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credit rating

  1. 1. 1 A REPORT ON CREDIT RATING By HARSHIT KOTHARI Enrollment No: 12BSP0583 SMERA
  2. 2. 2 A REPORT ON CREDIT RATING By HARSHIT KOTHARI Enrollment No: 12BSP0583 SMERA A report submitted in partial fulfillment of the requirements of PGPM Program of IBS MUMBAI
  3. 3. 3 Contents 1. EXECUTIVE SUMMARY ..........................................................................................................................4 2. INTRODUCTION TO CREDIT RATINGS....................................................................................................5 3. HISTORY OF CREDIT RATING .................................................................................................................6 4. DEFINITION OF CREDIT RATING ............................................................................................................7 5. DETERMINANTS OF CREDIT RATINGS ...................................................................................................8 6. UTILITY OF RATINGS............................................................................................................................10 7. LIMITATION OF CREDIT RATING..........................................................................................................11 8. BANK LOAN RATINGS..........................................................................................................................12 9. INTRODUCTION TO SMERA.................................................................................................................13 10. SMERA ACCOMPLISHMENTS...........................................................................................................16 11. PRODUCTS OFFERED BY SMERA .....................................................................................................17 12. PROCESS OF RATING.......................................................................................................................19 13. APPLICABLE REGULATORY BODIES .................................................................................................22 14. CREDIT RATING ANCENCIES PRODUCT SUITE.................................................................................24 15. KIND OF INSTRUMENTS RATED.......................................................................................................25 16. ETHICS TO BE FOLLOWED BY RATING AGENCIES............................................................................26 17. FUTURE OF CREDIT RATING AGENCY..............................................................................................27 18. CONCLUSION...................................................................................................................................28 19. REFERENCES....................................................................................................................................29
  4. 4. 4 1. EXECUTIVE SUMMARY The project began with a top down understanding of credit ratings i.e. the Rating Business, various credit rating agencies in the business, various credit rating products. The next phase was to understand SMEAR’s product suite and finally to work on different Bank Loan Rating (BLR) cases which were assigned. My role was to create a platform on the basis of which a company is rated. My prime responsibility was to create a database of relevant information which is used by analyst in analyzing the company and subsequently assigning rating to it. I get this data from information provided by company. I am provided with companies’ Balance sheet, Profit and loss account, Cash flow, fund flow & other such financial statements. Along with the data, we are required to take feedback from various stakeholders of the company to be rated like, its bankers, auditor, supplier. During my internship period, I have worked on cases from several industries like, media and entertainment, commercial real estate textile etc. A structured format is followed while creating database of information of any company. This information is collated in pre defined Excel spread sheet format. Looking at the Excel spread, analyst can figure out the financial position of the company. Various ratios are calculated and posts analyzing the information, I along with my senior analyst prepare a rating note which contains details of the company profile, a brief analysis of its financial statements and future prospects of the company. Rating note is finally concluded with assigning a rating to the company. This Rating note is then presented to the Ratings committee. Rating committee comprises of experienced and senior members from the company and other experts in relevant field. Analyst is required to present his case in the committee and justify his rating. Committee members debate on various aspects of the case like, its financial position, management, project risk, Industry risk, growth aspects etc. This discussion gives many insights about the respective business and industry. Post this discussion committee either passes the rating assigned by analyst if they are satisfied with the analysis done and subsequent rating assigned or they defer the case for next committee meet if they need some more information or analysis to be done.
  5. 5. 5 2. INTRODUCTION TO CREDIT RATINGS Credit Rating is an estimate of the credit worthiness of an individual, corporation, or a country. It is an opinion made by credit evaluators of a borrower’s potential to repay debt. Every rating grade comes with its probability of default, which in turn assists investor/lender to take informed investment decision. Rating is arrived after considering various financial, non-financial parameters, past credit history and future outlook. There are various types of ratings viz. Issuer Rating/ Obligor Rating, Bank loan Rating, Issue based Ratings, Project Rating etc. Based on type of borrower/issuer, Ratings can be classified as Individual Rating, Corporate Rating, Bank/Financial Institutions Rating, SME Rating, MFI Rating etc.
  6. 6. 6 3. HISTORY OF CREDIT RATING The initial rating exercise was started by Henry Poor who published financial statistics of Railroad companies in 1860. In addition to his publishing business, John Moody (Moody’s Investors Services) started publishing ratings for railroad bonds from the year1909. The rating activity got a boost post Great Depression of 1933 when US Government Controller of Currency directed the banks in USA to purchase bonds rated BBB/Baa and above and the rest came to be known as ‘junk’ bonds. At present in US markets all commercial bonds are invariably rated.
  7. 7. 7 4. DEFINITION OF CREDIT RATING Credit ratings are judgments about firms financial and business prospects. Credit rating is defined ‘…as a process by which a statistical service prepares various ratings identified by symbols which are indicators of the investment quality of the credit rated’. The credit may be a debt instrument or equity. In case of debt, ratings are given while in the case of shares grading is done. It is an independent assessment of the creditworthiness of a bond or any security having debt by a credit rating agency. It measures the probability of the timely repayment of principal and interest of a bond. Generally, a higher credit rating would lead to a more favorable effect on the marketability of a bond. The credit rating symbols (long term) are generally assigned with “triple A” as the highest and “triple B” as the lowest in investment grade. Anything below “triple B” is commonly known as a ‘junk bond’. Credit rating is the process of assigning standard scores which summarize the probability of issuer being able to meet its repayment obligations for a particular debt instrument in a timely manner. Credit rating is integral to debt markets as it helps market participants to arrive at quick estimates and opinions about various instruments. In this manner it facilitates trading in debt and money market instruments especially in instruments other than Government of India Securities. Credit rating is not a recommendation to buy, hold or sell. Rating is usually assigned to a specific instrument rather than the company as a whole. In the Indian context, the rating is done at the instance of the issuer, which pays rating fees for this service. If it is unsatisfied with the rating assigned to its proposed instrument, it is at liberty not to disclose the rating given to it. There are 6 rating agencies in India. These are as follows: Credit rating is a dynamic concept and all the rating companies are constantly reviewing the companies rated by them with a view to changing (either upgrading or downgrading) the rating. They also have a system whereby they keep ratings for particular companies on "rating watch" in case of major events, which may lead to change in rating in the near future. Ratings are made public through periodic newsletters issued by rating companies, which also elucidate briefly the rationale for particular ratings. In addition, they issue press releases to all major newspapers and wire services about rating events on a regular basis.
  8. 8. 8 5. DETERMINANTS OF CREDIT RATINGS Credit Rating is an estimate of the credit worthiness of an individual, corporation, or a country. It is an opinion made by credit evaluators of a borrower’s potential to repay debt. Every rating grade comes with its probability of default, which in turn assists investor/lender to take informed investment decision. Rating is arrived after considering various financial, non-financial parameters, past credit history and future outlook. There are various types of ratings viz. Issuer Rating/ Obligor Rating, Bank loan Rating, Issue based Ratings, Project Rating etc. Based on type of borrower/issuer, Ratings can be classified as Individual Rating, Corporate Rating, Bank/Financial Institutions Rating, SME Rating, MFI Rating etc. Business Risk: Business risk relates to the market position of the company, operating efficiency and management quality. The key factor taken into consideration are: the nature of the industry the company is in, the demand-supply position, cyclical/ seasonal factors and government policies vis-à-vis the industry; and the competition it’s facing within the industry. Market Position: Market share the company enjoys, its competitive advantages and selling and distribution arrangements.
  9. 9. 9 Forex Risk: Rating agencies factor forex risk by checking how company is exposed to fluctuating exchange rates and has the company made any hedging arrangements. Operating Efficiency: Location advantages, labor relationships, cost structure, technological and manufacturing efficiency as compared to its competitors. Financial Risk: Financial risk is a function of the profitability, debt leverage flexibility and adequate cash flow. The assessment of financial risk is done on the basis of:  Financial analysis, including accounting quality: accuracy of statement of profit, auditors comments, valuation and depreciation policies.  Earnings protection: Sources of future earning, profitability ratios and earnings in relation to fixed income charges.  Adequacy of cash flow: Sustainability of cash flows and working capital management.  Financial flexibility: Ability to raise funds. Management Risk: An evaluation of the management, which is qualitative in nature and imparts certain amount of subjective element, is done on the basis of track record of the management; planning and control system, depth of managerial talent, succession plans. Environmental Risk: An analysis of environment covering regulatory and operating environment, national economic outlook, pending litigation and unpaid taxes are also attempted. Auditor Feed Back: Credit Rating Agencies generally ask for a feedback from client auditors regarding the accuracy of financial statements. Bankers Feed Back: Credit Rating Agencies ask for a feedback from client’s banker regarding his banking conduct. Rating thus is not based on a predetermined formula which specifies the relevant variables and as well as weights attached to each one of them. Further the emphasis on different aspects varies from agency to agency. Broadly the rating agencies assure itself that there is good congruence between assets and liabilities of a company and downgrades the rating if the quality of the assets depreciates. The rating agencies employ qualified professionals to ensure consistency and reliability. The agencies also ensure the integrity of rating by insulating rating from conflicts of interest.
  10. 10. 10 6. UTILITY OF RATINGS Investors have always received credit ratings with enthusiasm. But issuers do not share the enthusiasm since they have to share their securities at higher yields if their issue gets inferior rating. Credit rating gives an investor a simple and easy indicator to the credit quality of the debt instrument, the risks and likely returns, thus providing a yardstick against which the risk inherent in an instrument can be measured. An investor uses the rating to assess the risk level and compares the offered rate of return, which is expected rate of return (for the given level of risk) to optimize his risk return trade- off. Ratings also provide a comparative framework, which allows the investor to compare investment opportunities. Credit rating also benefits the issuer. If a public offer is contemplated, the financial manager must bear in mind the rating while determining the appropriate leverage. Additional debt may lower the rating from an investment to a speculative grade category, thus rendering the security ineligible for investment by many institutional investors. It may well be that the advantages of debt outweigh the disadvantages of the lower credit rating. Junk bonds, for instance, are a high risk and a high yield (16 to 25% in USA) instruments. Investment may be limited in such instrument to what an investor can afford to loose. Ratings will also affect the pricing of the issue Ratings are used by brokers for opinions and as a service for their customers. Insurance companies and mutual funds use them in the purchase of securities even though their own staff prepares investment analysis. Portfolio managers also use them in security management. Banks depend on them for their investment in commercial paper. Individual investors depend on them for their decisions to place fixed deposits. Ratings are bound to assume greater importance with the institutionalization of investors in the form of unit trusts, mutual funds, pension and provident funds. The debt has shown considerable buoyancy in 1996 not only at the wholesale level (institutional investors) but also at retail level in view of poor offerings of equity in the primary market. This has come about largely on account of the availability of ratings on debt instruments, which boosted investor confidence. Rating has impact on interest rate in case Bank Loan Rating. (BLR) If the rating is low interest rate charged is high and vice versa.
  11. 11. 11 7. LIMITATION OF CREDIT RATING 1. Possibility of Bias Exist: The information collected by the rating agency may be subject to personal bias of the rating team. However, rating agencies try their best to provide an unbiased opinion of the credit quality of the company and/or instrument. If not, they will not be trusted. 2. Improper Disclosure May Happen: The company being rated may not disclose certain material facts to the investigating team of the rating agency. This can affect the quality of credit rating. 3. Impact of Changing Environment: Rating is done based on present and past data of the company. So, it will be difficult to predict the future financial position of the company. Many changes take place due to changes in economic, political, social, technological, legal and other environments. All this will affect the working of the company being rated. Therefore, rating is not a guarantee for financial soundness of the company. 4. Problems for New Companies: There may be problems for new companies to collect funds from the market. This is because, a new company may not be in a position to prove its financial soundness. Therefore, it may receive lower credit ratings. This will make it difficult to collect funds from the market. 5. Downgrading by Rating Agency: The credit-rating agencies periodically review the ratings given to a particular instrument. If the performance of a company is not as expected, then the rating agency will downgrade the instrument. This will affect the image of the company. 6. Difference in Rating: There are cases, where different ratings are provided by various rating agencies for the same instrument. These differences may be due to many reasons. This will create confusion in the minds of the investor.
  12. 12. 12 8. BANK LOAN RATINGS Bank Loan Ratings are used by banks to determine risk weights for their loan exposures, in keeping with the Reserve Bank of India's (RBI's) April 2007 Guidelines for Implementation of the New Capital Adequacy Framework under Basel II framework. Bank loan rating is an opinion on the relative ability and willingness of a borrower to fulfill obligations on specific fund-based or non-fund based facilities in a timely manner. The primary focus is to assess the capability of an issuer to meet its debt obligations against a specific line of credit under its respective terms & conditions. A credit rating is not a requirement for a loan sanction or for renewal of working capital facilities. However, a bank could insist on rating the loan/facility before sanction/renewal of loan facilities as it would help the bank to save on capital and provide it with additional inputs to decide on the terms of the loan. Features  All types of facilities (Fund based & Non fund based) are rated.  Ratings are assigned to each facility and are linked to the tenure of the facility rated  Ratings are published through a press release on SMERA’s website  Ratings are kept under constant surveillance Benefits For Borrowers  Better negotiating power with respect to availability and pricing of credit  Faster turnaround time for enhancement/approvals  Aligns borrowers with strengths and weaknesses across other rated entities  Greater visibility amongst lenders/investors For Bankers  Capital relief and regulatory adherence through rating of exposure  An independent and credible credit opinion  Risk based pricing of facilities  Exposure to rating knowledge across geographies and rating spectrum
  13. 13. 13 9. INTRODUCTION TO SMERA SME Rating Agency of India Limited (SMERA) is a joint initiative by SIDBI, Dun & Bradstreet Information Services India Private Limited (D&B) and several leading banks in the country. SMERA is the country's first Rating agency that focuses primarily on the Indian MSME segment. SMERA's primary objective is to provide Ratings that are comprehensive, transparent and reliable. This would facilitate greater and easier flow of credit from the banking sector to MSMEs. SMERA has also been registered under Securities and Exchange Board of India (Credit Rating Agencies) Regulations, 1999 making it only the sixth rating agency in India to rate issues such as IPO, bonds, commercial papers, security receipts and others. SMERA has also been granted approval as an eligible Credit Rating Agency for ratings bank loans.
  14. 14. 14 Rating Scale LONG TERM RATING SMERA ‘AAA’ Instruments with this rating are considered to have the highest degree of safety regarding timely servicing of financial obligations. Such instruments carry lowest credit risk. SMERA ‘AA’ Instruments with this rating are considered to have high degree of safety regarding timely servicing of financial obligations. Such instruments carry very low credit risk SMERA ‘A’ Instruments with this rating are considered to have adequate degree of safety regarding timely servicing of financial obligations. Such instruments carry low credit risk SMERA ‘BBB’ Instruments with this rating are considered to have moderate degree of safety regarding timely servicing of financial obligations. Such instruments carry moderate credit risk SMERA ‘BB’ Instruments with this rating are considered to have moderate risk of default regarding timely servicing of financial obligations SMERA ‘B’ Instruments with this rating are considered to have high risk of default regarding timely servicing of financial obligations SMERA ‘C’ Instruments with this rating are considered to have very high risk of default regarding timely servicing of financial obligations SMERA ‘D’ Instruments with this rating are in default or are expected to be in default soon
  15. 15. 15 SHORT TERM RATING SMERA ‘A1’ Instruments with this rating are considered to have very strong degree of safety regarding timely payment of financial obligations. Such instruments carry lowest credit risk. SMERA ‘A2’ Instruments with this rating are considered to have strong degree of safety regarding timely payment of financial obligations. Such instruments carry low credit risk. SMERA ‘A3’ Instruments with this rating are considered to have moderate degree of safety regarding timely payment of financial obligations. Such instruments carry higher credit risk as compared to instruments rated in the two higher categories. SMERA ‘A4’ Instruments with this rating are considered to have minimal degree of safety regarding timely payment of financial obligations. Such instruments carry very high credit risk and are susceptible to default. SMERA ‘D’ Instruments with this rating are in default or expected to be in default on maturity. SMERA may apply '+' (plus) or '-' (minus) signs to its ratings assigned to indicate their relative standing within the category.
  16. 16. 16 10. SMERA ACCOMPLISHMENTS 1) SMERA has pioneered SME ratings in the country and has till date completed over 22000 ratings across sectors and geographies on a PAN – India basis. SMERA Ratings have gained wide acceptability and are now an integral part of the risk assessment process within the lending and investing community. 2) The Association of Development Financing Institutions in Asia and the Pacific (ADFIAP) has awarded SIDBI with "Outstanding Development Project Award" for setting up SMERA. The award was given under the SME Development Category during the 30th ADFIAP Annual Meeting held on May 10, 2007 at Hanoi, Vietnam. 3) SMERA has also been registered under Securities and Exchange Board of India (Credit Rating Agencies) Regulations, 1999 making it only the sixth rating agency in India to rate issues such as IPO, bonds, commercial papers, security receipts and others. 4) RBI has recently approved SMERA as an eligible External Credit Assessment Institution (ECAI) under the Basel norms. RBI’s approval paves way for SMERA to offer its services in the bank loan space under Basel II norms.
  17. 17. 17 11. PRODUCTS OFFERED BY SMERA  MSME Ratings. Micro, Small and Medium Enterprise Rating is a comprehensive and an independent third-party evaluation of the MSME. It takes into account the financial position and several qualitative parameters of the MSME that has bearing on credit worthiness of the entity.  Greenfield & Brownfield Greenfield project means to start a project without the need to consider any prior work. & Brownfield means project to start a project based on prior work or to rebuild (engineer) a product from an existing one. It is an independent, third party assessment of risk involved in viability of operations post project completion. The assessment takes into account construction and project specific risk, management risk, operational/business risk, market risk/industry risk, financial and sustainability risk.  MFI Grading It is an independent, third party comprehensive assessment of risk involved of underlying portfolio of Micro Finance Institution and its resultant social impact. Besides evaluating creditworthiness of MFIs, ratings also assess trustworthiness, operational excellence, quality of loans etc of a Micro Finance Institution, amongst other subjective parameters. The assessment of MFIs also covers Financial, Operational, Management & Political risk and matters related to its internal governance, strategic positioning and social profile.  Green Rating  Green Ratings will examine subject units’ current processes and technology and its impact on ecology i.e. air, land and water.  Green Rating process would focus on units’ processes & technology deployed from energy consumption perspective and understand various steps undertaken by the unit to become energy efficient  Green Rating would assess units’ industrial emission of air pollutants in the atmosphere due to its existing manufacturing process & technology deployed.
  18. 18. 18  Independent assessment of disposal of industrial waste & effluents and the re- cycling treatment, if any, would be undertaken.  Assessment of hazardous material management from raw material to waste product stage will be studied.  Depending on the industry, assessment of the noise management due to units’ activity will be undertaken under this study.  Related process knowledge and documentation in place for consistent & efficient management of air/water/noise pollution at the unit level will be analyzed.  Bond Rating SMERA gives opinion about timely debt payment including interest by the bond issuer.  IPO Grading For any company to get listed needs to be mandatorily rated by a credit rating company.  Bank loan Rating Bank Loan Ratings are used by banks to determine risk weights for their loan exposures, in keeping with the Reserve Bank of India's (RBI's) April 2007 Guidelines for Implementation of the New Capital Adequacy Framework under Basel II framework.
  19. 19. 19 12. PROCESS OF RATING The rating process is broadly divided in three stages a) Primary Stage b) Analysis Stage c) Rating Finalization Stage
  20. 20. 20 PROCESS FLOW CHART OF CREDIT RATING MANDATE INITIAL STAGE ASSIGN RATING TEAM RECEVE INITIAL INFORMATION, CONDUCT BAIC RESEARCH MEETING & VISIT FACTS FINDING & ANALYSIS ANALYSIS & PREPARTION OF REPORT STAGE PREVIEW MEETING RATING MEETNG FRESH INPUT CLARIFICATION ASIGN RATING COMMUNICATE THE RATING & RATIONALE ACCEPTNCE REQUEST FOR REVIEW NON ACCEPTANCE NON ACCEPTANCE RATING FINALIZATION
  21. 21. 21  Primary Stage This phase comprises of two stages At this stage client comes with a request to rate himself. This is followed by mandatory information which is required to be furnished to CRA by the client for the rating process. The case is allocated to analyst.  Analysis Stage Analyst fixes a meeting with the client & meets the client in personnel, discusses matters like about the future plans, understands the business model. Analyst visits the facilities and inspects it Analyst calculates various risk involve in the project and based on his analysis comes out with rating.  Rating Finalization Stage In this stage the rating is presented in front of the rating committee where senior members from the company come and give their on the rating assigned. Committee also has senior and experienced members from outside the company who give their views on the rating. Once the rating is discussed and approved in the committee it can be communicate to the client. It is at client’s sole discretion whether he wants to accept the rating or not. And if clients accept it then only it can be published.
  22. 22. 22 13. APPLICABLE REGULATORY BODIES SECURITIES AND EXCHANGE BOARD OF INDIA Credit Rating Agencies are governed by SEBI, regulator of capital market. SEBI governs the following issues relevant to Credit Rating Agencies: 1. REGISTRATION OF CREDIT RATING AGENCIES o Application for grant of certificate o Promoter of credit rating agency o Eligibility criteria o 5A Applicability of SEBI (Criteria for Fit and Proper Person) Regulations, 2004 o Application to conform to the requirements o Furnishing of information, clarification and personal representation o Grant of Certificate o Conditions of certificate and validity period o Renewal of certificate o Procedure where certificate is not granted o Effect of refusal to grant certificate 2. GENERAL OBLIGATIONS OF CREDIT RATING AGENCIES o Code of Conduct o Agreement with the client o Monitoring of ratings o Procedure for review of rating o Internal procedures to be framed o Disclosure of Rating Definitions and Rationale o Submission of information to the Board o Compliance with circulars etc., issued by the Board o Appointment of Compliance Officer o Maintenance of Books of Accounts records, etc. o Steps on auditor’s report o Confidentiality o Rating process
  23. 23. 23 3. RESTRICTION ON RATING OF SECURITIES ISSUED BY PROMOTERS OR BY CERTAIN OTHER PERSONS o Securities issued by promoter o Securities issued by certain entities, connected with a promoter, or rating agency not to be rated o Securities already rated 4. PROCEDURE FOR INSPECTION AND INVESTIGATION o Board’s right to inspect o Notice before inspection or investigation o Obligations of credit rating agency on inspection or investigation by the Board o Submission of report to the Board o Action on inspection or investigation report 5. PROCEDURE FOR ACTION IN CASE OF DEFAULT o Liability for action in case of default RESERVE BANK OF INDIA Although RBI does not directly govern CRAs, it plays an important oversight role as far as Bank Loan Rating products concerned OTHERS 1. MSME ministry oversight on SME/NSIC ratings 2. MNRE – Regulates RESCO ratings 3. Ministry of Shipping Regulates MTI
  24. 24. 24 14. CREDIT RATING ANCENCIES PRODUCT SUITE CRISIL ICRA CARE SMERA Brickworks Fitch CRABusiness Lines Real Estate Ratings Hospital Grading Advisory Risk Management Advisory Consulting Research Industry Research Research IPO Research Independent Equity IT Solutions Offshoring Solar Maritime Institute Grading Micro Finance Ratings SME Ratings BLR Ratings Corporate
  25. 25. 25 15. KIND OF INSTRUMENTS RATED To keep the pace with the changing credit requirements of new instruments the rating agencies have been upgrading the technology and bringing in analytical innovation. The instrument being rated by such agencies include: 1) Mortgage & Asset –Backed Securities 2) Letter Of Credit Backed Bonds, Commercial Paper and Structure Finance For Global Market; 3) Project Finance 4) Municipal and Corporate Bond Insurance; 5) Bonds and Money Market Funds; 6) Syndicated Banks Loans: Followings are the bodies or organization which can be rated 1. Manufacturing Companies 2. Banks 3. Non Banking Financial Institution 4. Financial Institutions 5. Housing Finance Companies 6. Municipal Bodies 7. Companies in Infrastructure Sector
  26. 26. 26 16. ETHICS TO BE FOLLOWED BY RATING AGENCIES Member Credit Rating Agencies shall put in place systems and procedures to ensure the following: 1) The proceedings of a credit rating board / rating committee, are kept confidential at all times, and not revealed to any external parties or agencies. If any records of the proceedings are made, credit rating agencies must take steps to keep such records properly safeguarded, except where required to be disclosed by the provisions of laws or regulations. 2) When the credit rating board decides on a rating, it shall be announced as a joint decision and the individual votes shall be kept confidential, even if recorded. This requirement of confidentiality shall apply to rating board members for their own votes as well. Member Credit Rating Agencies shall put in place systems and procedures to ensure the following: 1) When and after a credit rating board / rating committee member or credit rating agency employee terminates his/her employment or work association with the rating agency, the requirement of confidentiality with respect to the information received during the period of work association shall continue as information held in trust. 2) A credit rating board / rating committee member does not take undue material advantage of any confidential information received through his or her participation in a credit rating process. Persons involved in the ratings process should also be made vigilant to prevent abuse of prior knowledge of ratings changes.
  27. 27. 27 17. FUTURE OF CREDIT RATING AGENCY Undoubtedly credit rating agencies have a great future in a growing economy like India where more and more companies are resorting to exchanges and banks to raise and borrow funds. Another point which is in favour of CRA’s is that ratings have been made mandatory by regulatory bodies like RBI and SEBI. Year on year people’s disposal income is increasing and so they are looking for avenues to invest. So any company who has an investment grade attached to its instrument, gives immense confidence to the investors to invest in it. And because of the growing and developing nature of the nation there will be many companies in future who will raise or borrow funds, so by this we can conclude that CRA’s have great future in India. But the matter of concern is, in India credit rating agencies (CRA) are approved by two regulators, Securities and Exchange Board of India (SEBI) for capital market operations and by Reserve Bank of India (RBI) for rating of borrowers of banks. And as it is said dual control is no control. The existing regulations in India are not comprehensive enough to take care of the present crisis caused by many of the issuers dragging the rating agencies to courts on grounds of bias, manipulation and lack of transparency or sheer incompetence. And they do not come under the Right to Information (RTI) Act in our country as they are all in private sector, though their activities have a vital bearing on the economy of the country. The rising court cases against rating agencies, not only in India but in many other parts of the world, are indicative of the growing resentment to the arbitrariness of the rating agencies, which calls for serious thought on the part of the regulators all over the world.
  28. 28. 28 18. CONCLUSION A credit rating is a useful tool not only for the investor, but also for the entities looking for investors. An investment grade rating can put a security, company or country on the global radar, attracting foreign money and boosting a nation's economy. Indeed, for emerging market economies, the credit rating is key to showcase their worthiness of money for foreign investors, and because the credit rating acts to facilitate investments, many countries and companies will strive to maintain and improve their ratings, hence ensuring a stable political environment and better transparency. Credit rating agencies can best serve markets when they operate independently, adopt and enforce internal guidelines to avoid conflicts of interest and protect confidential information received from issuers. Credit rating agencies should be made accountable for any faulty rating.
  29. 29. 29 19. REFERENCES  SMERA’S Website.  SEBI’S Website.  On the job training.  Material provide by the company guide.

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