Credit rating agency(cra) hardcopy


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Credit rating agency(cra) hardcopy

  1. 1. K.E.S’s SHROFF COLLEGE OF ARTS & COMMERCE SUBJECT: Taxation for Investments
  2. 2. Class: S.Y.B.F.M. Semester: th 4 PRESENTATION ON: Credit Rating Agency(CRA) Submitted to: Prof. Ranjana Academic year: 2011-12
  4. 4. Introduction: 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 future rating. 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 mandatory. 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.”
  5. 5. 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 the creditor. 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 * interest * amount of credit used * saving patterns
  6. 6. 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 the loan. 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.
  7. 7. 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.
  8. 8. 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 public. 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 expansion
  9. 9. 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 information confidential. ii. It gives right to the issuer company to accept or not to accept the rating. 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.
  10. 10. 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. 6. Appeal: 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 rating.
  11. 11. 7. Publication: 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 approval. 8. Appeal: 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
  12. 12. 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 is the largest credit rating agency in India.. CRISIL‟s majority shareholder is STANDARD and POOR‟s. 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 business schools  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
  13. 13. ICRA ( Investment Information and Credit Rating Agency of India Limited) 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,
  14. 14. 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.
  15. 15. 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 SEBI-Regulator 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 years. 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 time.
  16. 16. 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.
  17. 17. Conclusion 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.