1. Chapter 3 Credit rating & IPO Grading
By Chirag Chotrani

2. Meaning of Credit Rating
Credit rating is basically the evaluation of the credit worthiness of an individual or of a business concern based on factors such as willingness and ability to pay.
It basically establishes a link between risk and return. So that one can analyse and assess the risk level and compares the offered rate of return with the expected rate of return.
First credit rating agency was established in New York in 1841 and in India CRISIL(credit rating and information service(India)Limited)was set up as first credit rating agency in 1987.
So basically it is a symbolic indication of the opinion regarding the capability of the issuer to repay the debt in time. It can be in alphabetical or alphanumerical symbols.

3. A rating is specific to a debt instrument and not the rating of the entity , so it can never be constructed that credit rating is rating of the entity , it is just an opinion on the instrument of the issuer.
Usually credit rating is relevant for debt securities , it can be done for other purposes also.
CREDIT RATING
Financial instrument Customer rating Borrower
Rating Rating
Bond Rating , Equity Rating Sovereign rating

4. USES OF CREDIT RATING
The uses of credit rating is not only restricted to the investors but also extends towards industry . Also companies who receiver lower rating are forewarned , so that they can take possible measures to improve and this improvement results into overall benefit to the economy and helps in a better way for investor protection .
Credit rating is useful to :
Investor
After looking at the rating an investor can decide whether to go for that investment in that security or not. Also it enables the investors to take a well informed judgment . In the absence of this credit rating the investors has to largely depend on the familiarity of the name of the promoters but because of credit rating a well researched result is in front of them , hence reducing the risk of loss.

5. (b) For Issuer As the market places faith in the opinion given by credit rating agency , the issuer with good rating can even hit the market and raise money when the condition in the market is adverse. (c) For Intermediaries Rating can be useful for any intermediaries like merchant banker , underwriter , broker, As they can monitor the risk exposures . Rating can also help in the pricing of the security. (d) For Regulators

6. Factors for success of a rating system
Credible and independent procedures;
Impartiality of opinions;
Analytical research and consistency;
Industry related expertise and professionalism;
Confidentiality;
Timeliness review of rating and proper announcement.
PROCEDURE FOR CREDIT RATING
To begin with the agency need to seek information required for the rating and is usually gathered from the annual reports , prospectus , news reports and many other sources.
After this if the agency requires they can have discussion with the company’s operational management and a final meeting is done with the top management of the company

7. After this an analytical report is prepared on the basis of the information gathered.
Now this analytical report is transferred to a committee comprising of all the senior executives of the credit rating agency
The aforesaid committee will discuss all relevant issues and consider the analytical report and based on the discussion will assign a rating.
Finally this rating is communicated to the issuer and along with it an assessment report outlining the rationale for the rating assigned will be sent.
Key note :
Rating can only be published after the approval of the issuer, subsequent changes can be published even if the issuer is not willing to get it published.
There can be two agencies for the same issue and the rating given by both the agencies can vary.

8. CREDIT RATING AGENCY
It is a capital market intermediary , which is incorporated in the form of a company and its main object in the business of rating securities.
Following are the important credit rating agencies :
CARE [Credit Analysis and Research Limited]
ICRA [Investment Information and Credit Rating Agency of India Limited]
FITCH Credit Ratings India Private Limited
Moody’s Investor Services
Standard and Poor’s corporation

9. PROMOTERS OF A CREDIT RATING AGENCY
It can be promoted by :
A public financial institution
Scheduled commercial bank
Foreign bank
Foreign credit rating agency having minimum 5 years of experience.
A body corporate having net worth (total assets-outsider liabilities) of Rs. 100 crores in each of the preceding 5 years
REGISTRATION OF CREDIT RATING AGENCY
Registration to work as a credit rating agency is granted under section 12 of SEBI(credit rating agencies) regulation,1999.

10. ELIGIBILITY CRITERIA
The applicant is set up and registered as a company
In the MOA of the company the main object contains ‘rating of securities’ as its main object
Minimum net worth of 5 crore
(existing CRA at the time of commencement of this act shall deemed to have satisfied this condition)
Adequate infrastructure
Promoters have professional competence , financial soundness and good reputation.
Neither the promoter nor its any director are involved in any kind of fraud or market manipulation.
Neither the person himself or any person directly or indirectly connected to him has been refused by the SEBI for registration

11. The applicant is a fit and proper person
Grant of registration in the interest of investor and securities market
FEES FOR REGSITARTION
Application Fees : Rs
Registration of grant of certificate : Rs
Renewal fees : Rs

12. Every CRA must enter into agreement with the client
Every such agreement should include the following :
Rights and liabilities of each party
Fee to be charged by the CRA
Client shall agree to periodic review of the rating by the CRA
The CRA shall first disclose the rating to the client.
The client shall disclose the rating assigned to it by the CRA
MONITORING OF CREDIT RATING
Every CRA shall monitor the rating assigned by it during the lifetime of the securities and should also disclose information about newly assigned rating through press releases and websites. In case of listed companies , such information must also be provided to the concerned stock exchanges.

13. It shall cover all aspects like: CRA operations and procedures
REVIEW OF RATINGS
Every CRA shall carry out periodic reviews of all published ratings during the lifetime of the securities. If the client does not cooperate with the CRA so as to enable the CRA to comply with its obligations, the CRA should carry out the review on the best available information.
INTERNAL AUDIT OF CREDIT RATING AGENCY
As per the regulation 22 of the SEBI (credit rating regulations), 1999 any professional person like CS , CA , CWA in whole time practice can do the internal audit of the CRA on half yearly basis , provided he has no conflict of interest with the CRA .
It shall cover all aspects like:
CRA operations and procedures
Investor grievance redressal mechanism
Compliance of the guidelines issued by SEBI

14. The report shall state the methodology adopted and also if any kind of deficiency is observed .
The report shall also comment on the adequacy of systems adopted by the CRA.
Time schedule for the internal audit :
Within two months from the end of the half year , a report should be submitted to the CRA
Based on the report the CRA is going to take all the actions and shall send an Action Taken Report to SEBI within next 2 months .

15. RATING SYMBOLS Every credit rating agency must specify about what that rating actually depicts. One important requirement is that CRA’s first name must be there as a prefix. Example : CARE AAA , CARE B Example of some of the ratings and their meaning AAA – this rating signifies highest degree of safety and lowest degree of risk AA – this rating signifies high degree of safety and very low credit risk. A – this rating signifies adequate degree of safety and low credit risk BBB – this instrument signifies moderate degree of safety and moderate credit risk.

16. THANK YOU