ARTS & COMMERCE
Taxation for Investments
Credit Rating Agency(CRA)
Submitted to: Prof. Ranjana
Academic year: 2011-12
India was perhaps the first amongst developing countries to set
up a credit rating agency in 1988. The function of credit rating
was institutionalised when RBI made it mandatory for the issue
of Commercial Paper (CP) and subsequently by SEBI. when it
made credit rating compulsory for certain categories of
debentures and debt instruments. In June 1994, RBI made it
mandatory for Non-Banking Financial Companies (NBFCs) to be
rated. Credit rating is optional for Public Sector Undertakings
(PSUs) bonds and privately placed non-conve11ible debentures
upto Rs. 50 million. Fixed deposits of manufacturing companies
also come under the purview of optional credit rating. Securities.
Credit Rating is valuable information, widely used measure for
the riskiness of the companies and bonds. It is expensive
information; costly to obtain. Credit Rating prediction is important
for investors to estimate riskiness of unrated companies and for
companies to monitor the companies‟ credit rating, predict the
With the increasing market orientation of the Indian economy,
investors value a systematic assessment of two types of risks,
namely “business risk” arising out of the “open economy” and
linkages between money, capital and foreign exchange markets
and “payments risk”. With a view to protect small investors, who
are the main target for unlisted corporate debt in the form of
fixed deposits with companies, credit rating has been made
Defination of CRA:-“An assessment of the credit worthiness of
individuals and corporations. It is based upon the history of
borrowing and repayment, as well as the availability of assets and
extent of liabilities.”
WHAT IS AND HOW CREDIT RATING IS GENERALLY DONE?
A credit rating assesses the credit worthiness of an individual,
corporation, or even a country. Credit ratings are calculated from
financial history and current assets and liabilities. Typically, a
credit rating tells a lender or investor the probability of the
subject being able to pay back a loan. However, in recent years,
credit ratings have also been used to adjust insurance
premiums, determine employment eligibility, and establish the
amount of a utility or leasing deposit.
A poor credit rating indicates a high risk of defaulting on a loan,
and thus leads to high interest rates or the refusal of a loan by
In countries such as the United States, an individual's credit
history is compiled and maintained by companies called credit
bureaus. In the United States, credit worthiness is usually
determined through a statistical analysis of the available credit
data. A common form of this analysis is a 3-digit credit score
provided by independent financial service companies such as
the FICO credit score.
The factors which may influence a person's credit rating are:
* ability to pay a loan
* amount of credit used
* saving patterns
Importances of credit rating agencies
Credit Rating Agencies are the main authority to assign rate of
credit for the companies who issue debt. Any investor can
measure the risk of bad debt after analysis these credit rates.
These credit rates are fixed on the basis of ability to pay back
Credit Rating Agencies are also helpful to rebuild the investor
confidence which is vital to the global capital markets.
In capital market, its importance is not less than SEBI because
credit rating agencies protect different investors from risk of
financial loss by providing them upto date information of credit
rate. Many other key roles can be explain with following way:
1. To compare the loan on the basis of quality of credit and
loan. Suppose X, Y and Z are three companies offering
debentures to investors. Credit rating agencies will assign their
credit rate because these are financial expert and assign rate on
the basis of analysis of past financial records and statements.
Credit rating agency will assign rate AAA to best of X, Y and Z
and to invest AAA -credit rating company means low risk of loss.
2. Not only show AAA but it show other range of credit rate like
A for medium risky company, BBB medium risky and BB high
risky and speculative company.
3. Credit rating agencies also assist to portfolio monitoring. In
portfolio monitoring, they provide information about which
investment is most secure and provide high return of interest.
4. Credit quality of transparency.
5. Credit rating of money market securities.
Benefit credit rating to investors :
1) Helps in Investment Decision : Credit rating gives an idea to
the investors about the credibility of the issuer company, and the
risk factor attached to a particular instrument. So the investors
can decide whether to invest in such companies or not. Higher
the rating, the more will be the willingness to invest in these
instruments and vise-versa.
2) Choice of Instruments : Credit rating enables an investor to
select a particular instrument from many alternatives available.
This choice depends upon the safety or risk of the instrument.
3) Saves Investor's Time and Effort : Credit ratings enable an
investor to his save time and effort in analyzing the financial
strength of an issuer company. This is because the investor can
depend on the rating done by professional rating agency, in
order to take an investment decision. He need not waste his time
and effort to collect and analyse the financial information about
the credit standing of the issuer company.
Benefit credit rating to company :
1) Improves Corporate Image : Credit rating helps to improve
the corporate image of a company. High credit rating creates
confidence and trust in the minds of the investors about the
company. Therefore, the company enjoys a good corporate
image in the market.
2) Wider Audience for Borrowing : A company with high rating
for its instruments can get a wider audience for borrowing. It can
approach financial institutions, banks, investing companies. This
is because the credit ratings are easily understood not only by
the financial institutions and banks, but also by the general
3) Helps in Growth and Expansion : Credit rating enables a
company to grow and expand. This is because better credit
rating will enable a company to get finance easily for growth and
Credit Rating Process :
The rating process begins with the receipt of formal request from
a company desirous of having its issue obligations rated by
credit rating agency. A credit rating agency constantly monitors
all ratings with reference to new political, economic and financial
developments and industry trends. The process/procedure
followed by all the major credit rating agencies in the country is
almost similar and usually comprises of the following steps.
1.Rating Request :
The rating process begins, with the receipt of formal request for
rating from a company desirous of having its issue obligations
under proposed instrument rated by credit rating agencies. An
agreement is entered into between the rating agency and the
issuer company. The agreement spells out the terms of the
rating assignment and covers the following aspects:
i. It requires the CRA (Credit Rating Agency) to keep the
ii. It gives right to the issuer company to accept or not to accept
iii. It requires the issuer company to provide all material
information to the CRA for rating and subsequentsurveillance.
2. Data gathering/Analysis :
To get all the information necessary for analysis, „Credit-Rating‟
agency sends a client the letter with information requirements: a
list of all the information and documents necessary for credit
rating analysis. „Credit-Rating‟ guarantees that your confidential
information will be kept safe.
3. Management Meetings :
Meetings and consultations with client company managers and
officials are very important in the process of credit rating
assignment. As a rule, we need two or three meetings. In the
first meeting analysts would ask questions about financial plans
and further development prospects. This information helps us to
remain objective in assessment of client‟s financial position for
the long-term period.
4. Rating committee/Assignment of Rating :
Rating team of the agnecy examines all the data, information
and documents. It also concideres all the points presented by
the client. The team then recommends the rating.
5. Advice to the Company/ institution:
The Company/ institution are informed about the rating proposed
by the rating agencies.
If the Company/ institution feel that the rating can be improved
and has adequate reason for it, it can appeal so to the agency.
Such appeal should be substantiated with proper reasoning and
justification. On appeal the agency may or may not revise the
Decision about rating publication is taken by a client individually.
Client may decide not to publish assigned rating. Even if rating is
not published the procedure of credit rating assignment remains
useful as conclusions of agency analysts written in the rating
report may help to determine factors influencing client‟s
credibility. Their improvement in the future may lead to credit
rating upgrade. Agency may not submit publication of
upgrades/downgrades of once published rating to client‟s
If a client thinks that in the process of rating assignment some
important factors have not been taken into consideration, client‟s
authorized representatives may appeal to rating committee
within the next ten days after rating assignment. The appeal will
be accepted only if a client can bring new data and documents
that are important for rating procedure. After examination of
these documents, credit rating committee will take a decision
which cannot be appealed.Appeal procedure does not influence
on client‟s rights on rating publication.
9. Surveliance and Annual Review :
Rating is a dynamic activity. So rating has to be monitored
continuously. Also it is mandatory
CRISIL (CREDIT RATING AND INFORMATION
SERVICES OF INDIA LTD.)
CRISIL, India's first credit rating agency, is incorporated,
promoted by the erstwhile ICICI Ltd, along with UTI and other
financial institutions. The head office of the company is located
at mumbai and it has established offices outside india. it is a
global analytical company providing ratings ,research and risk
and policy advisory services.it is the largest credit rating agency
in India.. CRISIL‟s majority shareholder is STANDARD and
WIth sustainable competitive advantage arising from their strong
brand, unmatched credibility, market leadership across
businesses, and large customer base, they deliver analysis,
opinions, and solutions that make markets function better.
they defining trait is our ability to convert data and information
into expert judgements and forecasts across a wide range of
domains, with deep expertise and complete objectivity.
At the core of their credibility, built up assiduously over the
years, are our values: Integrity, Independence, Analytical Rigour,
Commitment and Innovation.
CRISIL launches Education Grading, beginning with
CRISIL Rating enhances access to funding for SMEs;
Announces 20,000th SME Rating
CRISIL Ratings launches Solar grading
CRISIL Research launches Gold and Gilt Index
CRISIL Global Research & Analytics receives NASSCOM
Exemplary Talent Practices Award
ICRA ( Investment Information and Credit Rating Agency of
ICRA Limited (formerly Investment Information and Credit Rating
Agency of India Limited) was set up in 1991 by leading
financial/investment institutions, commercial banks and financial
services companies as an independent and professional
Investment Information and Credit Rating Agency.
Today, ICRA and its subsidiaries together form the ICRA Group
of Companies (Group ICRA). ICRA is a Public Limited Company,
with its shares listed on the Bombay Stock Exchange and the
National Stock Exchange.
ICRA’S GRADING OF IPO
ICRA's Grading of Initial Public Offerings (IPOs) is a service
aimed at facilitating assessment of equity issues offered to the
public. The Grade assigned to any individual IPO is a symbolic
representation of ICRA's assessment of the 'fundamentals' of the
issuer concerned on a relative grading scale. IPO Grades are
assigned on a five-point point scale, where IPO Grade 5
indicates the highest grading and IPO Grade 1 indicates the
lowest grading, i.e. a higher score indicates stronger
fundamentals. An ICRA IPO Grade does not comment on the
valuation or pricing of the issue that has been graded, nor does
it seek to indicate the likely returns to shareholders from
subscribing to the IPO. The emphasis of the IPO Grading
exercise is on evaluating the prospects of the industry in which
the company operates, the company's competitive strengths that
would allow it to address the risks inherent in the business(es)
and effectively capitalise on the opportunities available as well
as the company's financial position. In case the IPO proceeds
are planned to be used to set up projects, either Greenfield or
Brownfield, ICRA evaluates the risks inherent in such projects,
The capacity of the company's management to execute the
same, and the likely benefits accruing from the successful
completion of the projects in terms of profitability and returns to
shareholders. ICRA's five point IPO Grading Scale is as follows:
IPO Grade 5 Strong fundamentals
IPO Grade 4 Above-average fundamentals
IPO Grade 3 Average fundamentals
IPO Grade 2 Below-average fundamentals
IPO Grade 1 Poor fundamentals
CARE(Credit analysis and research limited)
CARE Ratings commenced operations in April 1993 and over
nearly two decades, it has established itself as the secondlargest credit rating agency in India. With the rating volume of
debt of around Rs.33,062 bn (as on June 30, 2011) , CARE
Ratings is proud of its rightful place in the Indian capital market
built around investor confidence. CARE Ratings has also
emerged as the leading agency for covering many rating
segments like that for banks, sub-sovereigns and IPO gradings.
CARE Ratings provides the entire spectrum of credit rating that
helps the corporates to raise capital for their various
requirements and assists the investors to form an informed
investment decision based on the credit risk and their own riskreturn expectations. Our rating and grading service offerings
leverage our domain and analytical expertise backed by the
methodologies congruent with the international best
practices.With majority shareholding by leading domestic banks
and financial institutions in India, CARE‟s intrinsic strengths have
also attracted many other investors.
DCR(Duff & Phelps credit rating india limited)
It 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 firm‟s 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
The capital market regulator regulates rating agencies in most
regions. In India, the capital markets regulator, the Securities
and Exchange Board of India (SEBI), regulates the rating
agencies in the country. SEBI laid down an extensive set of
regulations for rating agencies in 1999.
SEBI Issued Guidelines to Credit Rating Agencies
SEBI vide CIR/MIRSD/CRA/6/2010 dated May 3, 2010 has
provided for certain transparency and disclosure norms for the
Credit Rating Agencies (“CRAs”). The major measures taken in
this regard are summarized below:
1. CRAs should maintain records of the rating committee,
including voting details and notes of dissent, for a period of five
2. It has been made mandatory for CRAs to publish information
about the historical default rates of their rating categories and
whether the default rates of these categories have changed over
3. CRAs should ensure that its analysts do not participate in any
kind of marketing and business development, including
negotiations of fees with the issuer whose securities are being
rated. Also, the employees involved in the credit rating process
and their dependants cannot own shares of the issuer.
4. CRAs while rating structured finance products, are barred
from providing consultancy or advisory services regarding the
design of the structured finance instrument. This prohibition
would apply to the subsidiaries of CRAs too. While publishing
the ratings of structured finance products and their movements,
CRAs apart from following all the applicable requirements in
case of non-structured ratings should also disclose the track
record of the originator and details of nature of underlying assets
while assigning the credit rating.
5. In case of unsolicited credit ratings (the credit ratings not
arising out of the agreement between the CRAs and the issuer),
credit rating symbol should be accompanied by the word
“UNSOLICITED” in the same font size.
6. CRAs should also disclose
1. the policies, methodology and procedures in detail followed
by them regarding solicited and unsolicited credit ratings,
2. the history of credit rating of all outstanding securities,
3. the general nature of its compensation arrangements with
the issuers and
4. the details of any relationship it has with the issuer whose
securities are being rated and any of its associate of such
issuer and the CRAs or its subsidiaries.
A credit rating is not a recommendation to buy, hold or sell a
debt instrument. A rating is one of the inputs that is used by
investors to make an investment decision.
Investors also look at the returns being offered on the debt
instrument. Normally investors expect higher returns for lower
rated instruments to compensate for the increased risk profile.
Rating agencies do not comment on the return being offered
on a debt instrument. Also, investors use several other factors
like level of portfolio diversification and liquidity levels of the
instrument etc. in making investment decisions.