Functions of a Credit Rating Agency A credit rating agency serves following functions: 1.

Provides unbiased opinion: An independent credit rating agency is likely to provide an unbiased opinion as to relative capability of the company to service debt obligations because of the following reasons: i. It has no vested interest in an issue unlike brokers, financial intermediaries. ii. Its own reputation is at stake. 2. Provides quality and dependable information:. A credit rating agency is in a position to provide quality information on credit risk which is more authenticate and reliable because: i. It has highly trained and professional staff who has better ability to assess risk. ii. It has access to a lot of information which may not be publicly available. 3. Provides information at low cost: Most of the investors rely on the ratings assigned by the ratings agencies while taking investment decisions. These ratings are published in the form of reports and are available easily on the payment

of negligible price. It is not possible for the investors to assess the creditworthiness of the companies on their own. 4. Provide easy to understand information: Rating agencies first of all gather information, then analyse the same. At last these interpret and summarise complex information in a simple and readily understood formal manner. Thus in other words, information supplied by rating agencies can be easily understood by the investors. They need not go into details of the financial statements. 5. Provide basis for investment: An investment rated by a credit rating enjoys higher confidence from investors. Investors can make an estimate of the risk and return associated with a particular rated issue while investing money in them. 6. Healthy discipline on corporate borrowers: Higher credit rating to any credit investment enhances corporate image and builds up goodwill and hence it induces a healthy/ discipline on corporate. 7. Formation of public policy: Once the debt securities are rated professionally, it would be easier to formulate public policy guidelines as to the eligibility of securities to be

included in different kinds of institutional port-folio.

Functions of CRISIL CRISIL is acronym for Credit Rating Information Services of India Limited. CRISIL is India's leading Ratings, Financial News, Risk and Policy Advisory company. Since 1987 when CRISIL was incorporated, CRISIL has played an integral role in India's development milestones.

CRISIL's majority shareholder is Standard & Poor's, the world's

foremost provider of independent credit ratings, indices, risk evaluation, investment research and data. CRISIL's association with Standard & Poor's, a division of The McGraw-Hill Companies, dates back to 1996 when both companies started working together on rating methodologies and joint projects.

CRISIL Ratings is the only ratings agency in India to operate on the basis of sectoral specialisation. CRISIL Ratings plays a leading role in the development of the debt markets in India. CRISIL has also spearheaded the formation of the CariCRIS, the world's first regional credit rating agency.

The main functions of CRISIL can be classified into following subheads:

1.

Ratings

CRISIL Ratings: It is the only ratings agency in India with sectoral specialization It has played a critical role in the

development of the debt markets in India. The agency has developed new ratings methodologies for debt instruments and innovative structures across sectors. CRISIL Ratings provides technical know-how to clients all over the world and has helped set up ratings agencies in Malaysia (RAM), Israel (MAALOT) and in the Caribbean.

2.

Research

CRISIL Research: It provides research, analysis and forecasts on the Indian economy, industries and companies to over 500 Indian and international clients across financial, corporate, consulting and public sectors.

CRISIL FundServices: It provides fund evaluation services and risk solutions to the mutual fund industry.

The Centre for Economic Research: It applies economic principles to live business applications and provide benchmarks

and analyses for India's policy and business decision makers.

Investment Research Outsourcing: CRISIL added equity research to its wide bouquet of services, by acquiring Irevna, a leading global equity research and analytics company. Irevna offers investment research services to the world's leading investment banks and financial institutions.

3.

Advisory

CRISIL Infrastructure Advisory: It provides policy, regulatory and transaction level advice to governments and leading organisations across sectors.

Investment and Risk Management Services: CRISIL Risk Solutions offers integrated risk management solutions and advice to Banks and Corporates by leveraging the experience and skills of CRISIL in the areas of credit and market risk.

ICRA:

ICRA was established in the year 1991 by the collaboration of financial institutions, investment companies, and banks. The company has formed the ICRA group together with its subsidiaries. The company is headed by Mr. Piyush G. Mankad and offers products like short-term debt schemes, Issue-specific long-term rating and offers fund based as well as non-fund based facilities to its clients.

The most important criticism levied against public sector undertakings has been that in relation to thecapital employed, the level of profits has been too low. Even the government has criticized the publicsector undertakings on this count. Of the various factors responsible for low profits in the public sector Undertakings, the following are particularly important:

Price policy of public sector undertakings Under utilization of capacity Problem related to planning and construction of projects Problems of labor, personnel and management Lack of autonomy REASONS FOR DISINVESTMENT The public sector in India at present is at cross roads. The new economic policy initiated in July 1991, clearly indicated that the public sector undertakings have shown a very negative rate of return oncapital employed. On account of this phenomenon many public sector undertakings have become burden to the government. They are in fact turning out to be liabilities to the government rather than being assets.This is a sector which the government clearly wants to get rid off. In this direction the government hasadopted a new approach to reform and improve the public sector undertakings performance i.e.Disinvestment policy'. This has gained lot of importance especially in latter part

of 90s. At present thegovernment seriously perceives the disinvestment policy as inactive tool to reduce the burden to financingthe public sector OBJECTIVE OF THE DISINVESTMENT: Privatization intended to achieve the following: Releasing large amount of public resources Reducing the public debt Transfer of Commercial Risk Releasing other tangible and intangible resources Expose the privatized companies to market discipline Wider distribution of wealth

Definition of 'Loan Syndication'

The process of involving several different lenders in providing various portions of a loan. Loan syndication most often occurs in situations where a borrower requires a large sum of capital that may either be too much for a single lender to provide, or may be outside the scope of a lender's risk exposure levels. Thus, multiple lenders will work together to provide the borrower with the capital needed, at an appropriate rate agreed upon by all the lenders. The Process The process of bond valuation takes into consideration the cash flow, or interest payments, connected with the bond issue. Typically, the cash flow is realized from the interest payments that are made on the bond at regularly scheduled intervals. This in turn is related to the par value of the bond, or the face value that the bond holds at the time it reaches maturity. By approaching the overall worth of the investment from both these angles, it is easier for an investor to evaluate the issue and decide if it is worth his or her time, or if another investment option should be selected.

There are multiple, in-depth calculations that may be used to figure bond valuation. Under the relative pricing approach, the face value of a bond is often determined by comparing the bond to a standard bond, usually one issued by the government; the credit rating of a bond with comparable maturity dates and cash flow can be used to determine a bond's fair market value. Arbitrage-free pricing involves subtracting each cash flow payment separately; the amount is determined by the rate of a zero-coupon bond on the same date the interest payment is made. Another option, the stochastic calculus approach, recognizes the possibility of fluctuating interest rates and uses a partial differential math equation to determine a bond's fair market value. The equations for each of these processes can be found online, or calculated on the Internet by use of a free financial calculator; a financial advisor is often very helpful when trying to determine the most accurate value of a bond. Raising Foreign Currency Finance: The major sources available to an Indian firm for raising foreign currency finance are:

(1) Foreign currency term loans from financial institutions (2) (3) (4) Export External credit commercial Euro schemes borrowing issues

(5) issues in foreign domestic markets Foreign Currency Term loans Financial Institutions: Financial institutions provide foreign currency term loans for meeting the foreign currency expenditures towards import of plant, machinery, and equipment and also towards payment of foreign technical know how fees. The periodical liability for interest and principal remains in the currency/currencies of the loans and is translated into rupees at the then prevailing rate of exchange for making payments to the financial institution. Export Credit Schemes: Export credit agencies have been established by the

governments of major industrialized countries for financing exports of capital goods and related technical services. These agencies follow certain consensus guidelines for supporting exports under a convention known as the Berne Union. As per

these guidelines, the interest ate applicable for export credits to Indian companies for various maturities are regulated. Two kinds of export credit are provided: buyers credit and suppliers credit. Buyers credit: Under this arrangement, credit is provided directly to the Indian buyer for purchase of capital goods and/or technical services from the overseas exporter. The buyers credit facility operates as follows: (1) The overseas exporter and the Indian buyer negotiate a contract. (2) An application of the buyers credit facility is made to the export agency of the exporters country along with relevant details like the types of goods/services to be exported approximate value of the contract, terms of payments schedule of protected shipment of goods or provision of services, percentage agency of of financing the required exporters etc. country. (3) The buyers credit facility is approved by the export credit

(4) A loan agreement delineating the terms and conditions of the buyers credit is negotiated between the overseas exporters

bank, the Indian borrowers, and where applicable, the Indian guarantor.

Suppliers Credit: This is a credit provided to the overseas exporters so that they can make available medium-term finance to Indian importers. The suppliers credit facility operates as follows: (1) The overseas exporter notifies his bank and the export credit agency of a potential export order of an Indian buyer who requires medium-term finance.

(2) The export credit agency communicates to the bank its willingness to provide the facility.

(3) The terms of the facility are incorporated in the contract between the overseas exporter and the Indian buyer.

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Below mentioned are disadvantages/ demerits of Derivatives: 1. Raises Volatility: As a large no. of market participants can take part in derivatives with a small initial capital due to leveraging derivatives provide, it leads to speculation and raises volatility in the markets. 2. Higher no. of Bankruptcies: Due to leveraged nature of derivatives, participants assume positions which do not match their financial capabilities and eventually lead to bankruptcies. 3. Increased need of regulation: Large no. of participants take positions in derivatives and take speculative positions. It is necessary to stop these activities and prevent people from getting bankrupt and to stop the chain of defaults. the major types of financial derivatives: 1. Forwards: A forward contract is a contract between two parties obligating each to exchange a particular good or instruments at a set price on a future date. It is an over the counter agreement and has standardized market features. 2. Futures: Futures are standardized contracts between the

buyers and sellers, which fix the terms of the exchange that will take place between them at some fixed future date. A futures contract is a legally binding agreement. Futures are special types of forward contracts which are exchange traded, that is traded on an organized exchange. The major types of futures are stock index futures, interest rate futures, and currency futures. 3. Options: Options are contracts between the option writers ad buyers which obligate the former and entitles (without obligation) the latter to sell/buy stated assets as per the provisions of contracts. The major types of options are stock options, bond options, currency options, stock index options, futures options, and options on swaps. Options are of two types: calls and Puts. A call option gives a buyer/holder a right but not an obligation to buy the underlying on or before specified time at a specified price (usually called strike/exercise price) and quantity. A put option gives a holder of that option a right but not an obligation to sell the underlying on or before specified time at a specified price and quantity.

4. Warrants: Warrants are long term options with three to seven years of expiration. In contrast, stock options have a maximum life of nine months. Warrants are issued by companies as a

means of raising finance with no initial servicing costs, such as divided or interest. They are like a call option on the stock of the issuing firm. A warrant is a security with a market price of its own that can be converted into a specific share which leads at a predetermined price and date. If warrants are exercised, the issuing firm has to create a new share which leads to a dilution of ownership. Warrants are sweeteners attached to bonds to make these bonds more attractive to the investor. Most of the warrants are detachable and can be traded in their own right or separately. Warrants are also available on stock indices and currencies. 5. Swaps: Swaps are generally customized arrangements between counterparties to exchange one set of financial obligations for another as per the terms of agreement. The major types of swaps are currency swaps, and interest rate swaps, bond swaps, coupon swaps, debt equity swaps.

6. Swaptions: Swaptions are options on swaps. It is an option that entitles the holder the right to enter into having calls and puts, swaptions have receiver swaption (an option to receive fixed and pay floating) and a payer swaption (an option to pay fixed and receive floating).

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Problems

associated

with

Disinvestment

A number of problems and issues have bedevilled the disinvestment process. The number of bidders for equity has been small not only in the case of financially weak PSUs, but also in that of better-performing PSUs. Besides, the government has often compelled financial institutions, UTI and other mutual funds to purchase the equity which was being unloaded through disinvestment. These organizations have not been very enthusiastic in listing and trading of shares purchased by them as it would reduce their control over PSUs. Instances of insider trading of shares by them have also come

to light. All this has led to low valuation or under pricing of equity. Further, in many cases, disinvestment has not really changed the ownership of PSUs, as the government has retained a majority stake in them. There has been some apprehension that disinvestment of PSUs might result in the crowding out of private corporates (through lowered subscription to their shares) from the primary capital market... An important fact that needs to be remembered in the context of divestment is that the equity in PSUs essentially belongs to the people. Thus, several independent commentators have maintained that in the absence of wider national consensus, a mere government decision to disinvest is not enough to carry out the sale of peoples assets. Inadequate information about PSUs has impeded free, competitive and efficient bidding of shares, and a free trading of those shares. Also, since the PSUs do not benefit monetarily from disinvestment, they have been reluctant to prepare and distribute prospectuses. This has in

turn prevented the disinvestment process from being completely open and transparent. It is not clear if the rationale for divestment process is wellfounded. The assumption of higher efficiency, better / ethical management practices and better monitoring by the private shareholders in the case of the private sector all of which supposedly underlie the disinvestment rationale is not always borne out by business trends and facts. Total disinvestment of PSUs would naturally concentrate economic and political power in the hands of the private corporate sector. The US economist Kenneth Galbraith had visualized a role of countervailing power for the PSUs. While the creation of PSUs originally had economic, social welfare and political objectives, their current restructuring through disinvestment is being undertaken primarily out of need of government finances and economic efficiency. Lastly, to the extent that the sale of government equity in PSUs is to the Indian private sector, there is no decline in national wealth. But the sale of such equity to foreign

companies has far more serious implications relating to national wealth, control and power, particularly if the equity is sold below the correct price! If the disinvestment policy is to be in wider public interests, it is necessary to examine systematically, issues such as - the correct valuation of shares, the crowding out possibility, the appropriate use of disinvestment proceeds and the institutional and other prerequisites.