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1. INTRODUCTION OF CRA

India was perhaps the first amongst developing countries to set up a credit rating agency in

1988. The function of credit rating was institutionalized when RBI made it mandatory for the

issue of Commercial aper !C" and su#se$uently #y %&BI' when it made credit rating

compulsory for certain categories of de#entures and de#t instruments. In (une 199)' RBI

made it mandatory for *on+Ban,ing -inancial Companies !*B-Cs" to #e rated. Credit rating

is optional for u#lic %ector nderta,ings !%s" #onds and privately placed non+

conve11i#le de#entures upto Rs. /0 million. -ied deposits of manufacturing companies also

come under the purview of optional credit rating. %ecurities. Credit Rating is valua#le

information' widely used measure for the ris,iness of the companies and #onds. It is

epensive information2 costly to o#tain. Credit Rating prediction is important for investors to

estimate ris,iness of unrated companies and for  companies to monitor the companies3 creditrating' predict the future rating.

4ith the increasing mar,et orientation of the Indian economy' investors value a systematic

assessment of two types of ris,s' namely 5#usiness ris,6 arising out of the 5open economy6

and lin,ages #etween money' capital and foreign echange mar,ets and 5payments ris,6.

4ith a view to protect small investors' who are the main target for unlisted corporate de#t in

the form of fied deposits with companies' credit rating has #een made mandatory.

The first mercantile credit agency was set up in *ew 7or, in 18)1 to rate the a#ility of

merchants to pay their financia #ligatons. ater on' it was ta,en over #y Ro#ert :un. Thisagency pu#lished its first rating guide in 18/9. The second agency was esta#lished #y (onBradstreet in 18)9 which was later merged with first agency to form :un ; Bradstreet in19<<' which #ecame the owner of =oody3s Investor3s %ervice in19>?. The history of=oody3s can #e traced #ac, a#out a 100years ago. In 1900' (ohn =oody laid stone of=oody3s Investors %ervice and pu#lished his @=anual of Railroad %ecurities3.

&arly 19?03s saw the epansion of credit rating industry when the oor3s u#lishingCompany pu#lished its first rating guide in 191>. %u#se$uently -itch u#lishing Companyand %tandard %tatistics Company were set up in 19?) and 19?? respectively. oor and%tandard merged together in 19)1 to form %tandard and oor3s which was su#se$uently

ta,en over #y =cAraw ill in 19>>. Between 19?) and 190' no maDor new rating agencieswere set up. But since 1903s' a num#er of credit rating agencies have #een set up all overthe world including countries li,e =alaysia' Thailand' Eorea' Fustralia' a,istan andhilippines etc. In India' CRI%I !Credit Rating and Information %ervices of India td." wassetup in 198 as the first rating agency

Definition

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Fn independent company that evaluates the financial condition of issuers of  debt

instruments and then assigns a rating that reflects its assessment of the issuerGs a#ility to

ma,e the de#t payments. otential investors' customers' employees and #usiness partners 

rely upon the data and o#Dective analysis of credit rating agencies in determining the overall

strength and stability of a company.

2. WHAT IS A CREDIT RATING?

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3. WHAT IS AND HOW CREDIT RATING IS

GENERALLY DONE?

F 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 lia#ilities.Typically' a credit rating tells a lender or investor the pro#a#ility of the su#Dect #eing a#le to

 pay #ac, a loan. owever' in recent years' credit ratings have also #een used to adDust

insurance premiums' determine employment eligi#ility' and esta#lish the amount of a utility

or leasing deposit.

F poor credit rating indicates a high ris, of defaulting on a loan' and thus leads to high

interest rates or the refusal of a loan #y the creditor.

In countries such as the nited %tates' an individualGs credit history is compiled and

maintained #y companies called credit #ureaus. In the nited %tates' credit worthiness is

usually determined through a statistical analysis of the availa#le credit data. F common form

of this analysis is a <+digit credit score provided #y independent financial service companies

such as the -IC credit score.

The factors which may influence a personGs credit rating areH

a#ility to pay a loan interest

 amount of credit used saving patterns

4. IMORTANCES OF CREDIT RATING AGENCIES

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Credit Rating Fgencies are the main authority to assign rate of credit for the companies who

issue de#t. Fny investor can measure the ris, of #ad de#t after analysis these credit rates.

These credit rates are fied on the #asis of a#ility to pay #ac, the loan.

Credit Rating Fgencies are also helpful to re#uild the investor confidence which is vital tothe glo#al capital mar,ets.

In capital mar,et' its importance is not less than %&BI #ecause credit rating agencies protect

different investors from ris, of financial loss #y providing them upto date information of

credit rate. =any other ,ey roles can #e eplain with following wayH

To compare the loan on the #asis of $uality of credit and loan. %uppose ' 7 and J

are three companies offering de#entures to investors. Credit rating agencies will

assign their credit rate #ecause these are financial epert and assign rate on the #asis

of analysis of past financial records and statements. Credit rating agency will assign

rate FFF to #est of ' 7 and J and to invest FFF +credit rating company means low

ris, of loss.

 *ot only show FFF #ut it show other range of credit rate li,e F for medium ris,y

company' BBB medium ris,y and BB high ris,y and speculative company.

Credit rating agencies also assist to portfolio monitoring. In portfolio monitoring'

they provide information a#out which investment is most secure and provide high

return of interest.

Credit $uality of transparency.

Credit rating of money mar,et securities.

!. MERITS AND DEMERITS OF CREDIT RATING

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Improves Corporate Image H

Credit rating helps to improve the corporate image of a company. igh credit

rating creates confidence and trust in the minds of the investors a#out the company.Therefore' the company enDoys a good corporate image in the mar,et.

owers Cost of Borrowing

Companies that have high credit rating for their de#t instruments will getfunds at lower costs from the mar,et. igh rating will ena#le the company to offerlow interest rates on fied deposits' de#entures and other de#t securities. Theinvestors will accept low interest rates #ecause they prefer low ris, instruments. Fcompany with high rating for its instruments can reduce the cost of pu#lic issue toraise funds' #ecause it need not spend heavily on advertising for attracting investors.

4ider Fudience for Borrowing

F company with high rating for its instruments can get a wider audience for #orrowing. It can approach financial institutions' #an,s' investing companies. This is #ecause the credit ratings are easily understood not only #y the financial institutionsand #an,s' #ut also #y the general pu#lic.

Aood for *on+opular Companies

Credit rating is #eneficial to the non+popular companies' such as closely+heldcompanies. If the credit rating is good' the pu#lic will invest in these companies' evenif they do not ,now these companies.

Fct as a =ar,eting Tool H

Credit rating not only helps to develop a good image of the company amongthe investors' #ut also among the customers' dealers' suppliers' etc. igh credit ratingcan act as a mar,eting tool to develop confidence in the minds of customers' dealer'suppliers' etc.

elps in Arowth and &pansion

Credit rating ena#les a company to grow and epand. This is #ecause #etter credit

rating will ena#le a company to get finance easily for growth and epansion.

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De+e$it# of C$e%it R&tin'

ossi#ility of Bias &ist

The information collected #y the rating agency may #e su#Dect to personal #ias of therating team. owever' rating agencies try their #est to provide an un#iased opinion of thecredit $uality of the company andKor instrument. If not' they will not #e trusted.

Improper :isclosure =ay appen H

The company #eing rated may not disclose certain material facts to the investigating

team of the rating agency. This can affect the $uality of credit rating.

Impact of Changing &nvironment

Rating is done #ased on present and past data of the company. %o' it will #e difficultto predict the future financial position of the company. =any changes ta,e place due tochanges in economic' political' social' technological' legal and other environments. Fllthis will affect the wor,ing of the company #eing rated. Therefore' rating is not aguarantee for financial soundness of the company.

ro#lems for *ew Companies

There may #e pro#lems for new companies to collect funds from the mar,et. This is #ecause' a new company may not #e in a position to prove its financial soundness.Therefore' it may receive lower credit ratings. This will ma,e it difficult to collect fundsfrom the mar,et.

:owngrading #y Rating Fgency

The credit+rating agencies periodically review the ratings given to a particularinstrument. If the performance of a company is not as epected' then the rating agency

will downgrade the instrument. This will affect the image of the company.

:ifference in Rating H

There are cases' where different ratings are provided #y various rating agencies forthe same instrument. These differences may #e due to many reasons. This will createconfusion in the minds of the investor .

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The rating process #egins with the receipt of formal re$uest from a company desirous of

having its issue o#ligations rated #y credit rating agency. F credit rating agency constantly

monitors all ratings with reference to new political' economic and financial developments

and industry trends. The processKprocedure followed #y all the maDor credit rating agencies in

the country is almost similar and usually comprises of the following steps.

1. R&tin' Ree#t

The rating process #egins' with the receipt of formal re$uest for rating from a

company desirous of having its issue o#ligations under proposed instrument rated #y

credit rating agencies. Fn agreement is entered into #etween the rating agency and the

issuer company. The agreement spells out the terms of the rating assignment and covers

the following aspectsH

L It re$uires the CRF !Credit Rating Fgency" to ,eep the information

confidential.

L It gives right to the issuer company to accept or not to accept the rating.

L It re$uires the issuer company to provide all material information to the CRF

for rating and su#se$uent surveillance.

2. D&t& '&te$in'5An&)/#i#

To get all the information necessary for analysis' @Credit+Rating3 agency

sends a client the letter with information re$uirementsH a list of all the informationand documents necessary for credit rating analysis. @Credit+Rating3 guarantees that

your confidential information will #e ,ept safe.

3. M&n&'e+ent Meetin'#

=eetings and consultations with client company managers and officials arevery important in the process of credit rating assignment. Fs a rule' we need two orthree meetings. In the first meeting analysts would as, $uestions a#out financial plansand further development prospects. This information helps us to remain o#Dective inassessment of client3s financial position for the long+term period.

4. R&tin' ,o++ittee5A##i'n+ent of R&tin'

Rating team of the agnecy eamines all the data' information and documents.It also considers all the points presented #y the client. The team then recommends therating.

!. A%(i,e to te Co+*&n/5 in#tittion 6 

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The CompanyK institution are informed a#out the rating proposed #y the ratingagencies.

. A**e&)

If the CompanyK institution feel that the rating can #e improved and hasade$uate reason for it' it can appeal so to the agency. %uch appeal should #esu#stantiated with proper reasoning and Dustification. n appeal the agency may ormay not revise the rating.

7. 0)i,&tion

:ecision a#out rating pu#lication is ta,en #y a client individually. Client maydecide not to pu#lish assigned rating. &ven if rating is not pu#lished the procedure of

credit rating assignment remains useful as conclusions of agency analysts written inthe rating report may help to determine factors influencing client3s credi#ility. Theirimprovement in the future may lead to credit rating upgrade. Fgency may not su#mit

 pu#lication of upgradesKdowngrades of once pu#lished rating to client3s approval.

8. A**e&)

If a client thin,s that in the process of rating assignment some importantfactors have not #een ta,en into consideration' client3s authorized representativesmay appeal to rating committee within the net ten days after rating assignment. The

appeal will #e accepted only if a client can #ring new data and documents that areimportant for rating procedure. Ffter eamination of these documents' credit ratingcommittee will ta,e a decision which cannot #e appealed .Fppeal procedure does notinfluence on client3s rights on rating pu#lication.

9. S$(e)i&n,e &n% Ann&) Re(ie-

Rating is a dynamic activity. %o rating has to #e monitored continuously. Flso it

is mandatory.

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7. CREDIT RATING AGENCY IN INDIA

  C$e%it R&tin' Info$+&tion Se$(i,e# of In%i& Li+ite% :CRISIL;.

  In(e#t+ent Info$+&tion &n% C$e%it R&tin' A'en,/ of In%i& :ICRA;.

 C$e%it An&)/#i# < Re#e&$, Li+ite% :CARE;.

 Dff < e)*# C$e%it R&tin' In%i& $i(&te Lt%. :DCR In%i&;

 Oni,$& C$e%it R&tin' A'en,/ of In%i& )i+ite%.

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7.1. CRISIL : C$e%it $&tin' &n% info$+&tion #e$(i,e# of In%i& )t%. ;

CRI%I' IndiaGs first credit rating agency' is incorporated' promoted #y the erstwhile ICICI

td' along with TI and other financial institutions. The head office of the company is

located at mum#ai and it has esta#lished offices outside india. it is a glo#al analyticalcompany providing ratings 'research and ris, and policy advisory services.it is the largest

credit rating agency in India. CRI%I3s maDority shareholder is %TF*:FR: and R3s.

4Ith sustaina#le competitive advantage arising from their strong #rand' unmatched

credi#ility' mar,et leadership across #usinesses' and large customer #ase' they deliver

analysis' opinions' and solutions that ma,e mar,ets function #etter.

they defining trait is our a#ility to convert data and information into epert Dudgements and

forecasts across a wide range of domains' with deep epertise and complete o#Dectivity.

Ft the core of their credi#ility' #uilt up assiduously over the years' are our  valuesH Integrity'

Independence' Fnalytical Rigour' Commitment and Innovation.

CRI%I launches &ducation Arading' #eginning with #usiness schools

CRI%I Rating enhances access to funding for %=&s2 Fnnounces ?0'000th %=&

Rating

CRI%I Ratings launches %olar grading

CRI%I Research launches Aold and Ailt Inde

CRI%I Alo#al Research ; Fnalytics receives *F%%C= &emplary Talent

ractices Fward

CRI%I was set up in the year 198 in order to rate the firms and then entered into the field

of assessment service for the #an,s. ighly s,illed mem#ers manage the agency. =s. Roopa

Eudva who acts as the =anaging :irector and Chief &ecutive fficer of the company heads

it. The company has set up large num#er of committees to loo, after dispersal of various

services offered #y the company for eample' investor grievance committee' investment

committee' rating committee' allotment committee' compensation committee and so on. Thehead office of the company is located at =um#ai and it has esta#lished offices outside India

also.

CRI%I Ratings is the only ratings agency in India to operate on the #asis of sectoral

specialization. CRI%I Ratings plays a leading role in the development of the de#t mar,ets

in India. CRI%I has also spearheaded the formation of the Cari CRI%' the worldGs first

regional credit rating agency.

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LONG TERM

INSTRUMENT

SHORT=TERM

I NSTRUMENTS

CRISIL AAA

:Hi'e#t S&fet/;

Instruments with this rating areconsidered to have the highestdegree of safety regarding timely

servicing of financial o#ligations.%uch instruments carry lowest creditris,.

CRISIL A1

CRISIL AA

:Hi' S&fet/;

Instruments with this rating areconsidered to have high degree ofsafety regarding timely servicing offinancial o#ligations. %uchinstruments carry very low creditris,.

CRISIL A2

CRISIL A:A%e&te S&fet/; Instruments with this rating areconsidered to have ade$uate degreeof safety regarding timely servicingof financial o#ligations. %uchinstruments carry low credit ris,.

CRISIL A3

CRISIL """

:Mo%e$&te S&fet/;

Instruments with this rating areconsidered to have moderate degreeof safety regarding timely servicingof financial o#ligations. %uchinstruments carry moderate credit

ris,.

CRISIL A4

CRISIL ""

:Mo%e$&te Ri#>;

Instruments with this rating areconsidered to have moderate ris, ofdefault regarding timely servicing offinancial o#ligations.

CRISIL D

CRISIL "

:Hi' Ri#>;

Instruments with this rating areconsidered to have high ris, ofdefault regarding timely servicing offinancial o#ligations.

CRISIL C:e$/ Hi' Ri#>;

Instruments with this rating areconsidered to have very high ris, ofdefault regarding timely servicing offinancial o#ligations.

CRISIL D

Def&)t

Instruments with this rating are in

default or are epected to #e in

default soon.

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CRISIL Ri#> So)tion#

198

(anuary ?9H CRI%I' IndiaGs first credit rating agency' is incorporated' promoted #y the erstwhile ICICI td' along with TI and other

financial institutions.

=r. * Maghul and =r. radip %hah are CRI%IGs first Chairman and=anaging :irector' respectively.

1988

(anuary 1H CRI%I commences operations within a year of itsincorporation. The #usiness environment is far from promising for theone+year old + the lending rates are fied' and India has no such thingas a corporate #ond mar,et as yet. Fnd' whatGs more' credit rating isan idea thatGs far ahead of its times.

1990  The CRI%ICFR: %ervice + providing comprehensive information

and analytical opinion on IndiaGs corporate entities + is launched.

1991

:espite the odds' and the initial lac, of mar,et acceptance of creditratings' CRI%IGs operations are now well esta#lished. It #egins toac$uire #rand identity' with a reputation for analytical rigour andindependence.

199? CRI%I offers technical assistance and training to help set up Rating

Fgency =alaysia Berhad' and =FFT' the Israeli securities ratingcompany.

199<  CRI%IGs I is a whopping success + its ?0' 00'000 shares' sold at a

 premium of Rs.)0 per share' are oversu#scri#ed #y ?.) times.

199)

=r. R Ravimohan ta,es over as CRI%IGs =anaging :irector.

CRI%I diversifies #usiness portfolio with a strategic entry intoadvisory services' and wins its first maDor mandate in theinfrastructure policy advisory domain.

199/ In partnership with the *ational %toc, &change of India td

!*%&I"' CRI%I develops and launches the CRI%I/00 &$uityInde' helping investors clue in on stoc, price movements.

199> CRI%I forges a strategic #usiness alliance with %tandard ; oorGs

!%;" Ratings Aroup. The tie+up is part of CRI%IGs strategy todevelop its s,ills and processes.

199

%; ac$uires a 9.>8 per cent sta,e in CRI%I. The alliance with theworldGs leading rating agency adds a new dimension to CRI%IGsmethodologies. It provides CRI%I with eposure to the international

rating mar,ets and to %;Gs rating processes.

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1998 CRI%I sets up India Inde %ervices td !II%"' a Doint venture with

 *%&I' to provide a variety of indices and inde+related services and products to IndiaGs capital mar,ets.

1999

CRI%IGs proprietary Ris, Fssessment =odel !RF=" #ecomes the

 #an,ing industry standardH given the heightened regulatory focus onthe #an,sG ris, management practices' RF= serves as a customisedcredit rating model for the #an,s.

?000

CRI%I ac$uires the #usiness' and #rand' I*-FC' of Informationroducts and Research %ervices !India" vt td. I*-FC is a leading

 provider of research to IndiaGs financial sector. The ac$uisitionstrengthens CRI%IGs research #usiness' and ma,es it IndiaGs leading

 provider of integrated research.

CRI%I launches the CRI%I Composite erformance Ran,ing

!CRI%INCR" to provide performance evaluation standards andinvestment decision support to mutual fund houses' distri#utors' andinvestors.

?001

CRI%I sets up su#sidiary' Alo#al :ata %ervices of India td' tostandardize pu#lished financial data for analysis.

CRI%I launches =utual -und Fwards in association with C*BC+TM18 + a #enchmar, award for IndiaGs #est performing mutual funds.

CRI%I launches the CR!" #oun$ %&ou$&t "eader 'C#%"()*ard + to attract outstanding talent and provide a platform to IndiaGsfuture #usiness leaders to showcase their views.

?00?

CRI%I sets upH The Centre for &conomic Research + to apply economic principles to

live #usiness situations

CRI%I =ar,et 4ire + to provide real+time financial news services tohelp clients ma,e pricing+ and investment+related decisions

?00<

CRI%I sets up its investment and ris, management services group tooffer integrated ris, management solutions and advice to #an,s andcorporates.

CRI%I follows it up with its first overseas ac$uisition +&cono=atters td !later the Aas %trategies Aroup"' a ondon+#asedcompany providing natural gas related consulting' information andtraining' and conference+organizing services.

?00)   CRI%I epands its glo#al reach further with an e$uity investment inthe worldGs first regional rating agency' the Cari##ean Information

and Credit Rating %ervices imited !CariCRI%"' which CRI%I also

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helps set up.

The CRI%I Fwards for &cellence in =unicipal Initiatives areinstituted' to recognize outstanding programms in ur#an development.

?00/

The strategic alliance with %; since 199> culminates in %;Gsac$uiring maDority control of CRI%I.

CRI%I ma,es its second overseas ac$uisition' of Irevna' thus addinge$uity research to its wide canvas of wor,. Irevna is a leading glo#ale$uity research and analytics company.

CRI%I launches !mall and +edium ,nterprise '!+,( Ratin$s toserve the specialized needs of the %=& sector.

CRI%I partners C*BC+TM18 for &merging India Fwards + the first

 platform to recognize and reward the achievements of IndiaGs %mall ;=edium &nterprises.

?00>

CRI%I launches I grading services to provide investors withindependent' relia#le' and consistent assessments of the fundamentalstrengths of new pu#lic issues.

Irevna is ran,ed glo#ally as the top Investment Research utsourcing-irm #y The Blac, Boo, of utsourcing.

?00

=s. Roopa Eudva ta,es over as =anaging :irector and C& ofCRI%I' following =r. RavimohanGs appointment as =anaging:irector and Region ead of %;' %outh Fsia.

CRI%I assigns IndiaGs first Ban, oan Rating under the ReserveBan, of IndiaGs Basel+II related regulations.

The ension -und Regulatory and :evelopment Futhority awardsCRI%I with a prestigious mandate to assist in the selection of -und=anagers under the *ew ension %cheme.

The Blac, Boo, of utsourcing ran,s Irevna the *o. 1 -inancial

%ervices Industry Fnalytics utsourcing -irm.

CRI%I launches Real &state Fwards with C*BC F4FFJ. Theaward honors IndiaGs eemplary developers and #uilders.

?008

CRI%I launches Compleity evels' an initiative to strengthenIndiaGs capital mar,ets #y providing greater transparency to investors.

CRI%IGs revenues cross Rs./ #illion in ?008.

?009   CRI%IGs %=& Ratings group assigns its /000th %=& rating.

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CRI%I captures a#out half of IndiaGs #an, loan rating mar,et.

Irevna is ran,ed glo#ally #y The Blac, Boo, of utsourcing as the *o. 1 Investment Research and Fnalytics utsourcing -irm.

CRI%I Research launches Independent &$uity Research !I&R".

?010

CRI%I moves into a new' corporate head office + the new CRI%Iouse' at owai' =um#ai' is a state+of+the+art' green #uilding.

CRI%I %=& Ratings crosses its 1/'000th %=& rating.

CRI%I launches Real &state %tar Ratings.

CRI%I ac$uires ipal Research' further strengthening its leadershipin the E industry.

?011

CRI%I launches &ducation Arading' #eginning with #usiness schools

CRI%I Rating enhances access to funding for %=&s2 Fnnounces?0'000th %=& Rating

CRI%I Ratings launches %olar grading

CRI%I Research launches Aold and Ailt Inde

CRI%I Alo#al Research ; Fnalytics receives *F%%C=&emplary Talent ractices Fward

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Fn,tion# of ,$i#i)

R&tin'#

CRISIL R&tin'#: 

It is the only ratings agency in India with sectoral specialization It has played acritical role in the development of the de#t mar,ets in India. The agency has developednew ratings methodologies for de#t instruments and innovative structures across sectors.CRI%I Ratings provides technical ,now+how to clients all over the world and has helpedset up ratings agencies in =alaysia !RF="' Israel !=FFT" and in the Cari##ean.

Re#e&$,

It provides research' analysis and forecasts on the Indian economy' industries andcompanies to over /00 Indian and international clients across financial' corporate' consultingand pu#lic sectors.

CRI%I -und %ervicesH It provides fund evaluation services and ris, solutions to themutual fund industry.

 The Centre for &conomic ResearchH It applies economic principles to live #usinessapplications and provide #enchmar,s and analyses for IndiaGs policy and #usinessdecision ma,ers.

 Investment Research utsourcingH CRI%I added e$uity research to its wide #ou$uet of services' #y ac$uiring Irevna' a leading glo#al e$uity research andanalytics company. Irevna offers investment research services to the worldGs leadinginvestment #an,s and financial institutions.

A%(i#o$/ 

 CRISIL Inf$&#t$,t$e A%(i#o$/6

It provides policy' regulatory and transaction level advice to governments andleading organizations across sectors.

 In(e#t+ent &n% Ri#> M&n&'e+ent Se$(i,e#6

CRI%I Ris, %olutions offers integrated ris, management solutions andadvice to Ban,s and Corporates #y leveraging the eperience and s,ills of CRI%I inthe areas of credit and mar,et ris,.

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7.2. ICRA : In(e#t+ent Info$+&tion &n% C$e%it R&tin' A'en,/

of In%i& Li+ite%;

ICRF imited !formerly Investment Information and Credit Rating Fgency of India imited"

was set up in 1991 #y leading financialKinvestment institutions' commercial #an,s andfinancial services companies as an independent and professional Investment Information andCredit Rating Fgency.

Today' ICRF and its su#sidiaries together form the ICRF Aroup of Companies !AroupICRF". ICRF is a u#lic imited Company' with its shares listed on the Bom#ay %toc,&change and the *ational %toc, &change.

ICRA@S G$&%in' of IO

ICRFGs Arading of Initial u#lic fferings !Is" is a service aimed at facilitating

assessment of e$uity issues offered to the pu#lic. The Arade assigned to any individual Iis a sym#olic representation of ICRFGs assessment of the GfundamentalsG of the issuer

concerned on a relative grading scale. I Arades are assigned on a five+point point scale'

where I Arade / indicates the highest grading and I Arade 1 indicates the lowest

grading' i.e. a higher score indicates stronger fundamentals. Fn ICRF I Arade does not

comment on the valuation or pricing of the issue that has #een graded' nor does it see, to

indicate the li,ely returns to shareholders from su#scri#ing to the I. The emphasis of the

I Arading eercise is on evaluating the prospects of the industry in which the company

operates' the companyGs competitive strengths that would allow it to address the ris,s

inherent in the #usinesses and effectively capitalize on the opportunities availa#le as well asthe companyGs financial position. In case the I proceeds are planned to #e used to set up

 proDects' either Areenfield or Brownfield' ICRF evaluates the ris,s inherent in such proDects'

The capacity of the companyGs management to eecute the same' and the li,ely #enefits

accruing from the successful completion of the proDects in terms of profita#ility and returns

to shareholders. ICRFGs five point I Arading %cale is as followsH

I Arade / %trong fundamentals

I Arade ) F#ove+average fundamentals

I Arade < Fverage fundamentals

I Arade ? Below+average fundamentals

I Arade 1 oor fundamentals

The company changed its name to ICRF imited' and went pu#lic on 1< Fpril 199'

with a listing on the Bom#ay %toc, &change and the *ational %toc, &change.

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=oodyGs continues to #e the largest single shareholder in ICRF. ICRF has a pan+India presence and has offices in 8 locations. Fpart from the four metros' it hasoffices in une' Fhmeda#ad' Bangalore and ydera#ad.

ICRF imited

Typeu#licTraded asB%& H /<?8</ *%&H ICRF Industry -inancial services -ounded 1991 ead$uarters *ew :elhi' 

India Eey people *aresh Ta,,ar' C& %ervices Credit ratings

-inancial consulting perating income 1'?9< million !%O?/.8 million" *et income

))9 million !%O8.9> million"P1Q  %u#sidiaries T. ICRF Indonesia

ICRF an,a imited

ICRF =anagement Consulting %ervices imited

ICRF Techno Fnalytics imited

ICRF nline imitedP?Q 4e#site www.icra.in

7.3. CARE :C$e%it &n&)/#i# &n% $e#e&$, )i+ite%;

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CFR& Ratings commenced operations in Fpril 199< and over nearly two decades' it has

esta#lished itself as the second+largest credit rating agency in India. 4ith the rating volume

of de#t of around Rs.<<'0>? #n !as on (une <0' ?011" ' CFR& Ratings is proud of its rightful

 place in the Indian capital mar,et #uilt around investor confidence. CFR& Ratings has also

emerged as the leading agency for covering many rating segments li,e that for #an,s' su#+sovereigns and I gradings.

CFR& Ratings provides the entire spectrum of credit rating that helps the corporates to raise

capital for their various re$uirements and assists the investors to form an informed

investment decision #ased on the credit ris, and their own ris,+return epectations. ur

rating and grading service offerings leverage our domain and analytical epertise #ac,ed #y

the methodologies congruent with the international #est practices. 4ith maDority

shareholding #y leading domestic #an,s and financial institutions in India' CFR&3s intrinsic

strengths have also attracted many other investors.

CFR& was registered #y %&BI as per %ecurities ; &change Board of India Regulations

1999.%ervices offered #y CFR& The various services offered #y CFR& includeH

R&tin' Se$(i,e#6

4ith regard to rating services offered #y CFR& or Credit Fnalysis ; Research td' theagency carries out rating of the following de#t instrumentsH

%tructured o#ligations

Commercial paper 

:e#entures

-ied deposits

Bonds

C$e%it Re*o$t#

In addition to rating industrial houses' Credit Fnalysis ; Research td !CFR&" also doesrating of financial institution' state governments' municipalities' special purpose vehicles.Credit Fnalysis ; Research td !CFR&" also prepares credit reports. These credit reports areavailed of #y different corporate houses. The credit reports wor,ed out #y CFR& areinstrumental in ma,ing decisions pertaining to colla#orations' Doint ventures' mergers'ac$uisitions.

&)&tion#

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CFR& conducts enterprise evaluations for #ig investors' #usiness partners !eisting partnersas well as prospective partners"' managements of #ig companies. The Indian governmentGs:isinvestment Commission had availed the services of CFR& for carrying out evaluation ofstate owned enterprises' which were ?0 in num#er .

C$e%it A**$&i#&)H

Credit Fnalysis ; Research td !CFR&" also assists non #an,ing companies and different #an,s in setting up or #ringing a#out modifications in the credit appraisal.

Re(ie-in' De0t M&$>et6

In order to remain a#reast with the prevailing mar,et conditions' CFR& pu#lishes a #ulletinevery month. The #ulletin is called :e#t mar,et review. This #ulletin contains informationregarding the latest developments in the de#t mar,ets. It also pu#lishes information regardingchanges in the economic structure of the country.

• A #>e)et&) ot)ine of te i+*o$t&nt #e$(i,e# offe$e% 0/ C$e%it An&)/#i# <

Re#e&$, Lt% :CARE;6

A%(i#o$/ #e$(i,e#

reparing credit reportsConducting studies in differentsectors.

R&tin' #e$(i,e#

:ifferent ,inds of de#t+Converti#le #ondsBonds:e#enturesCommercial paper Certificates of depositsfied depositsInter corporate depositsuasi de#ts

G$&%in' #e$(i,e# I !initial pu#lic offer" gradings.

7.4. DCR: Dff < e)*# ,$e%it $&tin' in%i& )i+ite%;

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It was founded in 19<? to provide high $uality investment research services focused on the

utility industry. ver the decades' it evolved into a diversified financial services firm that

 provides financial advisory' investment #an,ing' credit rating and investment management

services. The investment management and credit rating #usinesses were ac$uired #y Mirtus

Investment artners and -itch' respectively. The firm3s current management team ac$uired:uff ; helps3 financial advisory and investment #an,ing #usiness in ?00). The following

year' :uff ; helps strengthened its valuation capa#ilities with the ac$uisition of %tandard ;

oorGs Corporate Malue Consulting #usiness

F leading glo#al financial advisory and investment #an,ing firm' :uff ; helps !*7%&H

:-" #alances analytical s,ills' deep mar,et insight and independence to help clients ma,e

sound decisions. The firm provides epertise in the areas of valuation' transactions' financial

restructuring' alternative assets' disputes and taation. 4ith more than 1'000 employees'

:uff ; helps serves clients from offices in *orth Fmerica' &urope and Fsia.

rofile of :uff ; helps Credit Rating India rivate td !:CR India"

:uff ; helps Credit Rating India rivate td !:CR India" rated the fore de#t o#ligations

of India as G BBB+G or a Triple B =inus. This rating is of great importance for the economy of

India and the credi#ility of the national government.

This rating reflects the fact that the Indian national government is trying its #est to improve

the state of Indian economy. Fs per the rating of :CR India' the national government of

India is trying to #ring a#out a #etter economic environment through the introduction of

several economic policies and plans for the last 1 years.

ver the years India has had powerful accounts of payments. %ince the decade of 1990s the

records of de#t service have also #een impressive. The eternal de#t indicators of India are

also showing #etter patterns. Fll these support the rating provided #y :uff ; helps Credit

Rating India rivate td !:CR India".

Dff < e)*# C$e%it R&tin' In%i& $i(&te Lt% :DCR In%i&; Se$(i,e#

%&e ser-ices pro-ided by uff / &elps Credit Ratin$ ndia ri-ate "td 'CR ndia(

are considered to be at par *it& ot&er leadin$ pro-iders of credit ratin$ ser-ices inndia lie Credit Ratin$ nformation !er-ices of ndia "imited 'CR!"( CR)

Credit Ratin$ )$ency of ndia "td. n-estment nformation and Credit Ratin$ )$ency

of ndia 'CR)( peration Researc& roup / +aretin$ / Researc& roup and

Credit )nalysis / Researc& "imited 'C)R,(.

e/ Hi#to$i,&) Hi')i't#

1932 :uff ; helps opened to provide investment research2 epanded

services su#stantially over su#se$uent decades

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1994 %old credit rating and investment management #usiness

2BB! Fc$uired %tandard ; oorGs Corporate Malue Consulting' whichincluded wC3s legacy valuation #usiness

2BB Fc$uired Chan in Capital artners

2BB7 Conducted initial pu#lic offering via *7%&

  Fc$uired Rash ; Fssociates

2BB8 Fc$uired :u#ins,y ; Company

Fc$uired Eane Reece Fssociates

Fc$uired umin &pert Aroup

2BB9 -inancial advisor to the &aminer in the ehman BrotherGs #an,ruptcy

Maluation advisor to the &uropean Commission

Maluation advisor for the .%. Congressional versightCommitteeGs Trou#led Fsset Relief rogram !TFR"

2B1B Fc$uired Cole ; artners' esta#lishing a presence in Canada

Fc$uired :ynamic Credit artnersG .%. consulting #usinessFc$uired (une Consulting Aroup

2B11 Fc$uired Arowth Capital artners

Fc$uired =CR' greatly epanding our presence in the E

Fc$uired R%= Richter3s financial restructuring practice inToronto

Fc$uired age mill artners 

&pert witness regarding the =ad off &state

2B12 Fdministrator for Rangers in the largest foot#all clu# insolvencyin E history

7.!. Oni,$& C$e%it R&tin' A'en,/ of in%i& )i+ite%

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2B12  • Conducted first of its ,ind study in agriculture sector

• eadership achieved in the =%=& Rating Business

• Completed 10000 =%=& Ratings

2BB9=11 • aunched &ducation Rating Business + Conducted %trength' wea,nessopportunity and threat analysis !%4T" and Training *eed Fnalysis !T*F"for engineering colleges under the Technical Education Quality

 Improvement Program (TEQIP)

• aunched Mendor Rating Business

• Tied with %tate Aovernment for Rating Business

• aunched Fssociate Rating Business

• %inged =emorandum of understanding with ?0 Ban,sK-inancial Institutions

2BB  • aunched Rating Business

2BB! • Registration with *ational %mall Industries Corporation !=inistry of =icro'

%mall and =edium &nterprises' Aovernment of India " to underta,e =icro'%mall and =edium &nterprises Ratings

2BB2 •  *ationwide Infrastructure set up

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8. SE"I=REGULATOR

The capital mar,et regulator regulates rating agencies in most regions. In India' the capital

mar,ets regulator' the %ecurities and &change Board of India !%&BI"' regulates the rating

agencies in the country. %&BI laid down an etensive set of regulations for rating agencies in

1999.

SE"I I##e% Gi%e)ine# to C$e%it R&tin' A'en,ie#

%&BI vide CIRK=IR%:KCRFK>K?010 dated =ay <' ?010 has provided for certaintransparency and disclosure norms for the Credit Rating Fgencies !5CRFs6". ThemaDor measures ta,en in this regard are summarized #elowH

CRFs should maintain records of the rating committee' including voting details andnotes of dissent' for a period of five years.

 It has #een made mandatory for CRFs to pu#lish information a#out the historicaldefault rates of their rating categories and whether the default rates of these categorieshave changed over time.

 CRFs should ensure that its analysts do not participate in any ,ind of mar,eting and

 #usiness development' including negotiations of fees with the issuer whose securitiesare #eing rated. Flso' the employees involved in the credit rating process and theirdependants cannot own shares of the issuer.

CRFs while rating structured finance products' are #arred from providingconsultancy or advisory services regarding the design of the structured financeinstrument. This prohi#ition would apply to the su#sidiaries of CRFs too. 4hile

 pu#lishing the ratings of structured finance products and their movements' CRFsapart from following all the applica#le re$uirements in case of non+structured ratings

should also disclose the trac, record of the originator and details of nature ofunderlying assets while assigning the credit rating.

 In case of unsolicited credit ratings !the credit ratings not arising out of theagreement #etween the CRFs and the issuer"' credit rating sym#ol should #eaccompanied #y the word 5*%ICIT&:6 in the same font size.

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 CRFs should also disclose1. the policies' methodology and procedures in detail followed #y them regarding

solicited and unsolicited credit ratings'

?. the history of credit rating of all outstanding securities'

<. the general nature of its compensation arrangements with the issuers and

). the details of any relationship it has with the issuer whose securities are #eing ratedand any of its associate of such issuer and the CRFs or its su#sidiaries.

The ,$e%it $&tin' &'en,ie# in In%i& mainly include ICRF and CRI%I. ICRF was formerly

referred to the Investment Information and Credit Rating Fgency of India imited. Their

main function is to grade the different sector and companies in terms of performance and

offer solutions for up gradation.

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9. GUIDELINES FOR CREDIT RATING AGENCIES IN

INDIA 

The %ecurities and &change Board of India !Credit Rating Fgencies" Regulations'

1999 offers various guidelines with regard to the registration and functioning of the

credit rating agencies in India. The registration procedure includes application for the

esta#lishment of a credit rating agency' matching the eligi#ility criteria and providing

all the details re$uired. They have to undergo the strict eamination procedure with

regard to the details furnished #y them. They are re$uired to prepare internal

 procedures ' a#idance with circulars. They are offered guidelines regarding the credit

rating procedure' #y the Fct. The credit rating agencies are provided with compliance

officers. They are re$uired to show their accounting records.

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1B. USES OF RATINGS

Credit ratings are used #y in-estors issuers' investment #an,s' #ro,er+dealers' and

governments. -or investors' credit rating agencies increase the range of investment

alternatives and provide independent' easy+to+use measurements of relative credit ris, 2 this

generally increases the efficiency of the mar,et' lowering costs for #oth #orrowers and

lenders. This in turn increases the total supply of  ris, capital in the economy' leading to

stronger growth. It also opens the capital mar,ets to categories of #orrower who might

otherwise #e shut out altogetherH small governments' startup companies' hospitals' and

universities

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1B.1. R&tin'# #e 0/ 0on% i##e$#

Issuers rely on credit ratings as an independent verification of their own credit+worthinessand the resultant value of the instruments they issue. In most cases' a significant #ondissuance must have at least one rating from a respected CRF for the issuance to #e successful!without such a rating' the issuance may #e undersu#scri#ed or the price offered #y investorstoo low for the issuerGs purposes". %tudies #y the Bond =ar,et Fssociation note that manyinstitutional investors now prefer that a de#t issuance have at least three ratings.

Issuers also use credit ratings in certain structured finance transactions. -or eample' acompany with a very high credit rating wishing to underta,e a particularly ris,y research

 proDect could create a legally separate entity with certain assets that would own and conductthe research wor,. This Uspecial purpose entityU would then assume all of the research ris,and issue its own de#t securities to finance the research. The %&Gs credit rating li,ely would

 #e very low' and the issuer would have to pay a high rate of return on the #onds issued.

owever' this ris, would not lower the parent companyGs overall credit rating #ecause the%& would #e a legally separate entity. Conversely' a company with a low credit rating might

 #e a#le to #orrow on #etter terms if it were to form an %& and transfer significant assets tothat su#sidiary and issue secured de#t securities. That way' if the venture were to fail' thelenders would have recourse to the assets owned #y the %&. This would lower the interestrate the %& would need to pay as part of the de#t offering.

The same issuer also may have different credit ratings for different #onds. This differenceresults from the #ondGs structure' how it is secured' and the degree to which the #ond issu#ordinated to other de#t. =any larger CRFs offer Ucredit rating advisory servicesU that

essentially advise an issuer on how to structure its #ond offerings and %&s so as to achieve agiven credit rating for a certain de#t tranche. This creates a potential conflict of interest' ofcourse' as the CRF may feel o#ligated to provide the issuer with that given rating if theissuer followed its advice on structuring the offering. %ome CRFs avoid this conflict #y

refusing to rate de#t offerings for which its advisory services were sought.

1B.2 R&tin'# #e 0/ 'o(e$n+ent $e')&to$/

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Regulators use credit ratings as well' or permit ratings to #e used for regulatory purposes. -oreample' under the Basel II agreement of the Basel Committee on Ban,ing %upervision'

 #an,ing regulators can allow #an,s to use credit ratings from certain approved CRFs !calledU&CFIsU' or U&ternal Credit Fssessment InstitutionsU" when calculating their net capitalreserve re$uirements. In the nited %tates' the %ecurities and &change Commission !%&C"

 permits investment #an,s and #ro,er+dealers to use credit ratings from U *ationallyRecognized %tatistical Rating rganizationsU !*R%R" for similar purposes. The idea is that

 #an,s and other financial institutions should not need ,eep in reserve the same amount ofcapital to protect the institution against !for eample" a run on the #an,' if the financialinstitution is heavily invested in highly li$uid and very UsafeU securities !such as .%.government #onds or short+term commercial paper  from very sta#le companies".

CRF ratings are also used for other regulatory purposes as well. The % %&C' for eample' permits certain #ond issuers to use a shortened  prospectus form when issuing #onds if theissuer is older' has issued #onds #efore' and has a credit rating a#ove a certain level. %&Cregulations also re$uire that money mar,et funds !mutual funds that mimic the safety and

li$uidity of a #an, savings deposit' #ut without -ederal :eposit Insurance Corporation insurance" comprise only securities with a very high *R%R rating. i,ewise' insuranceregulators use credit ratings to ascertain the strength of the reserves held #y insurancecompanies.

In ?008' the % %&C voted unanimously to propose amendments to its rules that wouldremove credit ratings as one of the conditions for companies see,ing to use short+formregistration when registering securities for pu#lic sale.

This mar,s the first in a series of upcoming %&C proposals in accordance with :odd+-ran,to remove references to credit ratings contained within eisting Commission rules andreplace them with alternative criteria.

nder #oth Basel II and %&C regulations' not Dust any CRFGs ratings can #e used forregulatory purposes. !If this were the case' it would present a moral hazard"  Rather' there is avetting process of varying sorts. The Basel II guidelines !paragraph 91' et al."' for eample'descri#e certain criteria that #an, regulators should loo, to when permitting the ratings froma particular CRF to #e used. These include Uo#Dectivity'U Uindependence'U Utransparency'Uand others. Ban,ing regulators from a num#er of Durisdictions have since issued their owndiscussion papers on this su#Dect' to further define how these terms will #e used in practice.!See The Committee of &uropean Ban,ing %upervisors :iscussion aper' or the %tate Ban,

of a,istan &CFI Criteria".

In the nited %tates' since 19/' *R%R recognition has #een granted through a U*o FctionetterU sent #y the %&C staff. -ollowing this approach' if a CRF !or investment #an, or

 #ro,er+dealer" were interested in using the ratings from a particular CRF for regulatory purposes' the %&C staff would research the mar,et to determine whether ratings from that particular CRF are widely used and considered Urelia#le and credi#le.U If the %&C staffdetermines that this is the case' it sends a letter to the CRF indicating that if a regulatedentity were to rely on the CRFGs ratings' the %&C staff will not recommend enforcementaction against that entity. These U*o FctionU letters are made pu#lic and can #e relied upon

 #y other regulated entities' not Dust the entity ma,ing the original re$uest. The %&C has since

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sought to further define the criteria it uses when ma,ing this assessment' and in =arch ?00/ pu#lished a proposed regulation to this effect.

n %eptem#er ?9' ?00>' % resident Aeorge 4. Bush signed into law the Credit RatingReform Fct of ?00>. This law re$uires the % %ecurities and &change Commission to

clarify how *R%R recognition is granted' eliminates the U*o Fction etterU approach andma,es *R%R recognition a Commission !rather than %&C staff" decision' and re$uires

 *R%Rs to register with' and #e regulated #y' the %&C. % ;  protested the Fct on thegrounds that it is an unconstitutional violation of  freedom of speech  In the %ummer of ?00the %&C issued regulations implementing the act' re$uiring rating agencies to have policies to

 prevent misuse of nonpu#lic information' disclosure of conflicts of interest and prohi#itionsagainst Uunfair practicesU.

Recognizing CRFsG role in capital formation' some governments have attempted to Dump+

start their domestic rating+agency #usinesses with various ,inds of regulatory relief or

encouragement. This may' however' #e counterproductive' if it dulls the mar,et mechanism #y which agencies compete' su#sidizing less+capa#le agencies and penalizing agencies that

devote resources to higher+$uality opinions

1B.3 R&tin'# #e in #t$,t$e% fin&n,e

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Credit rating agencies may also play a ,ey role in structured financial transactions. nli,e aUtypicalU loan or #ond issuance' where a #orrower offers to pay a certain return on a loan'structured financial transactions may #e viewed as either a series of loans with differentcharacteristics' or else a num#er of small loans of a similar type pac,aged together into aseries of U#uc,etsU !with the U#uc,etsU or different loans called UtranchesU". Credit ratings

often determine the interest rate or price ascri#ed to a particular tranche' #ased on the $ualityof loans or $uality of assets contained within that grouping.

Companies involved in structured financing arrangements often consult with credit ratingagencies to help them determine how to structure the individual tranches so that eachreceives a desired credit rating. -or eample' a firm may wish to #orrow a large sum ofmoney #y issuing de#t securities. owever' the amount is so large that the return investorsmay demand on a single issuance would #e prohi#itive. Instead' it decides to issue threeseparate #onds' with three separate credit ratingsSF !medium low ris,"' BBB !mediumris,"' and BB !speculative" !using %tandard ; oorGs rating system".

The firm epects that the effective interest rate it pays on the F+rated #onds will #e much lessthan the rate it must pay on the BB+rated #onds' #ut that' overall' the amount it must pay forthe total capital it raises will #e less than it would pay if the entire amount were raised from asingle #ond offering. Fs this transaction is devised' the firm may consult with a credit ratingagency to see how it must structure each trancheSin other words' what types of assets must

 #e used to secure the de#t in each trancheSin order for that tranche to receive the desiredrating when it is issued.

There has #een criticism in the wa,e of large losses in the collateralized de#t o#ligation !C:" mar,et that occurred despite #eing assigned top ratings #y the CRFs. -or instance'losses on O<)0. million worth of C:s issued #y Credit %uisse Aroup added up to a#outO1?/ million' despite #eing rated FFF or Faa #y %tandard ; oorGs' =oodyGs Investors%ervice and -itch Aroup.

The rating agencies respond that their advice constitutes only a Upoint in timeU analysis' thatthey ma,e clear that they never promise or guarantee a certain rating to a tranche' and thatthey also ma,e clear that any change in circumstance regarding the ris, factors of a particulartranche will invalidate their analysis and result in a different credit rating. In addition' someCRFs do not rate #ond issuances upon which they have offered such advice.

Complicating matters' particularly where structured finance transactions are concerned' the

rating agencies state that their ratings are opinions !and as such' are protected free speech'granted to them #y the UpersonhoodU of corporations" regarding the li,elihood that a givende#t security will fail to #e serviced over a given period of time' and not an opinion on thevolatility of that security and certainly not the wisdom of investing in that security. In the

 past' most highly rated !FFF or Faa" de#t securities were characterized #y low volatility andhigh li$uiditySin other words' the price of a highly rated #ond did not fluctuate greatly day+to+day' and sellers of such securities could easily find #uyers.

owever' structured transactions that involve the #undling of hundreds or thousands of

similar !and similarly rated" securities tend to concentrate similar ris, in such a way that even

a slight change on a chance of default can have an enormous effect on the price of the

 #undled security. This means that even though a rating agency could #e correct in its opinion

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that the chance of default of a structured product is very low' even a slight change in the

mar,etGs perception of the ris, of that product can have a disproportionate effect on the

 productGs mar,et price' with the result that an ostensi#ly FFF or Faa+rated security can

collapse in price even without there #eing any default !or significant chance of default". This

 possi#ility raises significant regulatory issues #ecause the use of ratings in securities and #an,ing regulation !as noted a#ove" assumes that high ratings correspond with low volatility

and high li$uidity

11. FUTURE OF CREDIT RATING IN INDIA

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size of de#enture issued #y company' the num#er of companies issuing de#enture end the

num#er of invertors have grown su#stantially.

Fs the num#er of companies #orrowing directly from capital mar,et increases'

investors find that the company3s size or name is no longer a sufficient assurance of the

timely payment of interest and principal. :efault #y large and well ,nown company recently

in payment of interest on fied deposit or de#enture has reinforced this #elief among

investors. They felt the need for an independent and credi#le agencies which Dudges the

$uality of de#t o#ligation of different companies and assist individual and institution

investors in ma,ing investment.

In this contet' the credit rating information services of India limited was in 198.

following this' investment information and credit rating agencies of India was promoted in

1991 and credit analysis and research limited was floated in199<. all the credit rating

agencies have #een approved #y the R&%&RM& BF*E - I*:IF.

12. CRITICISM

Credit rating agencies have #een su#Dect to the following  criticismH

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Credit rating agencies do not downgrade companies promptly enough. -oreample' &nronGs rating remained at investment grade four days #efore thecompany went #an,rupt' despite the fact that credit rating agencies had #eenaware of the companyGs pro#lems for months. r' for eample' =oodyGs gave-reddie =ac preferred stoc, the top rating until 4arren Buffett tal,ed a#out

-reddie on C*BC and on the net day =oodyGs downgraded -reddie to one tic,a#ove Dun, #onds.P11Q %ome empirical studies have documented that yield spreadsof corporate #onds start to epand as credit $uality deteriorates #ut #efore a ratingdowngrade' implying that the mar,et often leads a downgrade and $uestioning theinformational value of credit ratings.P1?Q This has led to suggestions that' ratherthan rely on CRF ratings in financial regulation' financial regulators shouldinstead re$uire #an,s' #ro,er+dealers and insurance firms !among others" to usecredit spreads when calculating the ris, in their portfolio.

arge corporate rating agencies have #een criticized for having too familiar arelationship with company management' possi#ly opening themselves to undueinfluence or the vulnera#ility of #eing misled. P1<Q These agencies meet fre$uentlyin person with the management of many companies' and advise on actions thecompany should ta,e to maintain a certain rating. -urthermore' #ecauseinformation a#out ratings changes from the larger CRFs can spread so $uic,ly!#y word of mouth' email' etc."' the larger CRFs charge de#t issuers' rather thaninvestors' for their ratings. This has led to accusations that these CRFs are

 plagued #y conflicts of interest that might inhi#it them from providing accurateand honest ratings. Ft the same time' more generally' the largest agencies

!=oodyGs and %tandard ; oorGs" are often seen as promoting a narrow+mindedfocus on credit ratings' possi#ly at the epense of employees' the environment' orlong+term research and development. These accusations are not entirelyconsistentH on one hand' the larger CRFs are accused of #eing too cozy with thecompanies they rate' and on the other hand they are accused of #eing too focusedon a companyGs U #ottom lineU and unwilling to listen to a companyGs eplanationsfor its actions.

4hile often accused of #eing too close to company management of their eisting

clients' CRFs have also #een accused of engaging in heavy+handed U#lac,mailUtactics in order to solicit #usiness from new clients' and lowering ratings for thosefirms . -or instance' =oodyGs pu#lished an UunsolicitedU rating of annover Re'with a su#se$uent letter to the insurance firm indicating that Uit loo,ed forward tothe day annover would #e willing to payU. 4hen annover managementrefused' =oodyGs continued to give annover Re ratings' which were downgradedover successive years' all while ma,ing payment re$uests that the insurerre#uffed. In ?00)' =oodyGs cut annoverGs de#t to Dun, status' and even thoughthe insurerGs other rating agencies gave it strong mar,s' shareholders wereshoc,ed #y the downgrade and annover lost O1/ million %: in mar,etcapitalization.

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The lowering of a credit score #y a CRF can create a vicious cycle and self+fulfilling prophecy' as not only interest rates for that company would go up' #utother contracts with financial institutions may #e affected adversely' causing an

increase in epenses and ensuing decrease in credit worthiness. In some cases'large loans to companies contain a clause that ma,es the loan due in full if thecompaniesG credit rating is lowered #eyond a certain point !usually a UspeculativeUor U Dun, #ondU rating". The purpose of these Uratings triggersU is to ensure that the

 #an, is a#le to lay claim to a wea, companyGs assets #efore the company declares #an,ruptcy and a receiver  is appointed to divide up the claims against thecompany. The effect of such ratings triggers' however' can #e devastatingH undera worst+case scenario' once the companyGs de#t is downgraded #y a CRF' thecompanyGs loans #ecome due in full2 since the trou#led company li,ely isincapa#le of paying all of these loans in full at once' it is forced into #an,ruptcy!a so+called Udeath spiralU". These rating triggers were instrumental in the collapse

of &nron. %ince that time' maDor agencies have put etra effort into detecting thesetriggers and discouraging their use' and the .%. %ecurities and &changeCommission re$uires that pu#lic companies in the nited %tates disclose theireistence.

Fgencies are sometimes accused of #eing oligopolists' #ecause #arriers to mar,etentry are high and rating agency #usiness is itself reputation+#ased !and thefinance industry pays little attention to a rating that is not widely recognized". fthe large agencies' only =oodyGs is a separate' pu#licly held corporation thatdiscloses its financial results without dilution #y non+ratings #usinesses' and itshigh profit margins !which at times have #een greater than /0 percent of grossmargin" can #e construed as consistent with the type of returns one might epectin an industry which has high #arriers to entry.

Credit Rating Fgencies have made errors of Dudgment in rating structured products' particularly in assigning FFF ratings to structured de#t' which in alarge num#er of cases has su#se$uently #een downgraded or defaulted. The actualmethod #y which =oodyGs rates C:s has also come under scrutiny. If defaultmodels are #iased to include ar#itrary default data and URatings -actors are #iasedlow compared to the true level of epected defaults' the =oody3s PmethodQ willnot generate an appropriate level of average defaults in its default distri#ution

 process. Fs a result' the perceived default pro#a#ility of rated tranches from ahigh yield C: will #e incorrectly #iased downward' providing a false sense ofconfidence to rating agencies and investors.U ittle has #een done #y ratingagencies to address these shortcomings indicating a lac, of incentive for $ualityratings of credit in the modern CRF industry. This has led to pro#lems for several

 #an,s whose capital re$uirements depend on the rating of the structured assetsthey hold' as well as large losses in the #an,ing industry. FFF rated mortgage

securities trading at only 80 cents on the dollar' implying a greater than ?0Vchance of default' and 8.9V of FFF rated structured C:s are #eing considered

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for downgrade #y -itch' which epects most to downgrade to an average of BBBto BB+. These levels of reassessment are surprising for FFF rated #onds' whichhave the same rating class as % government #onds. =ost rating agencies do notdraw a distinction #etween FFF on structured finance and FFF on corporate orgovernment #onds !though their ratings releases typically descri#e the type of

security #eing rated". =any #an,s' such as FIA' made the mista,e of not holdingenough capital in reserve in the event of downgrades to their C: portfolio. Thestructure of the Basel II agreements meant that C:s capital re$uirement roseGeponentiallyG. This made C: portfolios vulnera#le to multiple downgrades'essentially precipitating a large margin call. -or eample under  Basel II' a FFFrated securitization re$uires capital allocation of only 0.>V' a BBB re$uires ).8V'a BB re$uires <)V' whilst a BB!+" securitization re$uires a /?V allocation. -or anum#er of reasons !fre$uently having to do with inade$uate staff epertise and thecosts that ris, management programs entail"' many institutional investors reliedsolely on the ratings agencies rather than conducting their own analysis of theris,s these instruments posed. !Fs an eample of the compleity involved in

analyzing some C:s' the F$uarius C: structure has /1 issues #ehind the cashC: component of the structure and another 1?9 issues that serve as referenceentities for O1.) #illion in C:% contracts for a total of 180. In a sample of Dust )0of these' they had on average >/00 loans at origination. roDecting that num#er toall 180 issues implies that the F$uarius C: has eposure to a#out 1.? millionloans." imco founder 4illiam Aross urged investors to ignore rating agency

 Dudgments' descri#ing the agencies as Uan idiot savant with a full command of themathematics' #ut no idea of how to apply them.6

=any of the structured financial products that they were responsi#le for rating'consisted of lower $uality GBBBG rated loans' #ut were' when pooled together intoC:s' assigned an FFF rating. The strength of the C: was not whollydependent on the strength of the underlying loans' #ut in fact the structureassigned to the C: in $uestion. C:s are usually paid out in a GwaterfallG stylefashion' where income received gets paid out first to the highest tranches' with theremaining income flowing down to the lower $uality tranches i.e. WFFF. C:swere typically structured such that FFF tranches which were to receive first lien!claim" on the BBB rated loans cash flows' and losses would tric,le up from thelowest $uality tranches first. Cash flow was well insulated even against heavy

levels of home owner defaults. Credit rating agencies only accounted for a N/Vdecline in national housing prices at worst' allowing for a confidence in rating themany of these C:s that had poor underlying loan $ualities as FFF. It did nothelp that an incestuous relationship #etween financial institutions and the creditagencies developed such that' #an,s #egan to leverage the credit ratings off oneanother and GshopG around amongst the three #ig credit agencies until they foundthe #est ratings for their C:s. ften they would add and remove loans ofvarious $uality until they met the minimum standards for a desired rating' usually'FFF rating. ften the fees on such ratings were O<00'000 + O/00'000' #ut ran upto O1 million.

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It has also #een suggested that the credit agencies are conflicted in assigningsovereign credit ratings since they have a political incentive to show they do notneed stricter regulation #y #eing overly critical in their assessment ofgovernments they regulate.

Fttempts to regulate more strictly credit rating agencies in the wa,e of the&uropean sovereign de#t crisis have #een rather unsuccessful. %ome &uropeanfinancial regulation eperts have argued that the hastily drafted' unevenlytransposed in national law' and poorly enforced & rule on rating agencies!RXglement C& nY 10>0K?009" has had little effect on the way financial analysts and economists interpret data or potential conflict of interests created #y thecomple contractual arrangements #etween credit rating agencies and theirclientsU

13.RATING METHODOLOGY FOR RIMARY

DEALERS

1. C&*it&)

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The RBI norms stipulate a minimum capital of Rs. /00 million for the standalone :

operations and a Capital Fde$uacy Ratio !CFR" of 1/V of the ris,+weighted assets.

Currently' all :s meet the norm on CFR easily as the assets held #y them are

 primarily in government securities' which carry zero credit ris, weight. The ratio

would #ecome important when the de#t mar,ets widen and the :s increase theircorporate de#t !non+government securities" eposure' which have a 100V credit ris,

weight age associated with it. ICRF analyses the financial capa#ility of a : in terms

of *et worth or own funds. ICRF epects the capital re$uirements to increase with

increase in the scale of operations of the :. Flso' in view of the inherent ris,s in a

: #usiness' a high net worth acts as a #uffer. ICRF' while placing high importance'

views the networth of a : as a very strong #uffer against insolvency.

2. M&$>et Ri#>

The mar,et ris,' one of the inherent ris,s in the : #usiness' is epressed #y the

decline in the mar,et value of its assets. ICRF analyses the portfolio of the : and

su#Dects the same to stress analysis under varying interest rate scenarios. Fs the

 potential loss is determined #y the duration of the portfolio' ICRF studies the a#ove

stress test for different duration and the gearing levels of the :. ICRF views the net

worth to potential loss as an important ratio while evaluating the :. In case of

erosion of the a#ove cover' ICRF epects the :s to scale down its operations orinfuse more capital in form of e$uity. ICRF also studies the mar,et ris, models used

 #y the :' if any' for their operations and evaluates the :s contingency plans.

3. C$e%it Ri#>

%ince the :s primarily deal in government securities' the credit ris, is negligi#le.

owever' with the :s gradually increasing their eposure to corporate de#t paper to

its improve yields and margins' the credit ris, would assume a greater importance.

ICRF evaluates the internal norms and the control systems used to measure the credit

ris, #y the :.

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4. Fn%in' &n% Le(e$&'e

Currently the funding profile for a :s is s,ewed in favour of call money and

repo #orrowings. Fs a : is #asically a trader' it #orrows from the short+term call

mar,et and deploys them in government securities' there#y earning an interest spread.

4ith the #orrowings on call money and repo #eing repriced daily and the associated

volatility with the call mar,ets' a lower leverage would mitigate the interest rate ris,s

for the : on the lia#ility side. ICRF epects the :s funding profile to change in

favour of the term money mar,et once the de#t mar,et in the country deepens. F

higher proportion of the own funds in the funding profile provides comfort.

!. M&n&'e+ent &n% S/#te+#

This is one of the im portant factors while evaluating the ris, profile of a :.

Currently as most of the :s are #ac,ed #y strong promoters' ICRF factors in the

implicit support of the parent while evaluating the :. ICRF views a sta#le and

eperienced management to manage the interest rate and li$uidity ris, profile of the #usiness #etter. The a#ility of the management to retain ,ey operating personnel is an

important factor in this line of #usiness. ICRF also evaluates the internal operating

guidelines and ris, management systems such as the prudential norms and Malue at

Ris, !MFR" set in place #y the management. The adherence and efficient usage of

such systems #y the management are construed as a comforting factor. ICRF

appreciates that due to eternal mar,et environment' there could #e periods when the

internal norms were #reached. ICRF studies and analyses such nstances and the

actions ta,en #y the : to rectify the same. In addition' ICRF evaluates :s

 performance as regards conformity regulatory norms in respect of

the primary mar,et and secondary mar,et operations in terms of #idding

commitments and turnover ratios. Though confirming to these norms are not a

 pro#lem for the :s currently with a fewer num#er of : operating and steadily

growing government #orrowings programmes' ICRF feels that this could #ecome

important with entry of more players in the : #usiness and the any changes in the

regulatory norms.

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. $ofit&0i)it/

The financial performance of a : is largely dependent on eternal environment

such as the economic cycle' government #orrowing programme and the interest rates

movements. The profita#ility is seen over a meaningful period of time to understand

the income sta#ility of a : with respect to its peers. 4hile considering the

 performance of the : in terms of revenues' gearing and Return on *etworth' ICRF

notes the profita#ility is dependent on the aggressiveness of the :. The a#ility of themanagement to $uic,ly adapt to the changing environment provides comfort in form

of a relatively lower volatility in income. There are low li$uidity ris,s for a :s as

most of their assets are in government securities' which are highly li$uid. Fs their

main #usiness revolves around trading' their investments in non government

securities are usually in instruments that carry high credit rating !rating of FF and

e$uivalent and a#ove". The growing repo mar,et for government securities and

li,ely introduction of repo on corporate #onds further alleviates any li$uidity

concerns of a : operation

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14.CONCLUSION

Credit rating as an industry has passed through several cycles and phases' and will

continue to evolve going forward. Running through all of these' however' is one common

thread' which serves as the ,ey determinant of success in the industryH

credi#ility.

In the sense of recognition #y the mar,et' credi#ility is theulitimate touchstone of a

rating agency3s success' and is #uilt up through a period of sustained performance in the core

rating area. %ome ,ey factor feeding into credi#ility areH

• In%e*en%en,e &n% o0e,ti(it/+ signals of the agency3s freedom from #ias.

•

Inte'$it/+ freedom from influence' the capacity to stic, to the correct decision evenin the face of #usiness consideration.

• An&)/ti,&) $i'o$+ the cultivation of analytical strength in the #edroc, of accuracy

and progress in any rating agency' and is the strongest guarantee of sustaina#le

 #usiness success.

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1!."I"LOGRAHY

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