CREDIT RATING

Credit Rating Credit Rating is the symbolic indicator of the current opinion of rating agency regarding the relative ability and willingness of issuer of a financial( debt) instrument to meet the ( debt) service obligation Rating Defined BY SEBI As a opinion regarding securities expressed in the form of standard/symbols in any other standardized form assigned by a credit rating agency and used by the issuer of such securities to comply with a requirement specified by SEBI regulations

Regulatory Framework  Registration of Credit Rating Agencies  Registration with SEBI  The application for the grant of certificate of registration should be made to the sebi accompanied by a non refundable fee of Rs  Credit rating agency is a body corporate engaged or proposed to be engaged in the business of rating of securities offered in way of public/ rights issues

Promoter of Credit rating agency  Credit rating agency can be promoted by  Public Financial institutions  Scheduled bank  Foreign bank operating in India with RBI approval  Any company incorporated under Companies Act having networth of minimum of Rs. 100 crore as per its audited annual accounts for the previous five years prior to filing of the application with SEBI

Eligibility Criteria  The agency is set up and registered as a company  Has specified rating activity as one of its main objects in Memorandum of association  Minimum networth of Rs.5 crore  Its promoters have professional competence, financial soundness and a general reputation of fairness and integrity in business transaction

Eligibility Criteria  Employed persons with adequate professional and relevant experience  Applicant or promoters is not involved in any legal proceedings connected with securities market

Registration fee  Initial registration fee : Rs. 5,00,000  Payment of renewal fee Rs.3,00,000 for every three year

General Obligations  Agreement with client  Rights and responsibilities of each party  Fee to be charged  Client agreement to co-operate in order to enable the CRA to arrive at and maintain true rating  Disclosure of CRA to the client regarding the rating assigned to its securities  Clients agreement to disclose in the offer document  Clients agreement to obtain a rating from atleast two difference CRA for any issue of debt securities for Rs. 100 crore or more

General Obligations  Monitoring of Rating  CRA should continously monitor the rating of securites rated by it during their life time  It should disseminate the information regarding newly assigned ratings and changes in earlier rating promptly through press release or website or to respective regional stock exchange

General Obligations  Procedure for Review of Rating  CRA should carry out periodic reviews of all published rating during the lifetime of the securites. It client doesn’t cooperate CRA should carry out on the basis of the best available information and disclose this fact to the investors  Internal Procedures  Every CRA should frame appropriate procedures and systems for monitoring the trading of securities in order to prevent contravention of SEBI insider trading regulation, SEBI prohibition of fradulent and unfair trade practices

General Obligations  Disclosure of Rating Definitions  The credit rating agency should make the public the definition of concerned rating along with the symbol  Also state the rating doesnot constitute recommendation to buy, hold or sell any securities  Submission of Information to SEBI  Appointment of Compliance officier  Maintenance of Book of Accounts – for the period of 5 years

General Obligations  Restriction on Rating of securites  Securities issued by the promoters – who holds 10% more of its shares  Securities issued by certain entities  Borrower of the promoter  Subsidiary of the promoter  Chairman/ director

CREDIT RATING AGENCIES  CRISIL  ICRA  CARE  FITCH LTD

CRISIL  Promoted in 1987 jointly by the ICICI ltd and unit trust of India  Initially the CRISIL was set up to rate debt obligations that would guide investors as to the risk timely payment of interest and principal

Objectives  To assist both individual and institutional investors in making investment decisions in fixed interest securities  To enable companies to mobilise funds in large amounts from wide investors base  TO enable intermediaries to place debt instruments with investors by providing them with an efficient marketing tool  To provide regulators with the market driven system for bringing about discipline and a healthy growth of capital markets

Rating Process and Methodology  All four rating agencies in the country adopt a similar rating process. The step followed by them in this rating process are  New issue /instruments  Review of rating  Flowchart of rating

Rating Process for New Issue  Rating agreement and Assignment of Analytical Team  Starts with issue of rating request letter by the issuer of the instrument  Signing of the rating agreement  On receipt of request CRA assigns an analytical team comprising two or more analyst. Once of whom would be the lead analyst and would serve as the issuer’s primary contact  The analyst should be the expert in the relevant business area

Meeting with Management  Annual reports for the past five years – Cash flow statement should be provided  Interim report with balancesheet  Two copies of Latest prospectus and application for listing in the stock exchange  Consolidated financial statements for the past three fiscal year  Two copies of statements of projected sources and application of funds, Balancesheet for atleast three years

Meeting with Management  Copies of existing loan agreements along with recent compliance letters  A certified copy of resolution adopted by the board of company authoursing the issuance of commercial paper or any other shortterm instruments  List of banks, showing line of credit and contact officers for each short term borrowings

 Discussion on the management philosophy and plan should cover the financial and operating data for past five years  Discussion on projections should reveal mangement objectives, future plans and future growth plans  All information is kept strictly confidential by the rating group and is not used for any other purpose or by any third party other than CRA’s

Rating Committee  After meeting with management, the analyst present their report to rating committee, which then decides on rating  Issuer will not participate  The rating is arrived after a composite assessment of all factors concerning the issuer

Communication to the issuer  After assigning the rating, the rating decision is communicated to the issuer  The thoroughness and transparency of its rating methodology and the integrity and fairness of its approach are important factors in establishing and maintaining credibility  If the issuer disagrees he may appeal the decision for which new additional information should be submitted  The client has the right to reject the rating and whole exercise is kept confidential

Dissemination to the Public  Through print media

Rating review for possible change  The rated company is on surveillance system of CRA from time to time and to be reviewed  The CRA constantly monitors all rating with ref to new political, economic and financial development  New Data for company  Rating change  Credit Rating Watch : Positive – Upgrade, Negative- downgrade, stable, Developing

Rating Methodology for Manufacturing Companies  Business Risk Analysis  Financial Risk Analysis  Management Risk Analysis

Business Risk Analysis  The nature of competition is different for different industries based on price, product quality, distribution capabilities, image, product differentiation  Industry Risk  Market position of issuing entity within the industry  Operating effeciency  Legal positions

Financial risk analysis  Accounting quality  Earning prospects  Adequacy of cash flows  Financial flexibility – ability to raise funds, asset deployment  Interest and Tax sensitivity

Management Risk  Track record of the management planning and control systems  Evaluation of capacity to overcome adverse situation  Goals, Philosophy and strategies

Rating Methodology for Financial service sector  Regulatory and competitive environment  Fundamental Analysis  Capital adequacy  Resources  Asset quality  Liquidity management  Profitability and financial position  Interest and tax senstivity