They go to the company, talk to the people, go through the company's books and records, its accounts, talk to its auditors, its bankers, its consumers, look at how the company has handled investor grievances, look at its track record in servicing debt obligations and so on. This pile of data is then screened and, based on that, the team arrives at a structured report. This report is then presented before the rating committee. A brainstorming session on due diligence ensures that no one gets away by making a sweeping statement. After a lot of interaction, the matter is finally put to vote for a decision on the rating.21 3. Analytical Team Obtains & Analysis Information: After assignment of Analytical Team, the team obtains and analysis information relating to its financial statements, cash flow and other relevant information which have impact on the companys functioning. Generally, following kind of information is obtained and analyzed by this team: A. B. C. three fiscal years. D. E. Two copies of the projected financial statements A certified copy of resolution passed by the along with assumptions on which projection have made. Board of Directors authorizing the insurance of debentures instruments, including the name of authorized signatories.
21

Annual reports for past five years including cash Two copies of the prospectus offering statement Consolidated financial statements for the past

flow statements and interim reports. and application for listing on any major stock exchange.

Khan MY(2003), Rating Process Ch. Credit rating, Financial services Tata McGraw Hill Publishing

Company Limited New Delhi sixth edition 2003.p16.25-16.31.

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F.

List of bank showing lines of credit along with

the contact officers. Apart from this, analytical team may obtain some addition information, which it considers to be necessary for this purpose. 4. Meeting with Management:After obtaining and analyzing the information explained in previous step, analytical team meets with the management of the company and obtains more information on some important aspects which have impact on the credit quality of the instrument being rated. Though the topics discussed during the management meeting are wide ranging but discussion with management might reveal more information like: Managements Philosophy and Plan for the company in future. Business segment analysis. Competitive position, strategies, financial policies. Historical performance. 5. Interaction with Back Up Team:While Analytical team collects the information from company; its back up team collects the information on industry which this company belongs. It also makes interaction with back up team in order to collect information on industry along with the industry prospects in near future. 6. Rating Committee: After collecting and analyzing information from company and its management, the analytical team presents their report to a rating committee which then decides on the rating. The rating committee meeting is the only aspects of the process in which the issuer does not participate. 7. Deciding on Rating by Rating Committee:Now the rating committee makes assessment or evaluate all the factors concerning the issuer giving greater attention to some key issues. After proper analysis rating committee arrives at the rating, which is suitable to the proposed issue.

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8. Notification to the issuer: After the committee has assigned the rating, this decision is communicated to the issuer along with the reasons or rational supporting the rating. If the issuer agrees with the ratings and does not wish to appeal fo9r reviewing the rating given to the instrument, then as a last movement rating is released through print media by the rating agency. But if issuer raises objection on the rating given by the rating agency and wants to furnish additional data for that, then this additional information is reviewed and rating agency may revise previous rating. Then this revised rating is released through media and formal notification of final rating assigned to the issuer.22

1.1.10 International Credit Rating Agencies (CRAs)

Currently, the following rating agencies rate general obligation bonds, notes, lease-purchase revenue bonds and commercial papers:

International Credit Rating Agencies

Moodys Investor Service Figure 1.3 International Credit Rating Agencies Fitch How are bonds rated?

Standard & Poors Ratings Services

The rating process begins with an application to the rating agencies by the issuer or its agent either via a telephone call or in writing. The State of California has engaged Standard & Poor's, Moody's and Fitch in rating all its debt instruments for decades.

22

V Bhalla VK(2001), Investment Management S. Chand and Co. Ltd. New Delhi 8th edition 2001.p 136-

137

53

The rating request is usually done several weeks before the issuance of the bonds to allow time for the rating agencies to perform their review and analysis. Generally, the following documentations are provided to the rating agencies as soon as possible: a. The preliminary official statement; b. Latest audited and unaudited financial statements; c. The latest budget information, including economic assumptions and trends; d. Capital outlay plans; The bond counsel opinion addressing the authority and tax-exempt status of the bond issuance; All legal documents relating to the security for the bonds; and Any other documents that may pertain to the bond issuance as requested by the rating agencies. Following this, a meeting is set up at the rating agency's or issuer's office to present the credit worthiness. The credit analyst prepares a municipal credit report, which discusses key analytical factors. The credit analyst presents credit for "sign-off" with the senior analyst and makes a recommendation for rating. The credit analyst makes a presentation before a rating committee comprised of senior analysts. Finally, the rating is released to the issuer, then to a wire service, followed by a publication of full credit report. Table 1.6: International CRAs Rating Symbols Chart Moodys Aaa Aa1 Aa2 Aa3 A1 A2 A3 Baa1 Baa2 Baa3 Ba1 Ba2 Ba3 S&P AAA AA+ AA AAA+ A ABBB+ BBB BBBBB+ BB BBFitch AAA AA+ AA AAA+ A ABBB+ BBB BBBBB+ BB BBNAIC 1 1 1 1 1 1 1 2 2 2 3 3 3

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B1 B2 B3 Moody's Explanation Aaa indicates Best quality. Aa indicates High quality.

B+ B B-

B+ B B-

3 3 3

Source: National Association of Insurance Commissioners

A indicates Higher-medium grade. Baa indicates Medium grade. Ba indicates Possess speculative elements. B Generally lack characteristics of desirable investment. Caa indicates Poor standing; may be in default. Ca indicates Speculative in a high degree; often in default. C indicates lowest grade. Standard & Poor's Explanation AAA Highest grade. AA High grade. A Upper medium grade. BBB Medium grade. BB Lower medium grade. B Speculative. CCC-CC Outright speculation. C' Reserved for income bonds. DDD-DD In default, with rating indicating relative salvage value. All of these agencies are represented in India through their collaborations: S&P: CRISIL Moodys: ICRA Fitch: CARE (for 1 year only) Fitch: Fitch India (formerly Duff & Phelps India)

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These collaborations bring in financial capital, and more importantly, know how, experience, depth of expertise, research capabilities and manpower synergies. The global orientation received by CRAs in India is further enhanced by two factors Affiliation to the Association of Credit Rating Agencies in Asia (ACRAA), an ADB sponsored body. Indian CRAs are founder members. Alignment with the IOSCO Code of Conduct, to the extent they coincide with the SEBI Code of Conduct for CRAs. These collaborations, affiliations and alignments enable the Indian CRAs to benefit from an exposure to an international environment. It is also a notable feature that Indian CRAs, in turn, provide technical expertise and knowhow to CRAs in Mexico and other countries in the SAARC and ASEAN regions. This provides an emerging markets perspective. Indian CRAs have a leadership position in Asia, behind only Japan, whos CRAs show a greater affinity in interacting with CRAs from the developed (G7) countries.

1.1.11 Elements involved in determining a credit rating

Economic Factors. Evaluation of historical and current economic factors. Economic diversity. Response to business cycles. Economic restructuring. Assessing the quality of life in the given area.

Debt/Issue Structure.
Economic feasibility and need for project. Length of bond's maturity, short-term debt financing. Pledged security and other bondholder protections. Futuristic outlook: capital improvement plan.

Financial Factors.
Sufficient resources accumulated to meet unforeseen contingencies and liquidity requirements. On-going operations are financed with recurring revenues. Prudent investing of cash balances. 56

 Ability to meet expenditures within economic base. Management/Structural Factors. Organization of government and management. Taxes and tax limits. Clear delineation of financial and budgetary responsibilities. Definitions of Ratings by Standard & Poors and Moodys. Investors are often confused or uncertain about bond ratings used by the major security rating services.

1.1.12 Credit Rating: Its Trustworthiness

Why ratings are so trustworthiness? Investors and creditors are primarily concerned with relative value based on their lending and for the investment horizon they have. Accordingly, the credit ratings have traditionally provided one element in support of the investment decision-making process. As such, they help lower the aggregate costs of borrowing and lending and increase overall market transparency and efficiency for both issuers and investors. However, certain attributes of ratings have, over time, encouraged proliferation in the types of users and uses of ratings: Public dissemination Because ratings are publicly available, information about issuers can easily and quickly be disseminated to broad and varying groups of users. Simplicity Rating symbols distill much information into an easy to use symbol. Breadth of coverage The worldwide ratings exist on a large and diverse group of entities and debt instruments. Rating service allows investors to assign an individual issuer or debt 57

instrument into a credit risk class vis-a-vis the overall universe of debt issuers and instruments.

Objectivity and independence The few reputable players in the Rating industry have strict internal policies and procedures have mitigated the latent conflict of interest that is inherent in the rating agency business model. As such, the rating opinions are the product of analysis that is widely accepted as unbiased and trustworthy. Predictive content The predictive content of the world-recognized ratings has been consistently mapped and measured. All top rating agencies and many academic researchers have published studies on the relationship between the ratings and credit defaults. Research has shown a strong relationship between assigned ratings and actual default experience. Judicious rating process The recognized rating agencies assign ratings through a rigorous and judicious process that tends not to react to transitory conditions in favor of longer-term considerations and ratings stability. For different class of persons different benefits accrue from use of rated instruments. Such benefits directly accruing to investors through rated instruments that become a reason for trustworthiness are as follows:

1.1.12.1 Trustworthiness to Investors

Investors are benefited in very many ways if the corporate security in which they intend to invest their saving has been rated by credit rating agency. Some of the benefits, which become a reason for trustworthiness to investors, are as: Safeguards against bankruptcy:

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Credit rating of an instrument by credit rating agency give an idea to the investors about degree of financial strength of the issuer company, which enables him to decide about the investment. Highly rated instrument of a company gives an assurance to the investors of safety of instrument and minimum risk of bankruptcy. Recognition of risk: Credit rating provides investors with rating symbols, which carry information in easily recognizable manner for the benefit of investors to perceive risk involved in investment. Rating symbol gives them the idea about the risk involved or the expected advantages from the investment. Credibility of Issuer: Rating gives a clue to the credibility of the issuer company. The rating agency is quite independent of the issuer company and has no business connections or otherwise any relationship with it or its Board of Directors, etc. Easy understandability of investment proposal: Rating symbols can be understood by an investor, which needs no analytical knowledge on his part. Investor can take quick decisions about the investment to be made in any particular rated security of a company. Saving of resources: Investors rely upon credit rating. This relieves investors from the botheration of knowing about the fundamentals of a company, its actual strength, financial standing, management details, etc. The quality of credit rating done by professional experts of the credit rating agency repose confidence in him to rely upon the rating for taking investment decisions. Independent of investment decisions: For making investment decisions, investors have to seek advice of financial intermediaries, the stock brokers, merchant bankers, the portfolio managers etc. about the

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good investment proposal, but for rated instruments, investors need not depend upon the advice of these financial intermediaries as the rating symbol assigned to a particular instrument suggests the credit worthiness of the instrument and indicates the degree of risk involved in it. Benefits of rating surveillance: Investors get the benefit of credit rating agencys on-going surveillance of the rating and rated instruments of different companies. The credit rating agency downgrades the rating of any instrument if subsequently the companys financial strength declines or any event takes place, which necessitates consequent dissemination of information on its position to the investor. 1.1.12.2 Trustworthiness to Company Company which had its credit instrument or security rated by a credit rating agency is benefited in many ways as summarized below: Lower cost of borrowing: A company with highly rated instrument has the opportunity to reduce the cost of borrowing from the public by quoting lesser interest on fixed deposits or debentures or bonds as the investors with low risk preference would come forward to invest in safe securities through yielding marginally lower rate of return. Wider audience for borrowing: A company with a highly rated instrument can approach the investors extensively for the resource mobilization using the press media. Investors in different strata of the society could be attracted by higher rated instrument as the investors understands the degree of certainty about timely payment of interest and principal on a debt instrument with better rating.

Rating as marketing tool:

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

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

Motivation for growth: Rating provides motivation to the company for growth as the promoters feel confident in their own efforts and are encouraged to undertake expansion of their operations or new projects. With better image created through higher credit rating the company can mobilize funds from public and instructions or banks from self-assessment of its own status, which is subject to self-discipline and self-improvement, it can perceive and avoid sickness. Unknown issuer: Credit rating provides recognition to a relatively unknown issuer while entering into the market through wider investor base who rely on rating grade rather than on name recognition. Benefits to brokers and financial intermediaries: Highly rated instruments put the brokers at an advantage to make less effort in studying the companys credit position to convince their clients to select an investment proposal. This enables brokers and other financial inter-mediaries to save time, energy,

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costs, and man-power in convincing their clients about investment in any particular instrument.

1.1.13 Credit Rating as a tool for Credit risk management in Banks

A simple way to evaluate credit risk is to think in terms of past credit worthiness. Apart from the big credit rating agencies like Moodys, Standard & Poor or Fitch-IBCA, there are the databases compiled by Equifax and CCN on people whose creditworthiness is frequently queried by companies and banks.16 CRISIL believes that for radically improving credit risk management, the use of better tools and techniques needs to be complemented by improved information systems, redesigned organizational structures and processes, skill up gradation and most of all, the willingness and ability to adapt attitudes and organizational cultures to suit the changing environment. The RBI guidelines for risk rating on credit risk management are as: Set up comprehensive risk scoring system (6 to 8 point scale) Clearly define rating thresholds. Periodic (half yearly) review of ratings Map rating migrations to estimate expected loss. For purpose of better control, the RBI study group (Tandon Committee) has also suggested a system of borrower classification in each bank within a credit rating scale. The study group has suggested a five point-point scale in which borrowers could be classified as excellent, good, average, Below-Average or Unsatisfactory: an alphabetical range would do equally well. Such a system of classification according to credit risk, which results for periodic review will facilitate easy identification of the borrower whose affair require to be watched with more than ordinary care. Moreover,

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such classification will be advantageous for the formulation of a rational base for fixing the rates of interest according to the credit rating of the borrower. A customer who is given the finest credit rating may be given the lowest lending rate of the bank. On the other hand, a customer who is rated as a poor risk, will have to pay the worst interest rate. In such a case the bank should take appropriate action to improve the quality of loan and lessen the banks exposure. The recommendation of the study group have been, by & large, accepted by the Reserve Bank. Banks have, therefore accepted the suggested procedure as a regular part of their follow-up machinery. A procedural consideration will have to do how management chooses to deal with loans graded anything less than satisfactory, that is, those that are classified below average or unsatisfactory. In effect, the entire administration of a substandard loan should be shared or regularly reviewed with management. Rating Industry Performance Surprisingly, the largest wealth creating sectors are the industrials-oil & gas, utilities, transportation, financial services, and metals & mining. On the other hand, growth oriented sectors like leisure, telecom, and FMCGs have destroyed shareholders wealth. Moreover wealth-creating sectors have created more wealth than the growthoriented sectors. Role of Rating Agencies in Capital Market The capital and financial markets in developing countries are remarkable for their lack of sophistication. Apart from a few stock exchanges and government-appointed regulators, there arent many reliable intermediaries like Credit rating agencies, investment analysts, merchant bankers, or venture capital firms. Credit rating agencies have played an important role in the capital markets for almost a century by providing analytic opinions to investors on the ability and willingness of issuers to make timely payments on debt instruments over the life of those instruments. Issuers pay for the ratings in order to lower the cost of and increase their 63

access to capital. Investors trust the agencies impartiality and quality, and rely on the ratings.

1.1.14 Limitations of Credit Rating System in India

(1) The first problem of Credit Rating System relates to the rating symbols. Sometimes, rating symbols according to the tenure of the instrument and not by the instruments characteristics creates confusion. For example the instruments like Fixed Deposits, Non Convertible Debentures or Commercial papers are rated by ICRA on the basis of their maturity period, them will be given the same rating by ICRA.But on the other hand CRISIL provides rating symbols in accordance with the characteristics of instrument. For example, CRISIL prefix F to the rating for Fixed Deposits. This problem of assigning rating symbols cause confusion among treasury managers and investors who otherwise can determine the product or the instrument on the instrument on seeing the rating. (2) The rating agencies do not perform an audit and they rely only on the information provided by the issuer of the instrument. If the information provided is inaccurate or incomplete, the ratings process is compromised. Therefore, ultimately, this kind of rating will not reflect the true picture behind the issuance of security or in other words, it will not assess the true creditworthiness of the issuer. (3) A Credit Rating provides only guidance to the investors and creditors in determining the risk associated with a instrument. It does not recommend buying selling a particular security because it does not take into account factors like: market prices and personal risk preferences, which might influence investors decision. So apart from Credit Rating, investors should analyze all those factors depending on his proposed investment decision. (4) Sometimes, certain instrument of a specific company is provided lower rating by a rating agency. Now the company has an incentive to go around for the best possible rating by compromising the authenticity of the rating process itself.

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(5) Some companies use Credit Rating as a tool to cheat the investors. They get rating done by more then one rating agency and publish only that rating which reflects highest safely. But this published rating may not be true which can mislead investors decision.23 (6) Conflict between the two rating agencies can be happen. E.g. IDBI Bank has been upgraded to AA+ from A on account of the merger with Industrial Development Bank of India (IDBI), said Crisil. Meanwhile, Icra has placed IDBI Bank under rating watch with positive implications. The agency said that the rating action takes into account the announcement of the in-principle approval of the merger of the IDBI Bank with IDBI. The rating agency is in the process of evaluating the impact of the merger and would announce its final view on the outstanding rating after completion of the merger, an Icra official said. The rating agency is in the process of evaluating the impact of the merger and would announce its final view on the outstanding rating after completion of the merger said an official with the rating agency. Agency has also assigned outstanding ratings of LAA, MAA+ and A1+ to IDBIs long-term, medium-term and short-term debt plans. Now it can create controversy between the two rating agency if the ratings of the bank varies.24 (7) Ratings volatility The most important issue arising in the present turmoil is do rating agencies need the quasi government authority of inside access at all as rating agencies access to inside access at all as rating agencies access to inside information did not help them anticipate the financial information is essential to understanding company creditworthiness, it is not helpful to detect fraud. It is not economically viable for rating agencies to act as guarantors of fraud. Financial instruments are increasingly designed solely to carry a particular rating, not the other way round. The effect is to discourage agencies from changing ratings on objective grounds until it is too late. Further, though companies tend to give credit rating agencies access to confidential documents in general

23

Bhalla VK(2001), Investment Management S. Chand and Co. Ltd. New Delhi 8th edition 2001.p 136-

137
24

Sowdeepti(2004), Rating volatility titled financial services rating agencies inducing competition,

Chartered Financial Analyst, Vol. X, Issue 1, p.49

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to justify the highest possible credit rating, there is no requirement that they divulge everything.

1.1.15 Evaluation of Ratings

In evaluation and monitoring ratings, both qualitative and quantitative criteria are employed. The methodology involves an analysis of the past performance of the company and an assessment of its future prospects which involves judgment of the companys competitive position and evaluation of its management and strategies. In order to eliminate subjectivity, a multi-layered decision-making process is applied in assigning a rating which ensures that no single individual decides on a rating. Table 1.7: Key Factors considered in the Evaluation of Ratings

Management Evaluation

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Track record of the management; planning and control systems; depth of managerial talent; succession plans. Evaluation of capacity to overcome adverse situations. Goals, philosophy and strategies.25

1.1 Rationale of Study

Main purpose of this study is to examine the activities of Credit rating agencies in India and their influence on the investment decisions, also, to determine the awareness and trustworthiness of Credit rating agencies among the investors and brokers. Credit rating is an opinion expressed by an independent professional organization, after making a detailed study of all relevant factors. Credit Rating assesses the credit worthiness of an individual, a corporation or even a country. It is basically calculated from the financial history and current assets and liabilities. It tells a lender or an investor the probability of the subject to pay back a loan. This study can help the issuers of debt instrument to price their issues correctly and to reach out to new investors.

1.3 Objectives of the Study

a) To examine the awareness of Credit Rating Agencies among the investors and its effect on various investment decisions. b) To examine the trustworthiness of Credit Rating Agencies among the investors and its effect on various investment decisions. c) To study the impact of Credit Rating Agencies activities on the Risk Management. d) To study the satisfaction level of investors with the working of Credit Rating Agencies and its effect on various investment decisions.

25

http://www.adbi.org/publications/ Qualitative and quantitative risk. Dated: 8/18/2004.

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CHAPTER 2 REVIEW OF LITERATURE

In this chapter the review of literature related to the credit rating agencies and there operations will be highlighted. The development of research on emotional intelligence (EI) over the years and the evidence of its impact on the work stress among the employees in insurance sector will be reviewed Madhav Godbole (1998), the purpose of this paper was to ensure that investors and the public at large are not misled by the credit rating agencies' glowing certificates. The increase in fraud, waste and corruption in government, of which everyone complaints, is a direct result of the absurd and unworkable arrangement for audit and accounts, in particular the heavy concentration of work with the comptroller and auditor general (CAG) which has destroyed accountability in government. Arturo Estrella et.al. (2000), this report contains background information about credit ratings and complementary sources of credit quality information, which may be helpful to those revising the proposed accord and more generally to those interested in the use of credit ratings in regulation. The focus of the study is on factual information, rather than on subjective assessments or explicit policy recommendations. The material may be classified into four basic categories: (1) facts about the credit ratings industry, such as lists of rating agencies, the extent of their

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activities, market practices, etc., (2) factual information about alternative sources of credit quality information, (3) summaries of the results of earlier research on credit ratings from various sources, including academics, supervisory institutions, and rating agencies, and (4) empirical work performed specifically for this study, intended to fill in a few gaps in the existing empirical literature. M K Datar (2000), the study shows that the role of credit rating agencies in the US credit crisis by transferring risks through new structured products has attracted much attention, especially since rating downgrades of these products were much faster than the other products. Improved disclosures in rating methodologies and the performance of rating models, avoiding conflict of interest situations, relevance of issuer to pay models and dealing with the oligopolistic nature of the industry are some of the lines along which new regulatory efforts could be organized. A clear articulation of the conditions for the use of ratings of new products by different investor classes may improve regulatory efficiency. Amitabh Kundu (2001), this paper shows the emergence, politics and economics of the credit rating agencies in India. With the financial markets becoming global and competitive and the borrowers base increasingly diversified, investors and regulators prefer to rely on the opinion of these institutions for their decisions. The rating of the debt instruments of the corporate bodies and municipal enterprises are currently being done by institutions like Information and Credit Rating Agency of India (ICRA), Credit Analysis and Research (CARE) and Credit Rating Information Services of India Limited (CRISIL), etc. The case discussed in this paper includes the information regarding the norms and procedures of CRISILs functioning has been available for sometimes now, often the discussion on the future of credit rating in the context of urban development takes place largely based on the experience of this agency. Avinash D Persaud (2007), the paper discusses the flaws and regulation criterions in credit rating. The paper shows that One fundamental flaw with the originate, rate

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and relocate model of banking is that credit risks were being transferred, in part, to traders of risk who did not intend to hold on to these instruments for a long time and so had little incentive to invest in learning more about them. Francois Coppens, Fernando Gonzalez and Gerhard Winkler (2007), the aims of this paper are twofold: first, the attempt is made to express the threshold of a single A rating as issued by major international rating agencies in terms of annualized probabilities of default. The data from Standard & Poors and Moodys was used to construct confidence intervals for the level of probability of default to be associated with the single A rating. The focus on the single A rating level is not accidental, as this is the credit quality level at which the Euro system considers financial assets to be eligible collateral for its monetary policy operations. The second aim is to review various existing validation models for the probability of default which enable the analyst to check the ability of credit assessment systems to forecast future default events. Within this context the paper proposes a simple mechanism for the comparison of the performance of major rating agencies and that of other credit assessment systems, such as the internal ratings-based systems of commercial banks. This is done to provide a simple validation yardstick to help in the monitoring of the performance of the different credit assessment systems participating in the assessment of eligible collateral underlying Euro system monetary policy operations. Uwe Blaurock (2007), the study shows that credit rating is now attracting worldwide legal interest. Whilst, in some legal systems, transparent requirements for attaining recognition status have been published, other legal systems do not have such requirements. However, in almost all systems, only those agencies that can show large market acceptance are recognized. In one case, this is elevated to an express criterion and in other cases, it is applied as an indicator of the reliability and trustworthiness of the agency. The competent authorities do not appear to want to do away with this criterion as a guarantee of high professional standards and financial independence, despite the damaging effects on competition.

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Marwan Elkhoury (2008), this paper outlines the role of credit rating agencies and their potential impact on developing countries. Credit rating agencies (CRAs) play key role in financial markets by helping to reduce the informative asymmetry between lenders and investors, on one side, and issuers on the other side, about the creditworthiness of companies or countries. Ratings tend to be sticky, lagging markets, and overreact when they do change. In making their ratings, CRAs analyse public and non-public financial and accounting data as well as information about economic and political factors that may affect the ability and willingness of a government or firms to meet their obligations in a timely manner. Promotion of competition may require policy action at national and international level to encourage the establishment of new agencies and to channel business generated by new regulatory requirements in their direction. M Jayadev (2008), this paper presents an analysis of the current status of internal credit rating practices of Indian banks. The survey reveals that the components of internal rating systems, their architecture, and operation differ substantially across banks. The range of grades and risks associated with each grade vary across banks analysed. This implies that lending decisions may vary across banks. There are differences among the rating systems of various banks. This paper presents a set of actions to improve the quality of internal rating models of Indian banks. Charles W. Calomiris and Joseph R. Mason(2009), in this paper the Policymakers and academic critics have identified conflicts of interest in the rating industry that have led to poor ratings quality, harming investors who purchase over- or miss-rated investments. Without appropriate regulatory interventions the perverse incentives that allow entrenched credit rating agencies and corporate governance rating agencies to dominate their respective industries will persist. Because of the market power in existing industry alliances, competitive pressures alone will not be sufficient to overturn these bad equilibrium. In Section II, they reviewed on theoretical arguments about the sources of low-quality ratings, placing corporate governance ratings and credit ratings within the broader context of the literature on

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ratings quality problems and conflicts of interest in the production of ratings. In Section III, described the empirical evidence on the corporate governance rating industry. Section IV considers appropriate regulatory interventions that could help to restore good equilibrium in credit ratings and corporate governance ratings. Martha Lagace (2009), the purpose of this paper was to find out the impact of competition o n the ratings given by the credit rating agencies. Here the discussion is made on why the users of ratings should exercise a little caution. Credit rating agencies provide an assessment of the creditworthiness of a corporation or security, based on the issuer's quality of assets, existing liabilities, borrowing history, and overall business performance. Investors depend on the ratings to predict the likelihood of default on financial obligations and the expected repayment in the event of default. The study shows that when competition is increased among credit rating agencies, the result was less accurate ratings. Ministry of Finance Capital Markets Division (2009), This Report is in response to the direction given by the High Level Coordination Committee on Financial Markets to reflect on the inter regulatory issues emanating from the activities of Credit Rating Agencies. Accordingly, the Committee was set up with representation from all the financial sector regulators. The High level Coordination Committee on Financial Matters (HLCCFM) in its meeting decided that the legal and policy framework for regulating the activities of CRAs should be revisited in order to take a larger view of the entire policy with respect to banking, insurance and securities market. By facilitating investment decisions they can help investors in achieving a balance in the risk return profile and at the same time assist firms in accessing capital at low cost. CRAs can thus potentially help to allocate capital efficiently across all sectors of the economy by pricing risk appropriately. Piero Cinquegrana (2009), this policy brief argues that credit ratings are a quasipublic good, and investors and financial markets regulators need an independent assessment of the credit-worthiness of an issuing entity because of information

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asymmetries and principal agent problems. In light of the high volatility of marketbased measures and the failure of internal risk management, private CRAs are best fit for purpose. However, natural barriers of entry in the rating business and conflicts of interest have led to an inflation of ratings and deterioration in their quality. It would thus appear that CRAs need closer supervision. While certainly burdensome and likely to raise barriers of entry, the European Commission's proposal seems to be the most sensible solution given the circumstances. Market discipline based on competition and transparency as envisioned in the US will lead to a weak surveillance regime, while leaving the regulatory license intact. Crisils Press release (2010), this Press Release is transmitted to show that how the damage to the micro finance institutions can affect the rural poor. CRISIL has placed its outstanding ratings on the debt instruments of 12 microfinance institutions (MFIs) on Rating Watch with Negative Implications. The paper shows that how the implementation of the Andhra Pradesh (Andhra) ordinance has triggered a chain of events that can permanently damage the business models of MFIs, by impairing their growth, asset quality, profitability, and capital-raising ability.

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CHAPTER 3 RESEARCH METHODOLOGY

The lifeblood of business and commerce in the modern world is information. The ability to gather, analyze, evaluate, present and utilize information is therefore is a vital skill for the manager of today. It is well known fact that the most important step in research process is to the problems choose for investigation, because a problem well defined is half solved. A questionnaire was designed major emphasis of which was gathering new ideas or insight so as to determine and bind out solution to the problems.

3.1 Sample Design

For carrying out any research or study on any subject it is very difficult to cover even 10% of the total population. Therefore the sample size has to be decided for a meaningful conclusion. For designing the sample size, it was thought proper to cover a very small percentage of population in various age groups. The method used for sample technique was non-probability convenience sampling method. This method is used because it is known previously as to whether a particular person will be asked to fill the questionnaire. Convenient sampling is used because only those people will be asked to fill the questionnaires that were easily accessible and available to the researcher.

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3.2 Scaling technique

The scaling technique is used to analyses the data collected from the survey. By scaling we mean the process of assigning numbers to objects or observation, the levels of measurement being a function of the rules under which the numbers are assigned. The research study is based on the close-ended questionnaire. The analysis is to be done on the basis of non-comparative scaling. In non-comparative scaling, respondents need to evaluate a single object. Their evaluation is independent of the other object which the researcher is studying. The scale used is Likert Scale and Guttmann Scaling.

3.3 Tools and Techniques

This research will adopt a Descriptive Research Design, which involves answering questions that start with words like which, how, what etc. The data collection in a descriptive research involves structured questionnaires, with a question having a number of options to choose from. The data collected is usually expected to yield a specific characteristic of a specific population. Gill & Johnson (1991), A descriptive survey is concerned primarily with addressing the particular characteristic of a specific population of subjects, either at a fixed point in time or at varying times for comparative purposes. Furthermore, the collected data is presented in the form of bar codes or charts, and interpreted to form the conclusions. The research will be carried out in the form of structured as well as unstructured questionnaires. The research study will be based on the close-ended questionnaire. The unstructured questionnaire will be a part of the qualitative research, which is expected to yield some common factors that consumers report to have affected them. Out of these factors, the most prominent factors will be chosen, and a quantitative research will be conducted using those factors. The quantitative survey results will be in the form of a major factors which has been recorded to have affected the investment decisions of the investors and brokers.

3.4 Data Collection

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To achieve at some fruitful results the task of data collection begins after a research problem has been defined. Being a Descriptive Research, the researcher will adopt the Survey Strategy to collect primary data, keeping in view the emphasis on description of consumer behavior involved. The survey strategy allows the researcher to answer questions like what, who, how much etc. which is why it is most appropriate for this research, keeping in view the research question already mentioned. There are two ways to collect the data, these are: Primary data Secondary data Primary Data: - The primary data are those which are collected afresh and for the first, and thus happened to be original in character. The primary data is collected from survey and by making the use of questionnaires. Secondary Data: - The secondary data on the other hand, are those which have already been collected by someone else and which have already been passed through the statistical process. The secondary data collected from the annual reports, pamphlets, magazines, broachers, newspapers etc. Data is collected from primary sources including investors and brokers: Population: - All Investors, All Brokers & Sub Brokers in northern India. Samples:- Some Investors, Brokers & Sub Brokers are randomly chosen from the population Sample Size :- 60 Sampling Procedure: -Non-probability convenience sampling.

3.5Data Analysis
The data will be analyzed in two ways- individual analysis of responses to different questions and comparative analysis using co-relation between responses of different questions. The tool used for the comparative data analysis is Pearson Corelation and is calculated with help of SPSS software. The tool is helpful in finding the validity and reliability of the data. Also helps in finding the co-relation and regression 76

analysis. These numbers measure the strength and direction of the linear relationship between the two variables. The correlation coefficient can range from -1 to +1, with -1 indicating a perfect negative correlation, +1 indicating a perfect positive correlation, and 0 indicating no correlation at all.

CHAPTER 4 RESULTS AND DISCUSSIONS

The aim of this section is to analyze and assess the data obtained through primary research (Qualitative & Quantitative). This section will establish the accomplishment of research objectives, through data analysis. Besides, this section will also throw light on other findings, which were achieved through this research. The data was collected through qualitative and quantitative surveys, both of which were self-administered ones.

1.1

Individual Data Analysis and Interpretation

1. How many credit rating agencies listed below are you aware of? Table 4.1 Responses to awareness of Credit rating Agencies Multiple Responses Percentage CRISIL 41 68.33 CARE 16 26.66 ICRA 17 28.33 Duff & Phelps 5 83.33
Credit R atingAg enciesK now to R pondents n es
NO Respondents .of

68.33% 26.66% C IS R IL C ARE

Ag encies

Percentag e 28.33% IC A R 8.33% Duff & phelps

Figure 4.1 Awareness about different Credit Rating Agencies 77

From fig. 4.1 we can see that most of the people are aware of CRISIL. But the awareness and knowledge about other CRAs is less among the investors as compared to CARE, ICRA and Duff &Phelps. 2. Are you aware of credit rating agencies with their rating symbols? Table 4.2 Responses to Awareness about Credit Rating Agencies Symbols Yes 43 No 17
Aw renes About CRsym a s bols
80.00% 60.00% 40.00% 20.00% 0.00% YE S NO 28.33% NO of R pondents es 71.67%

Figure 4.2 Awareness about Credit Rating Symbols The majority of the investors can recognize credit rating agency from its symbols. As shown in the table and chart i.e.71.33% investors says yes. While only 17investors says no. 3. Do you trust credit rating agencies? Table 4.3 Responses to trust on Credit Rating Agencies Yes No

46 14

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Trust O C n RAs
80.00 % 60.00 % 40.00 % 20.00 % 0.00 % Y ES NO 23.33% NO of Resp d ts on en 7 6.67%

Figure 4.3 Trust on Credit Rating Agencies The majority of the investors and brokers have trust on credit rating agency i.e. 76.67% investors says they trust on credit rating and 23.33% investors says they dont have trust on credit rating. 4. In which of these securities you prefer to invest your money? Table 4.4 Responses to Preferences of investment Multiple Percentage Responses 80 Shares 48 15 Debentures 9 18.33 Bonds 11 Government 71.66 Securities 43

W here youP refer to in t ves

NO. of res pondents

100% 80% 60% 40% 20% 0%

80% 15% Debentures sha res 18% Bonds

71.66% Governm ent securites

NO . Of respondents

s ecurities

Figure 4.4 Preferences in Investment

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The above table and chart shows that 80 per cent of respondents invest in shares while 71.66 per cent of respondents invest in debenture frequently and rest invest in bonds. 5. How occasionally do you invest in shares and debentures? Table 4.5 Responses to frequency of investment in shares and debentures Very Frequently 44 Frequently 9 Rarely 7

F requency of Inves ent in S tm haresand debentures

80.00% 70.00% 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00%

NOof respondents

73.33% 15% Very F requently F requently

NO of respondents .

11.67% Rarely

Figure 4.5 Frequency of Investment in shares and debentures The above table and chart shows that 73.33% investors invest in share and debenture frequently while 15% respondents invest in share and debenture frequently and rest are partly and not invest in share and debentures. 6. In which of these financial Institutions you prefer to invest your money? Table 4.6 Responses to preference of investment in financial institutions Percentage Multiple Responses Commercial Banks 32 53.33 Insurance Companies 23 38.33 Mutual Funds 41 68.33 Government Securities 24 40 Other FI's 13 21.66

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Figure 4.6 Preferences of Investment in Various Financial Institutions The above fig 4.6 shows that most of the respondents prefer to invest in mutual funds i.e. 68.33% of respondents and not invest in share and debentures. 7. Does your investment decision get affected by rating given to the instrument by credit rating agencies? Table 4.7 Responses to ratings influencing investment decision Yes 21 No 39
R tingInfluencingInvestm a ent
70% 60% 50% 40% 30% 20% 10% 0%

NO of resp d ts on en

65 % 35%

NO of respon en d ts

Y ES

NO

Figure 4.7 Ratings influencing Investment Decisions The majority of the investors do not made their investment decision on the rating given to the instrument by credit rating agencies. As shown in fig.4.7 i.e.65% investors says they do not make their investment based. On rating .While only 35% investors make their investment based on rating. 8. Are you satisfied with the working and rating of Credit Rating Agencies in India?
Table 4.8 Responses to Satisfaction with the working of Credit rating Agencies

Yes No

21 39

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S atisfaction With the w orkingof C RAs

70% 60% 50% 40% 30% 20% 10% 0% NO of res pondents

65% 35%

N of R pondent O es

YE S

NO

Figure 4.8 Satisfaction with the working of Credit Rating Agencies As per the results from fig. 4.8, only 21 investors are satisfied with the working of credit rating agencies. While 39said no. 9. Do you know anything about Multiple Credit Rating? Table 4.9 Responses to Multiple Credit Rating Yes 25 No 35
Multiple C redit R ating 70%
NOof res pondents

60% 50% 40% 30% 20% 10% 0% Y ES NO 42% 58% NO of res pondents

Figure 4.9 Multiple Credit Ratings From fig. 4.9 we can see that, only 25respondents know about the Multiple Credit Rating. While 35investors dont know about Multiple Credit rating.

10. Do you think Multiple Credit rating is boom to the capital market? 82

Table 4.10 Responses to Multiple credit rating boom to capital market Yes No
MCRB oomto c pita Ma et a l rk
No. of res pondents 100% 80% 60% 40% 20% 0% 23% YE S NO 77% N ofres o pondents

14 46

Figure 4.10 MCR boom to Capital Market Only 34 investors think that Multiple Credit Rating is boom to capital market. While 46said no. 11. Do you think Credit Rating Agencies prove to be an effective tool for risk management? Table 4.11 Responses to Effectiveness of CRAs in risk management Yes 45 No 15
C A effective for ris Manag ent R k em
No of res pondents 80% 60% 40% 20% 0% YE S NO 75% 25% NO of res pondents

Figure 4.11 Credit Rating Agencies effective tool for risk management Only 45 investors have the opinion that credit rating agencies will prove to be an effective tool for risk management. While 15 investors said no. 12. Do you think that it is safe for small investor to depend upon the ratings provided by the Credit Rating Agencies? Table 4.12 Responses to effects of CRAs on Small Investors 83

Yes No
C RAs affectingsm investors all
N of res O pondents 80% 60% 40% 20% 0% YE S NO 30% 70%

18 42

N O R pondents O F es

Figure 4.12 Effects of Credit Rating Agencies on Small Investors The above table and figure shows that only 18 investors have the opinion that it is safer for the small investors depending upon the rating given to the instrument by the credit rating agencies. However, 42 investors said no that it is not safer for the small investors. 13. Do you know any of these services provided by Credit Rating Agencies? Table 4.13 Responses to Credit rating Services Multiple Percenta Responses ge
Credit Rating Services Advisory Services Equity research Research and Information Services Info assistance to govt 48 9 6 22 19 80 15 10 36.66 31.66

Figure 4.13 Services provided by Credit Rating Agencies 84

It is shown from the fig. 4.13 that only one service i.e. credit rating service is recognized by most of the respondents while they have full ignorance regarding others 14. Should the rating agencies monitor the issue already rated? Table 4.14 Responses to monitoring of already rated issues
Yes No
Monitoringthe already rated is ues s
100.00% No of respondents 80.00% 60.00% 40.00% 20.00% 0.00% Y ES 76.67% 23.33% NO NOof respondents

46 14

Figure 4.14 Monitoring of already rated issues Majority of the investors i.e. 46 investors said that rating agencies should monitor the issue already rated or not. While 14 said no. 15. Do you think a good rating given to an instrument can help it sail easily in the market? Table 4.15 Responses to Help in sailing of instruments by CRAs
Yes No
S in the m ail arket
No of res pondents 100% 80% 60% 40% 20% 0% YE S 80% 20% NO NO OFR S E POND NT E S

48 12

Figure 4.15 Ratings help in sail of an instrument in Market

85

The majority of the respondents have the opinion that a good rating given to a instrument can help its easily sail in the capital market While 12 respondent said no, that this is not provide any help in its easily sail. 16. Does the introduction of Credit Rating Agencies prove conductive for capital market? Table 4.16 Responses to CRA being conductive for capital market
Yes No 21 39

CR -Conductive for capital m A arket

NO of res pondents 80% 60% 40% 20% 0% Y ES NO 68% 32% NO of res pondents

Figure 4.16 Credit Rating Agencies Conductive for capital Market Only 21 respondents said that these ratings agencies have proved conductive for the capital market, while 39 said no.

17. What are the main shortcomings of credit rating agencies in India? Table 4.17 Responses to Shortcomings of Credit rating Agencies Multiple Percenta Responses ge 51.67% Confusion created by various rating symbols 31
Rely only on information provided by issuer of the instrument

Companies publishing only the higher rated securities Conflict between ratings given by two agencies Any, Other

13 23 7

21.67% 38.33% 11.67%

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Figure 4.17 Shortcomings of Credit rating Agencies We can see from the chart that most of the respondents get confused by rating symbols of various companies. Also, some of them think that the credit rating agencies publish only the higher rated securities. One of the respondents says that a credit rating agency jacks up the share prices of certain companies. 18. What are the sources from where you get credit rating information? Table 4.18 Responses to sources of Credit rating Agencies Multiple Percentage Responses
News Paper Magazines Web-sites Personal Contacts Other Sources 42 29 16 6 15 70% 48.33% 26.66% 10% 25%

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Figure 4.18 Sources of Credit Rating Agencies Information Most of the respondents says that the sources of information regarding the credit rating is are news papers (i.e. 70%) and magazines (48.33). While 26.6 % of the sample also uses the web-sites to the information regarding credit agencies. Some Respondents say that TV is also one of the sources of getting information about the ratings.

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4.2 Comparative Data Analysis and Interpretation

The software used for the comparative data analysis is SPSS. The tool is helpful in finding the validity and reliability of the data. Also helps in finding the co-relation and regression analysis. Here we have used Pearsons Correlation to find out the relation between various variables and to find out how much they affect each other. 1. Awareness of Credit rating Agencies with their Symbols and Trust on Credit Rating Agencies Table 4.19 Descriptive Statistics of Awareness and Trust Mean Std. N Deviation 1.717 0.454 60 Awareness about CRA symbols 1.233 0.427 60 Trust on CRAs Table 4.20 Correlation between Awareness and Trust Awareness about CRA symbols 1 Awareness about CRA symbols Pearson Correlation Sig. (2-tailed) 60 N 0.172 Trust on CRAs Pearson Correlation 0.189 Sig. (2-tailed) 60 N As we can see from the table 4.19 that more people are aware of CRAs with their symbols but less people trust CRAs. This can be seen from the values of mean i.e. 1.717 and 1.233 of Awareness about CRAs with their symbols and Trust on CRAs respectively. Also, from table 4.20 we observe that Pearsons correlation coefficient of Awareness and Trust is 0.172 which shows that they are not highly correlated i.e. it is not necessary that people who are aware of CRAs with their symbols also trust the CRA ratings.

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2. Awareness and Investment Decision Table 4.21 Descriptive Statistics of Awareness and Investment Decision Mean Std. N Deviation Awareness about CRA symbols Investment Decision 1.717 1.717 0.454 0.454 60 60

Table 4.22 Correlation between Awareness and Investment Decision Awareness about CRA symbols Awareness about CRA symbols Pearson Correlation Sig. (2-tailed) N Pearson Correlation Sig. (2-tailed) N 1 60 0.754** 0.000 60

Investment Decision

**. Correlation is significant at the 0.01 level (2-tailed). As we can see from the table 4.21 that number of people who are aware of CRAs with their symbols is same to the number of people whose Investment Decision get affected by CRA ratings. Also, from table 4.22 we observe that Pearsons correlation coefficient of Awareness and Investment Decision is 0.754 which shows that they are highly correlated i.e. investment decisions are affected positively with the awareness of CRAs with their symbols. More the awareness among investors more their investment decision will be affected. 3. Awareness and Satisfaction Table 4.23 Descriptive Statistics of Awareness and Satisfaction Mean Std. N Deviation Awareness about CRA symbols Satisfaction with the working of CRAs 1.717 1.633 0.454 0.486 60 60

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Table 4.24 Correlation between Awareness and Satisfaction Awareness about CRA symbols Awareness about CRA symbols Pearson Correlation Sig. (2-tailed) N Pearson Correlation Sig. (2-tailed) N 1 60 0.596* 0.000 60

Satisfaction with the working of CRAs

*Correlation is significant at the 0.01 level (2-tailed). As we can see from the table 4.23 that more number of people are aware of CRAs with their symbols as compared to the number of people who are satisfied with the working of CRAs. The difference is not very high, almost same i.e. 1.717 and 1.633 respectively. Also, from table 4.24 we observe that Pearsons correlation coefficient of Awareness and Satisfaction is 0.596 which shows that they are positively correlated i.e. More the awareness among investors more are they satisfied. 4. Awareness and Risk Management Table 4.25 Descriptive Statistics of Awareness and Risk Management Mean Std. N Deviation Awareness about CRA symbols Risk Management 1.717 1.250 0.454 0.437 60 60

Table 4.26 Correlation between Awareness and Risk Management Awareness about CRA symbols Awareness about CRA 1 symbols Pearson Correlation Sig. (2-tailed) 60 N 0.107 Risk Management Pearson Correlation 0.417 Sig. (2-tailed) 60 N

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Here we can see from table 4.25 that there are more investors who are aware of CRAs with their symbols than they think it will act as an effective tool for risk management. Also, looking from table 4.26 the value of Pearsons Co-relation comes out to be 0.107 only which shows that our variables were not strongly correlated. This shows that awareness does influence much the risk management. 5. Awareness and Safety of Small Investors Table 4.27 Descriptive Statistics of Awareness and Safety Mean Std. N Deviation Awareness about CRA symbols Safety for Small Investors 1.717 1.700 0.454 0.462 60 60

Table 4.28 Correlation between Awareness and Safety Awareness about CRA symbols Awareness about CRA symbols Pearson Correlation Sig. (2-tailed) N Pearson Correlation Sig. (2-tailed) N 1 60 0.718** 0.000 60

Safety for Small Investors

**. Correlation is significant at the 0.01 level (2-tailed). As we can see from the table 4.27 that number of people who are aware of CRAs with their symbols is same to the number of people think it safe for small investors to depend on the ratings given by CRAs. Also, from table4.28 we observe that Pearsons correlation coefficient of Awareness and Investment Decision is 0.718 which shows that they are highly correlated.

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6. Awareness and Conductivity Table 4.29 Descriptive Statistics of Awareness and Conductivity Mean Std. Deviation N Awareness about CRA 1.717 0.454 symbols 60 Conductivity for capital 1.683 0.469 market 60 Table 4.30 Correlation between Awareness and Conductivity Awareness about CRA symbols 1 Pearson Correlation Sig. (2-tailed) 60 N 0.049 Conductivity for capital market Pearson Correlation 0.710 Sig. (2-tailed) 60 N As we can see from the table 4.29 that number of people who are aware of CRAs Awareness about CRA symbols with their symbols is same to the number of people whose Investment Decision gets affected by CRA ratings. Also, from table 4.30 we observe that Pearsons correlation coefficient of Awareness and Investment Decision is 0.049 which shows that they are not correlated i.e. both are totally different. They do not depend on each other, Awareness about CRAs and CRAs proved to be conductive for market are almost independent of each other. 7. Trust and Investment Decision Table 4.31 Descriptive Statistics of Trust and Investment decision Mean Std. Deviation N Trust on CRAs Investment Decision 1.233 1.717 0.427 0.454 60 60

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Table 4.32 Correlation between Trust and Investment Decision Trust on CRAs Trust on CRAs Pearson Correlation Sig. (2-tailed) N Pearson Correlation Sig. (2-tailed) N 1 60 0.347** 0.007 60

Investment Decision

**. Correlation is significant at the 0.01 level (2-tailed). This means that there is a weak relationship between the two variables. This means that changes in one variable are not correlated with changes in the second variable. From table 4.32 we observe that Pearsons correlation coefficient of Trust on CRAs and Investment Decision is 0.347 which shows that they are very less correlated i.e. they do not depend on each other, Trust on CRAs and Investment decisions depends less on each other. But looking at the significance level which is less than 0.05 we can say that those who trust CRAs also depends on CRAs to make their decisions regarding investment. 8. Trust and Satisfaction Table 4.33 Descriptive Statistics of Trust and Satisfaction Mean Std. N Deviation Trust on CRAs Satisfaction with the working of CRAs 1.233 1.633 0.427 60 0.486 60

Table 4.34 Correlation between Trust and Satisfaction Trust on CRAs Trust on CRAs Pearson Correlation Sig. (2-tailed) N Pearson Correlation Sig. (2-tailed) N 1 60 0.338** 0.008 60

Satisfaction with the working of CRAs

**. Correlation is significant at the 0.01 level (2-tailed).

94

This means that there is a weak relationship between the two variables. This means that changes in one variable are not correlated with changes in the second variable. From table 4.34 we observe that Pearsons correlation coefficient of Trust on CRAs and Satisfaction with the working of CRAs is 0.338 which shows that they are very less correlated i.e. they do not depend on each other, Trust on CRAs and Satisfaction with the working of CRAs depends less on each other. But looking at the significance level which is less than 0.05 we can say that those who trust CRAs are also satisfied with the working of CRAs. 9. Trust and Risk Management Table 4.35 Descriptive Statistics of Trust and Risk Management Mean Std. Deviation N Trust on CRAs Risk Management 1.233 1.250 0.427 0.437 60 60

Table 4.36 Correlation between Trust and Risk Management Trust on CRAs Trust on CRAs Pearson Correlation Sig. (2-tailed) N Pearson Correlation Sig. (2-tailed) N 1 60 0.956** 0.000 60

Risk Management

**. Correlation is significant at the 0.01 level (2-tailed). Almost same number of respondents trusts CRAs and thinks it an effective tool for risk management. By applying the Pearsons co-relation, we analyzed that it is the trust on the Credit Rating Agencies that proves them an effective tool for risk management. In our study, the value is 0.956 at a significant level of 0.01.

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10. Trust and safety of small Investors Table 4.37 Descriptive Statistics of Trust and Safety Mean Std. N Deviation Trust on CRAs Safety for Small Investors 1.233 1.700 0.427 0.462 60 60

Table 4.38 Correlation between Trust and Safety Trust on CRAs Trust on CRAs Pearson Correlation Sig. (2-tailed) N Pearson Correlation Sig. (2-tailed) N 1 60 0.275* 0.033 60

Safety for Small Investors

*. Correlation is significant at the 0.05 level (2-tailed). The result shows that there is a weak relationship between two variables. This means that changes in one variable are not correlated with changes in the second variable. From table 4.38 we observe that Pearsons correlation coefficient of Trust on CRAs and Safety for Small Investors is 0.275 which shows that they are very less correlated i.e. they do not depend on each other, Trust on CRAs and Safety for Small Investors depends less on each other. But looking at the significance level which is less than 0.05 we can say that those who trust CRAs are also think it safe for small Investors to depend on the ratings given by CRAs. 11. Investment Decision and satisfaction Table 4.39 Descriptive Statistics of Investment Decision and Satisfaction Mean Std. N Deviation Investment Decision Satisfaction with the working of CRAs 1.717 1.633 0.454 0.486 60 60

Table 4.40 Correlation between Investment Decision and Satisfaction 96

Investment Decision Investment Decision Pearson Correlation Sig. (2-tailed) N Pearson Correlation Sig. (2-tailed) N 1 60 0.519** 0.000 60

Satisfaction with the working of CRAs

**. Correlation is significant at the 0.01 level (2-tailed). As per table 4.40 we can see that there is a positive relation between investment Decision and satisfaction with the working of CRAs. Significance level is below 0.05 which shows that the investment decision of investors depends on their satisfaction with the working of CRAs. 12. Investment Decision and Risk Management Table 4.41 Descriptive Statistics of Investment Decision and Risk management Mean Std. N Deviation Investment Decision Risk Management 1.717 1.250 0.454 0.437 60 60

Table 4.42 Correlation between Investment Decision and Risk Management Investment Decision Investment Decision Pearson Correlation Sig. (2-tailed) N Pearson Correlation Sig. (2-tailed) N 1 60 0.278* 0.032 60

Risk Management

*. Correlation is significant at the 0.05 level (2-tailed).

97

The results from table 4.42 show that there is a positive relation between Investment Decision and Risk Management. Significance level is below 0.05 which shows that the investment decision of those investors depends on their perception that CRAs prove to be an effective tool for risk management. 13. Investment Decision and safety of Small Investors Table 4.43 Descriptive Statistics of Investment Decision and Safety Mean Std. N Deviation Investment Decision Safety for Small Investors 1.717 1.700 0.454 0.462 60 60

Table 4.44 Correlation Investment Decision and Safety Investment Decision Investment Decision Pearson Correlation Sig. (2-tailed) N Pearson Correlation Sig. (2-tailed) N 1 60 0.799** 0.000 60

Safety for Small Investors

**. Correlation is significant at the 0.01 level (2-tailed). As we can see from the table 4.43 that number of people whose investment decision gets affected CRAs ratings is same to the number of people think it safe for small investors to depend on the ratings given by CRAs. Also, from table 4.44 we observe that Pearsons correlation coefficient of Investment Decision and safety for small investors is 0.799 which shows that they are highly correlated. Also, as the significance level is below 0.05 which shows that the investors whose investment decision depends on CRAs also thinks it safe for small investors to depend on CRA ratings.

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14. Investment Decision and Conductivity Table 4.45 Descriptive Statistics of Investment Decision and Conductivity Mean Std. N Deviation Investment Decision Conductivity for capital market 1.717 1.683 0.454 0.469 60 60

Table 4.46 Correlation between Investment Decision and Conductivity Investment Decision Investment Decision Pearson Correlation Sig. (2-tailed) N 1 60

Conductivity for capital market

0.049 Pearson Correlation 0.710 Sig. (2-tailed) 60 N Looking at the results from table 4.46 we can see there exist a weak relationship

between your two variables. This means that changes in one variable are not correlated with changes in the second variable. Those investors whose investment decision gets affected by CRA ratings dont think CRA Ratings proven to be conductive for capital market. 15. Satisfaction and Risk Management Table 4.47 Descriptive Statistics of Satisfaction and Risk Management Mean Std. N Deviation Satisfaction with the working of CRAs Risk Management 1.633 1.250 0.486 0.437 60 60

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Table 4.48 Correlation between Satisfaction and Risk Management Satisfaction with the working of CRAs Satisfaction with the working of CRAs Pearson Correlation Sig. (2-tailed) N Pearson Correlation Sig. (2-tailed) N 1 60 0.280* 0.031 60

Risk Management

*. Correlation is significant at the 0.05 level (2-tailed). The result of table 4.48 shows that there is a positive relation between Satisfaction with the working of CRAs and Risk Management. Significance level is below 0.05 which shows that those investors who are satisfied with the working of CRAs also thinks CRAs to be an effective tool for risk management. 16. Satisfaction and Safety of Small Investors Table 4.49 Descriptive Statistics of Satisfaction and Safety Mean Std. N Deviation Satisfaction with the working of 1.633 0.486 CRAs 60 1.700 0.462 60 Safety for Small Investors Table 4.50 Correlation between Satisfaction and Safety Satisfaction with the working of CRAs Satisfaction with the working of CRAs Pearson Correlation Sig. (2-tailed) N Pearson Correlation Sig. (2-tailed) N 1 60 0.483** 0.000 60

Safety for Small Investors

**. Correlation is significant at the 0.01 level (2-tailed).

100

From that table 4.50, we can see that the value of Pearsons Correlation is 0.483 that shows there is a positive relation between Satisfaction with the working of CRAs and safety for small investors. Significance level is below 0.05 which shows that the investment decision of investors depends on their satisfaction with the working of CRAs. 17. Risk Management and Safety of Small Investors Table 4.51 Descriptive Statistics of Risk management and Safety Mean Std. Deviation N Risk Management Safety for Small Investors 1.250 1.700 0.437 0.462 60 60

Table 4.52 Correlation between Risk management and Safety Risk Management Risk Management Pearson Correlation Sig. (2-tailed) N Pearson Correlation Sig. (2-tailed) N 1 60 0.210 0.107 60

Safety for Small Investors

As per the results of co-relation from table 4.52 value of co-relation is very low. This means that as one variable increases in value, the second variable also increase in value. Here risk management and safety for small investors are positively correlated. 18. Risk management and Conductivity Table 4.53 Descriptive Statistics of Risk management and Conductivity Mean Std. Deviation N Risk Management Conductivity for capital market 1.250 1.683 0.437 0.469 60 60

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Table 4.54 Correlation between Risk management and Conductivity Risk Management Risk Management Pearson Correlation Sig. (2-tailed) N Pearson Correlation Sig. (2-tailed) N 1 60 0.145 0.270 60

Conductivity for capital market

From the results of table 4.54 it can be easily seen that there is a weak relationship between two variables. This means that changes in one variable are not correlated with changes in the second variable. Here we can see that it is not necessary that if an investor or broker thinks CRA to be an effective tool for risk management then he also thinks CRAs to be conductive for capital market. The value of Pearsons Co-relation comes out to be 0.172 only which shows that our variables were not strongly correlated.

4.3 Observations and Findings

a. Pearson Correlation - These numbers measure the strength and direction of the linear relationship between the two variables. The correlation coefficient can range from -1 to +1, with -1 indicating a perfect negative correlation, +1 indicating a perfect positive correlation, and 0 indicating no correlation at all.

When Pearsons r is close to 1 By applying the Pearsons co-relation, from table 4.22 we analyzed that awareness about credit rating symbols directly affects the Investment decisions. In our study, the value is 0.754 at a significant level of 0.01. Also, it comes out of the study that the awareness about the credit rating agencies directly affects the safety of small investors. This is clear from the value of Pearsons co-relation i.e. 0.718. Another interesting fact that came out of the study from table 4.54 is that it is the trust on the Credit Rating Agencies that proves them an effective tool for risk management not 102

just the awareness about the Credit Rating Agencies ( value of Pearson co-relation is 0.956). For this reason, we can conclude that there is strong relation between risk management and trust on CRAs. When Pearsons r is close to 0 This means that there is a weak relationship between your two variables. This means that changes in one variable are not correlated with changes in the second variable. Here we can see that it is not necessary that if an investor or broker is aware about CRA then he also trusts on it. We can see table 4.22, the value of Pearsons Co-relation comes out to be 0.172 only which shows that our variables were not strongly correlated. Similar is the case with Awareness and Risk management. But the relation is somewhat weaker as the value comes out just 0.107(From table 4.26). The smallest value comes out to be 0.049 between the Awareness about CRAs and CRAs contribution for Capital market to be conductive. When Pearsons r is positive (+) This means that as one variable increases in value, the second variable also increase in value. Similarly, as one variable decreases in value, the second variable also decreases in value. This is called a positive correlation. In our example, our Pearsons r value of Awareness about CRAs comes out to be positive with Trust on CRAs (0.172), Investment Decisions (0.754), Risk Management (0.107) and Safety for Small Investors (0.718) was positive (From tables 4.2, 4.4, 4.8 and 4.10 respectively). We know this value is positive because SPSS did not put a negative sign in front of it. So, positive is the default. When Pearsons r is negative (-) This means that as one variable increases in value, the second variable decreases in value. This is called a negative correlation. In our example, Pearsons r value is negative (0.333) between the Awareness about CRAs and how good rating by CRA can help the instrument in its sail easily in the market. This means that Awareness about CRAs does not helps the instruments in their sail in the capital market.

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Sig. (2-tailed) - This is the p-value associated with the correlation. The footnote under the correlation table explains what the single and double asterisks signify. This value will tell you if there is a statistically significant correlation between your two variables. When the Sig (2-Tailed) value is greater than .05 You can conclude that there is no statistically significant correlation between your two variables. That means, increases or decreases in one variable do not significantly relate to increases or decreases in your second variable. If the Sig (2-Tailed) value is less than or equal to .05 We can conclude that there is a statistically significant correlation between your two variables. That means, increases or decreases in one variable do significantly relate to increases or decreases in your second variable. There is a significant correlation between the awareness about CRAs and their contribution in the sail of instruments in the capital market. Also, the Trust on the CRAs is significantly related to the Investment Decisions and helpful in providing a sense of safety to small investors. c. N - This is number of cases that were used in the correlation. Because we have no missing data in this data set, all correlations were based on all 60 cases in the data set. However, if some variables had missing values, the N's would be different for the different correlations.

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CHAPTER 5 SUMMARY AND CONCLUSION

This section will review the results and findings of this research, and present the conclusions based on the quantitative results obtained. The conclusions will be presented on the basis of research objectives and their findings. The study is limited to a sample size of 45 investors which include all students, institutional investors and retail investors etc. and 15 brokers and sub-brokers. 5.1 Data Collection: The research is done with the help of both Primary data and Secondary data. The primary sources include students, brokers & sub-brokers & retail investors and the secondary from internet site, newspapers, journals and books). 5.2 Analysis: The research study is based on the close-ended questionnaire. The analysis is to be done on the basis of non-comparative scaling. In non-comparative scaling, respondents need to evaluate a single object. Their evaluation is independent of the other object which the researcher is studying. The scale used is Guttman Scaling. 5.3 Conclusion From the project it is clear today most of the investors are aware of the Credit rating Agencies. The investor has the knowledge and awareness regarding credit rating agencies. They are not fully aware of all kind of services provided by the credit rating agencies and their role in debt and equity ratings. As the study shows that 68.33% of the respondents know about the CRISIL and out of 60 respondents 10% did not know anything about the credit rating agencies working in India. The investors know about Credit Rating Agencies but are not able to differentiate between them from their symbols. This can be seen easily from the fig4.2 that only 17 of

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the samples were able to differentiate the CRAs from their symbols. Despite of this about 43 of the respondents trust the CRA ratings. The majority of the investors do not made their investment decision on the rating given to the instrument by credit rating agencies. As shown in the fig.4.7.i.e. 39. While only 21 investors make their investment decisions based on rating. We can see from the fig.4.10 that 14 said yes, it helps in booming the capital market, while 46 of investors think that it does not helps in booming the capital market. As per fig. 4.11, 45 of the investors have the opinion that credit rating agencies will prove to be an effective tool for risk management, while 15 said no. However, from fig 4.12 we can see that 42 said no that it is not safer for the small investors. Only one service i.e. credit rating service is recognized by respondents while the others are not recognized well by the respondents. After analyzing, the information given by the process in the questionnaire it can be concluded that they all invest in Shares and Debentures and also in government securities agencies have the knowledge of the Credit Rating Agencies but unable to differentiate between various credit rating. At the time of rating any investment decision in any debt instrument, only few investors take put consideration of the rating given to the instrument by the different rating agencies. The respondents who have the knowledge about Credit Rating Agencies they also have the knowledge Multiple Credit Rating. Most of the Brokers only knows what this Multiple Credit Rating but they do not know whether those are helpful in booming the capital market or not. Most of the Brokers have or opinion that if the rating any country goes up or down it has a long impact on the countrys economy and the stock market.

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5.4 Scope of the Study

This study is made to find out the impacts of the Credit Rating Agencies on the investors decision and to find out awareness and trustworthiness of Credit Rating Agencies amongst the Investors and Brokers. This study can help investors to get an introduction of the various credit rating agencies in India and to study their credit rating symbols. This study can help the issuers of the debt instrument to price their issues correctly and to reach out to new investors. 5.5 Suggestions and Recommendations

There is a need for a framework to be agreed upon by all CRAs and regulators to have a standardized and operational definition of default. For a market in India, where financial literacy is at a nascent stage, multiple rating symbols could confuse the investing community. It could also result in rating inflation and foster unhealthy competition. Rating scales, brought under comparable bands, need to be hosted on the websites of SEBI, RBI, IRDA and PFRDA and also on the sites of investors associations. Some CRAs have a clear-cut policy of staying away completely from services other than credit rating. This is a healthy sign. Yet, some other agencies continue to offer services other than ratings. It is to be ensured that the registered CRA, as a corporate entity, must not engage in any services other than ratings. In the interest of unbiased judgment, it is necessary to constitute an Appeals Committee that is different from the one that was involved in the initial rating exercises. The presence of External Committee Members brings with it a whole baggage of conflict of interest. Some CRAs have demonstrated that it is possible to develop the expertise either with full time employees from the domestic CRAs or in 107

collaboration with the overseas CRAs. Alternately, External Committee members could be deployed for providing inputs, leaving the final ratings to an Internal Committee. Issuers attempt to seek informal ratings from various CRAs and pass the final rating mandate to the agency that could potentially offer the highest rating. To curb this unhealthy practice, it is necessary to come to a stage where all ratings, including unaccepted ratings, are published. Along the lines of the compulsory Internal Audit for Stock Brokers, it is found necessary to stipulate an Operational Audit to ascertain that the rating processes leave a documentary trail. This could cover details of site inspections, management meetings, rating committee meetings, dissent notes, surveillance and monitoring schedules, minutes of the appeal process. It addresses the basic issue of good housekeeping and could be performed twice in a year. Some CRAs have taken the initiative to appoint a person with the task of Quality Control, and he is involved in all rating exercises. Public Education on Usage of Ratings: There is a danger that ratings may be accepted blindly without a self-check or giving due importance to the time gap between two review dates. Ratings are not to be construed as a guarantee. This is true of all intermediaries: Merchant Bankers, Bankers, and Mutual Funds etc no one can provide a guarantee. Ratings must be one of the inputs in the decision making process. Of course, this does not absolve the responsibility of the CRAs for negligence. There is also the practice of issuers using ratings for marketing purposes exhibited on all their business literature and office stationery. There could be information gaps that arise due to factors beyond anybodys control. In line with the Risk Factors highlighted on various products, CRAs also need to mention a disclaimer on all rating announcements as well as on the website. This is to the minds of the reader (user) of Ratings to the fact that credit

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related information is dynamic and subject to changes. Rating disclosures could also mention the latest review date. It is important for the members of the public to know that the relationship of the CRA is at arms length with that of the rated entity, in letter and spirit. Hence, shareholding ownership patterns of all CRAs need to be made public. Policy on Unsolicited Ratings: There have been instances in USA where S&P and Moodys have deliberately given low ratings to various issues on an unsolicited basis. This was used as a means of arm-twisting the issuers. This is a classic instance of abuse of independence provided to CRAs. Unsolicited ratings must not be permitted, in case the CRA community makes a representation to this effect in the future. Bad governance can contaminate financial statements, and hence annul the entire credit rating exercise. It is sad to know that CRAs heavily depend on the audited financial statements and do very little to gain the maximum from crossverification from formal and informal sources. While this is a lacuna on the part of auditors and CRAs, much needs to be done on Corporate Governance, since a governance code works only on paper. It is much easier and practical for the Regulators rather than CRAs to enforce governance.

5.6 Limitations of the Study 1. The sample was collected using convenience-sampling techniques. As the result may not give an exact representation of the population. 2. Shortage of time was reason for the incomprehensiveness. 3. The respondents may have not given the true and fair information. Therefore, the result of the research is not cent per cent accurate. 4. Credit rating change infrequently. 5. Sample size or no. of respondents is less which may not represent true result of whole population.

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6. Sometimes it happens that we take a wrong sample (Sampling error). 7. The perception of respondents cannot remain constant it always changes with time. 8. There are always biases on the part of brokers and investors while filling up questionnaire due to lack of interest.

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References
Books
Bhalla VK (2001), Investment Management, S. Chand and Co. Ltd., New Delhi, 8th edition, p 132-133 Bhalla VK(2001), Investment Management S. Chand and Co. Ltd., New Delhi, 8th edition, p 133-134 Bhalla VK(2001), Investment Management S. Chand and Co. Ltd. New Delhi 8th edition 2001.p 136-137. Bhalla VK(2001), Investment Management S. Chand and Co. Ltd., New Delhi, 8th edition, p137. Chopra Monika and Gupta NK(2008), Introduction Ch. Credit Rating quoted from book Financial markets Institutions and Services, Ane Books India, New Delhi, p 237 Desai Vasant(1997), CREDIT RATING: AN INTRODUCTION, The Indian Financial System, Himalaya Publication House Delhi, p375-378 Gurusamy S(2006), Range of Services, Ch. Credit rating and Information Services of India Limited (CRISIL), Financial Markets and Institutions, Thomson Business Information India Pvt. Ltd., P288-290. Gurusamy S(2006), Range of Services, Ch. Investment Information and Credit Rating Agency of India Ltd., Financial Markets and Institutions, Thomson Business Information India Pvt. Ltd., P298-301.

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Khan MY(2003), CRISIL Ch. Credit Rating, Financial services Tata McGraw Hill Publishing Company Limited New Delhi, p16.7-16.16. Khan MY(2003), CRISIL Rating Symbols Ch. Credit Rating, Financial services Tata McGraw Hill Publishing Company Limited, New Delhi, p16.31-16.38. Khan MY(2003), ICRA Rating Symbols Credit rating, Financial services Tata McGraw Hill Publishing Company Limited New Delhi sixth edition 2003.p16.39-16.47 Khan MY(2003), Care Ch. Credit rating , Financial services Tata McGraw Hill Publishing Company Limited New Delhi sixth edition 2003.p16.24-16.25. Khan MY(2003), Rating Process Ch. Credit rating, Financial services Tata McGraw Hill Publishing Company Limited New Delhi sixth edition 2003.p16.25-16.31.

Journals and Press Releases

Blaurock Uwe(2007), Control and Responsibility of Credit rating Agencies, Electronic Journal of Comparative Law, vol. 11.3 Calomiris Charles and Mason Joseph (2009), Conflicts of Interest, Low-Quality ratings and Meaningful reform of Credit and Corporate Governance ratings Chaudhary Sumitra(2003), Sovereign Rating , Fiscal Stress And Rating Views, Financial Express Cinquegrana Riero(2009), The Reform of the Credit rating Agencies : A Comparative Perspective, No. 12 Rating watch with negative Implications, CRISIL Ratings press release 22nd November 2010, Mumbai.

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Coppens Francois, Gonzalez Fernando and Winkler Gerhard(2007), The Performance of Credit Rating Systems in the Assessment of Collateral Used in Euro-system Monetary Policy Operations, Social Science Research Network Electronic Library, No 65 Datar MK(2011), Regulation of Credit Rating Agencies: New Business Models or Stringent Regulatory Use? Economic and Political Weekly, VOL XLVI, NO. 6 Estrella Arturo et. al.(2000), Credit Rating and Complementary Sources of Credit Quality Information, No. 3 Godbole Madhav(1998), Credit Rating of States Need for a Fresh Look, Economic and Political Weekly, Vol XXXIII, No.11 Gill, J. & Johnson, P. (1991) Research methods for Managers. Liverpool: Paul Chapman Publishing Ltd. Hesse-Biber, N. &Leavy, P. (2006) The practice of qualitative research. California: Sage Publications, Inc Jayadev M(2006), Internal Credit Rating Practices of Indian Banks, Economic and Political Weekly, Vol. 41, No.11 Krishanan KP(2009), Report of the Committee on Comprehensive Regulation for Credit Rating Agencies Kundu Amitabh(2001), Politics and Economics of Credit Rating, Economic and Political Weekly, Vol. 36, No.4 Lagace Martha(2009), Why Competition may not Improve Credit rating Agencies, Harward Business School

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McNabb D. E. (2009) Research methods for political science: quantitative and qualitative methods. New York: M E Sharpe Inc. Mitchell V. & Mitchell, W. (1999) Consumer perceived risk: conceptualizations and models. European Journal of Marketing 33(1/2), 163-195. Mehta VK and Prasad Narayan(2008), Credit rating Agencies in India,

www.egyankosh.ac.in/bitstream/123456789/25902/1/Unit13.pdf Persaud D Avinash(2007), The Right and Wrong Way to Regulate Credit Rating Agencies, Economic and Political Weekly, Vol. 42, No.42 Sowdeepti(2004), Rating volatility titled financial services rating agencies inducing competition, Chartered Financial Analyst, Vol. X, Issue 1, p.49 Editors views Compulsory Rating Titled outlook a notch up, The Economic Times India Mumbai bureau Ministry of Finance, Capital market division, p17-18

Links and Websites

http://www.duffandphelps.com/aboutus/Pages/AboutDuffPhelps.aspx http://www.brickworkratings.com/scale.html www.icraindia.com/services/inves/sebi.htm, SEBI Guidelines for Rating Agency http://www.icra.com , Investment information and credit rating agency of India ltd http://www.adbi.org/publications/ Qualitative and quantitative risk. Dated: 8/18/2004.

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ANNEXURE
Questionnaire on Impact of Activities of CRAs on the Investment Decision
Please read the instructions below and answer all questions:
1. This information collected will be kept confidential and only aggregated results will be presented in the research. 2. Please answer the questions by putting a tick mark on the relevant choice that best reflects your opinion. 3. If for any reason you feel uncomfortable with answering some questions, simply leave them blank. However, we would appreciate it if you answer all questions. 4. Try to answer as accurately as possible. 5. You can put a tick mark on more than one option also.

PART - 1 Basic Information

Contact Name : Age : Contact No : Email : Occupation : Qualification :

PART 2
Please indicate your response to each question by ticking the relevant option. You can mark more than one choice also. 1. How many credit rating agencies listed below are you aware of? a) CRISIL b) CARE c) ICRA d) Duff & Phelps. 2. Are you aware of credit rating agencies with their rating symbols? a) Yes. b) No. 3. Do you trust credit rating agencies? a) Yes b) No 4. In which of these securities you prefer to invest your money? a) Shares. b) Debentures. c) Bonds. d) Government Securities. 5. How occasionally do you invest in shares and debentures?

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a) Very frequently.

b) Frequently.

c) Rarely.

6. In which of these financial Institutions you prefer to invest your money? a) Commercial Banks. b) Insurance Companies. c) Mutual Funds d) Government Securities. e) Other FIs. 7. Does your investment decision get affected by rating given to the instrument by credit rating agencies? a) Yes. b) No. 8. Are you satisfied with the working and rating of Credit Rating Agencies in India? a) Yes. b) No. 9. Do you know anything about Multiple Credit Rating? a) Yes. b) No. 10. Do you think Multiple Credit rating is boom to the capital market? a) Yes. b) No. 11. Do you think Credit Rating Agencies prove to be an effective tool for risk management? a) Yes. b) No. 12. Do you think that it is safe for small investor to depend upon the ratings provided by the Credit Rating Agencies? a) Yes. b) No. 13. Do you know any of these services provided by Credit Rating Agencies? a) Credit Rating Services. b) Advisory Services. c) Equity Research. d) Research and Information Services. e) Information Assistant to govt. 14. Should the rating agencies monitor the issue already rated? a) Yes. b) No. 15. Do you think a good rating given to an instrument can help it sail easily in the market? a) Yes. b) No. 16. Does the introduction of Credit Rating Agencies prove conductive for capital market? a) Yes. b) No. 17. What are the main shortcomings of credit rating agencies in India? a) Confusion created by various rating symbols. b) Rely only on information provided by issuer of the instrument. c) Companies publishing only the higher rated securities.

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d) Conflict between ratings given by two agencies. e) Any, Other. If, any other, specify. Ans: 18. What are the sources from where you get credit rating information? a) News Paper. b) Magazines. c) Web-sites d) Personal Contacts. e) Television f) Other Sources.

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