1.

INTRODUCTION & DESIGN OF THE STUDY

1.1 INTRODUCTION
The Ratings industry in India has been built up to its present position over a period of fifteen years. Over the years, credit ratings have evolved into a 90-crore market, ith four agencies providing rating services, and significant pull from investors for the product. The ratings business in India has seen three phases. !uring the first of these phases, as described above, there as no e"perience of credit ratings, and virtually no a areness, on the part of investors and issuers. The second phase sa the advent of regulatory support for credit ratings, ith the

introduction and Increasing rigor of regulations covering primarily the markets for public issue of debt and for fi"ed deposits. #imed at protecting smaller investors, these measures also amounted to regulatory recognition of the role of credit ratings and the $uality of the effort put in till then, in estimating credit $uality. %ith these measures, credit ratings rapidly passed out of the arcane realm of high finance, and into the le"icon of the individual market participant. This phase also sa market. Recent years have seen a third phase of the market&s development ith public issues of the arrival of competition, in the form of other domestic agencies entering the

debt reducing in volume' the focus has shifted to the market for private placements. #lmost all the privately placed debt issued in the Indian market is rated, even though this is not a regulatory re$uirement. This shift is entirely driven by investors in these securities, ho typically tend to be highly sophisticated financial sector entities. %e are looking therefore at a $ualitative maturing of the market, here a rating is re$uired not as a compliance issue or a mandatory re$uirement, but as an opinion on credit $uality demanded by discerning buyers. (oing for ard, follo ing trends are e"pected to intensify in the Indian market) - *ore intensive use of ratings by investors. - Increasing sophistication in use of ratings.

These t o trends

ill result in credit ratings not being used only as a go- no-go input, as

is currently often the case. %e e"pect the ma+or use of credit ratings to be in the pricing of debt instruments. The correlation of yields and ratings, already strong, ill deepen as the bond market evolves further. *easures increasing the sophistication of the market, such as the introduction of credit derivatives, ill add a further dimension to the use of ratings. ,redit rating is also kno n as -.,/RIT0 R#TI1( in India. It is mandatory for the issuance of debt instruments, debentures, commercial paper issued by corporate and public deposits of all 123,s 41on 2anking 3inancial ,ompanies5.

Concept of Credit ratings # credit rating is a measure used by creditors to determine ho borro er, much they can trust a certain hether the borro er is an individual, a corporation, or a country. The credit rating is

derived using past financial data or the borro er&s credit history. There are several factors that can affect the credit rating of an individual including) The person&s ability to pay a loan 6 Reflected by the person&s salary and other assets The amount of credit in e"istence 6 This is hat credit limits are for. If the person is near his credit limit or has reached it is harder to get a loan. This also reflects person is in the habit of going into debt ,redit history 6 -ho s hether the person makes payments on time. This also reflects the persons spending and saving patterns. hether the

ORIGIN OF CREDIT R TINGS

The concept of ,redit Rating originated in the /nited -tates. The first ,redit Ratings ere published by 7ohn *oody during 8909 in his analysis or rail road investments. This evolved into the rating company, *oody&s Investors -ervices Inc, a division of !un and 2radstreet Inc. *oody as follo ed by 9oor&s publishing ,ompany in 898: and the -tandard -tatistics

,ompany in 89;;, hich merged, into 9oor to become the largest bond rating concern, -tandard and 9oor&s corporation, a subsidiary of *c (ra <ill, Inc. The third is 3itch publishing company of 1e 0ork, hich as established in 89;=. The fourth agency is !uff > 9helps of ,hicago, 0ork in 8998. These four security raring agencies are the only ones ith hich as recogni?ed by -ecurities and ."change ,ommission in 89@;. It ac$uired ,risanti and *affei Inc. of 1e -ecurities and ."change ,ommission recognition as national bond rating agencies. There are other services that rate securities especially stock, like Aalue Bine Investment -urvey. The recognition of rating agency by -ecurities and ."change ,ommission in /.-.# does not constitute approval. #ctually, such recognition is not necessary to enter the security rating business. -., uses the ratings of recogni?ed agencies for evaluation of bong assets of brokers and dealers registered ith it. In India there are C credit rating agencies. 3irst, ,redit Rating Information -ervices Of India Bimited 4,RI-IB5 set up by I,I,I #1! /TI in 89@@. -econdly Investment Information and ,redit Rating #gency of India limited 4I,R#5 set up by I3,I in 8998. Thirdly, ,redit #nalysis and Research Bimited 4,#R.5 promoted by I!2I in 899D in association rating non-banking financial companies for fi"ed deposits. ith financial institutions. 3ourthly, !uff and 9helps ,redit Rating India 9rivate Bimited 4!,R India5 for

DETER!IN NTS OF CREDIT R TINGS

,redit rating is a symbolic indicator of the current opinion of a rating agency of the illingness and relative of an issuer debt instrument to pay interest and repay principal as per the terms of the contract. # rating agency assigns $uality ratings that measures the default risk of a security and sells rating to their subscribers. The default risks primarily determined by the amount of ork available to the issuer relative to the amount of funds to be paid to the security holders. The ability to pay is evaluated by financial ratios. Ratio analysis is done to analy?e the present and future earning po er of the company issuing the security. Ratio analysis of the issuer&s financial statements yields insights about the strength and The credit rating agencies have ritten guidelines about have in order to earn each different $uality ratings. ,redit rating appraises the default risk financial risk. "#siness Ris$) 2usiness risk relates to the market position of the company, operating efficiency and management $uality. The key factor taken into consideration are) the nature of the industry the company is in, the demand-supply position, cyclicalE seasonal factors and government policies vis-F-vis the industry' and the competition its facing ithin the industry. !ar$et %osition) The market share the company en+oys, it is competitive advantages and selling and distribution arrangements. Operating Efficienc&) Bocational advantages, labor relationships, cost structure, technological and manufacturing efficiency as compared to its competitors. hich is a combination of business risk and eaknesses of the company. hat values particular ratios should

'ega( %osition) Terms of prospectus, systems for timely payment, and for protection against fraud. Financia( Ris$) 3inancial risk is a function of the profitability, debt leverage fle"ibility and ade$uate cash flo . The assessment of financial risk is done on the basis of)

a. 3inancial analysis, including accounting $uality) accuracy of statement of profit, auditors comments, valuation and depreciation policies. b. .arnings protection) -ources of future earning gro th, profitability ratios and earnings in relation to fi"ed income charges. c. #de$uacy of cash flo ) -ustainability of cash flo s and orking capital management. d. 3inancial fle"ibility) #bility to raise funds. *anagement) #n evaluation of the management, hich is $ualitative in nature and

imparts certain amount of sub+ective element, is done on the basis of track record of the management' planning and control system, depth of managerial talent, succession plans. .valuation of capacity to meet adverse situations, goals, philosophy and strategies. En*iron+ent) #n analysis of environment covering regulatory and operating environment, national economic outlook, pending litigation and unpaid ta"es are also attempted. Rating thus is not based on a predetermined formula as ell as hich specifies the relevant variables and

eights attached to each one of them. 3urther the emphasis on different aspects varies

from agency to agency. 2roadly the rating agencies assures itself that there is good congruence bet een assets and liabilities of a company and do ngrades the rating if the $uality of the assets depreciates. The rating agencies employ $ualified professionals to ensure consistency and reliability. The agencies also ensure the integrity of rating by insulating rating from conflicts of interest. The rating agencies employ nearly identical symbols. They e"amine the above factors before assigning a grade. The symbols are #, 2, , and ! and each symbol is graded ith associated risk by adding t o or one of the same symbol, like ###, ## and #' 222, 22 and b' and so on

UTI'ITY OF R TINGS
Investors have al ays received credit ratings ith enthusiasm. 2ut issuers do not share the enthusiasm since they have to share their securities at higher yields if their issue gets inferior rating. ,redit rating gives an investor a simple and easy indicator to the credit $uality of the debt instrument, the risks and likely returns, thus providing a yardstick against hich the risk inherent in an instrument can be measured. #n investor uses the rating to assess the risk level and compares the offered rate of return, hich is e"pected rate of return 4for the given level of risk5 hich to optimi?e his risk return trade- off. Ratings also provide a comparative frame ork, allo s the investor to compare investment opportunities. ,redit rating also benefits the issuer. If a public offer is contemplated, the financial manager must bear in mind the rating hile determining the appropriate leverage. #dditional ell be that the debt may lo er the rating from an investment to a speculative grade category, thus rendering the security ineligible for investment by many institutional investors. It may advantages of debt out eigh the disadvantages of the lo er credit rating. 7unk bonds, for instance, are a high risk and a high yield 48: to ;CG in /-#5 instruments. Investment may be limited in such instrument to hat an investor can afford to loose. Ratings ill also effect the pricing of the issue. #ctually pricing should reflect the rating. ho is competent is enhanced and the role of

The marketability of a relatively unkno n issuer

name recognition in an investment decision is minimi?ed. In actual practice ratings are reflected in prices. There is no difference bet een the interest rates that are paid on the fi"ed deposits of t o companies even if they are rated differently. -ame is true of long dated debentures. 2ut in commercial paper market here banks are ma+or players differentials in ratings are reflected in pricing. # reliance ,9 ould be cheaper than of a company, hich is not rated ell. 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 o n staff prepares investment analysis. 9ortfolio managers also use them in security management. 2anks depend on them for their investment in commercial paper. Individual investors depend on them for their decisions to place fi"ed deposits. Ratings are bound to assume greater importance ith

the institutionali?ation of investors in the form of unit trusts, mutual funds, pension and provident funds. The debt has sho n considerable buoyancy in 899: not only at the level 4institutional investors5 but also at retail level in vie instruments, hich boosted investor confidence. holesale of poor offerings of e$uity in the

primary market. This has come about largely on account of the availability of ratings on debt

THE GRO,TH OF CREDIT R TING INDUSTRY IN INDI

The prominent rating agencies in India are) iiiiiii*,RI-IB) - ,redit Rating Information -ervices of India Bimited. I,R#) - Investment Information and ,redit Rating #gency of India Bimited. ,#R.) - ,redit analysis and Research Bimited. 3itch Ratings India 9rivate Bimited. as formally kno n as !,R India- !uff and 9helps ,redit entity called 3itch India. 3itch India is a

3itch Rating India Bimited

Rating ,o. /-# and !,R India merged to form a ne

800G subsidiary of 3itch I2,#, and is the only holly o ned foreign operator in India. 3itch is the only international rating agency ith a presence on the ground in India. The Indian credit rating industry is ne"t to /- in terms of number of ratings issued and in the number of agencies. 2et een the four rating agencies in India, over C,000 ratings have been issued for around 8,=00 issuers. ,RI-IB is the market leader in credit rating agency market share. The regulators support played an important role in the development of the credit rating industry. In 899;, for the first time, the Reserve 2ank introduced the re$uirement of rating for commercial papers. -.2I follo ed up by introducing mandatory ratings of bonds. The other gro th drivers of the credit rating industry ere declining interest rates, a shift to ards market borro ings from bank loans and a steep increase in the state government borro ings through special purpose vehicles. 2esides these factors the gro th in the private placement market of debt increased business volume in the credit rating industry. 3or private placements, rating is not mandatory but mutual funds and banks ask for a rating. In 899H, the penetration of rating, that is, the number of rated issues, out of the total number of issues as DCG. In the year ;00;, it as 9HG. This means that the credit rating industry has transited from a regulatory driven market to an investor driven market in the gro ing debt markets. 2et een fiscal 899H and ;008, rated debt volumes increased from Rs. 8D,H=D crore to Rs. C;,H=: crore, hich is @=G of the total issuance. ith a :CG

TY%ES OF CREDIT R TINGS T.o t&pe of credit rating /as 0een noticed ) 1- Traditiona( de0t rating 1TDR2- %ri*ate p(ace+ent rating 1%%RTraditional debt ratings 4T!R5) Traditional debt ratings are a symbolic prediction about the debt security probability resulting in a default in timely payment of interest and principal. In other ords, traditional debt rating reflects the current opinion of a credit rating agency of the relative capability and illingness of an issuer of a debt instrument to service the debt obligation as per the term of contract .Traditional debt rating is specific to specific to to a debt instrument in term of credit risk associated level associated e"pectations 9rivate placement rating 499R5) 9rivately rating is ne ly introduced credit rating system finding in the literature generated by standard > poor on credit rating , private placement rating is not much different to traditional debt rating but it goes one step ahead to traditional debt rating ,ie. #part from evaluating a risk of default in timely payment it also evaluates the likelihood of loss to an investor in the vent of default according on the investment . ith such instrument .Traditional debt rating enable an investor ith his preferences ith to establish a link bet een risk and return and provide a symbolic yardstick to identify the risk ith the instrument and the return it offers to match

1ever the less, either or both of the t o types of rating can be used for ne issues of debt securities or structured obligations.

3INDS OF INSTRU!ENT R TED Fo((o.ings are t/e 0od&4s or organi5ation ./ic/ can 0e rated) 85 *anufacturing ,ompanies ;5 2anks D5 1on 2anking 3inancial Institution =5 3inancial Institutions C5 <ousing 3inance ,ompanies :5 *unicipal 2odies H5 ,ompanies In Infrastructure -ector To keep the pace ith the changing credit re$uirements of ne instruments the rating

agencies have been upgrading the technology and bringing in analytical innovation. The instrument being rated by such agencies include) 85 *ortgage > #sset 62acked -ecurities ;5 Better Of ,redit 2acked 2onds, ,ommercial 9aper and -tructure 3inance 3or (lobal *arket' D5 9ro+ect 3inance =5 *unicipal and ,orporate 2ond Insurance' C5 2onds and *oney *arket 3unds' :5 -yndicated 2anks Boans)

In Indian conte6t %ith reference to India the rating agencies have been rating the follo ing types of debts > debt obligations) 85 !ebenture 2onds ;5 3i"ed !eposits D5 ,ommercial 9aper =5 -tructured Obligations C5 other ratings ) a. /tilities Rating b. -tate (overnment Ratings c. #sset 2acked -ecurieties d. *utual 3unds Rating e. .$uity (radingE#ssessment f. 2ank Bines Of ,redit g. Others DU ' R TINGSs !ual Rating investor ,vi?. firstly, ould mean rating opinion on one or more instrument s from t o different hich of the t o ,R#&- rating opinion relied upon 'secondly , hy the hen both follo alike methodology, and thirdly, if such rating agencies. -uch dual rating leaves several $uestion unans ered in the minds of the difference in t o rating should occur

difference is unavoidable hy should not the rating s be rendered unreliable etc R TING SY!"O'S Rating agencies use symbols such as ###, ##, 222, 2, ,, !, to convey the safety grade to the investor. Ratings are classified into three grades) <igh investment grades, investment grades and speculative grades. In all ratings is classified into 8= or 8C categories. -igns IJK or I-K are used to sho the certainty of timely payment. The suffi" J or 6 may be used

to indicate the comparative position of the instrument

ithin the group covered by the symbol.

Thus 3##- lies one notch above 3#J. To provide finer gradations, rating industry attach J or 6 to their ratings. The rating symbols for different instruments of the same company need not necessarily be the same. <igh Investment (rades ###) - Triple # denotes highest safety in terms of timely payment of interest and principal. The issuer is fundamentally strong and any adverse changes are not going to affect it. ##) - !ouble # denotes high safety in terms of timely payment of interest and principal. The issuer differs in safety from ### issue only marginally. Investment (rades # ) - denotes ade$uate safety in terms of timely payment of interest and principal. ,hanges in circumstances can adversely affect such issues. 22) - Triple 2 denotes moderate safety in terms of timely payment of interest and principal speculative grades. -peculative (rades 22) - !ouble 2 denotes inade$uate safety terms of timely payment of interest and principal. /ncertain changes can lead to inade$uate financial capacity to make timely payments in the immediate future. 2) - denotes high risk. #dverse changes could lead to inability or un illingness to pay timely payment. ,) - denotes substantial risk. Issue rated is vulnerable to default. !) - denoted default in terms of timely payment of interest and principal. These symbols are +ust a current opinion of an agency and they are not recommendations to invest or not to invest. The rating assigned applies to a particular instrument of the company and is not a general evaluation of the company.

SE"I reg#(ations for Credit Rating gencies -.2I issued regulations for credit rating agencies in 8999. These regulations are called as -ecurities and ."change board of India. 4,redit Rating #gencies5 Regulations, 8999. 85 Only commercial banks, public financial institutions, foreign banks operating in India, foreign credit rating agencies, and companies rating agencies in India. ;5 Rating agencies are re$uired to have a minimum net orth of Rs C crore. D5 Rating agencies cannot assess financial instruments of their promoters stake in them. =5 Rating agencies cannot rate a security issued by an entity, hich is 4a5 a borro er of its ho have 80 G ith a minimum net orth of Rs 800 crore as per its audited annual accounts for the previous five years are eligible to promote

promoter. 4b5 a subsidiary of its promoter. 4c5 an associate of its promoter, if 4i5 there are common chairman, directors bet een credit rating agency and these entities 4ii5 there are common employees 4iii5 there are common chairman, directors, employees on the rating committee. C5 Rating agencies cannot rate a security issued by its associated or subsidiary, if the credit rating agency or its rating committee has a chairman, director or employee, chairman, director or employee of any such entity. :5 # penalty of suspension of the certificate of registration or a penalty of cancellation of registration may be imposed on the rating agency if it fails to comply or contravenes any of the provisions of the #ct. ith the condition ho is also a

REGISTR TION OF CREDIT R TING GENCIES 1- Grant of Certificate i. #ny person proposing to commence any activity as a credit rating agency on or after the date of commencement of these regulations shall make an application to the 2oard for the grant of a certificate of registration for the purpose. ii. ii5 # non- refundable application fee shall accompany an application for the grant of a certificate. 2- %ro+oter of Credit Rating genc& The 2oard shall not consider an application under unless a person belonging to any of the follo ing categories promotes the applicant) a. # 9ublic 3inancial Institution. 0. # -cheduled ,ommercial 2ank. c. # 3oreign 2ank operating in India. d. # foreign credit rating agency having at least five years e"perience in rating securities. e. #ny company or a body corporate, having continuous net the grant of certificate under these regulations. 7- E(igi0i(it& Criteria The 2oard shall not consider an application for the grant of a certificate unless the applicant satisfies the follo ing condition) a. The applicant is set up and registered as a company under the ,ompanies #ct, 89C:' 0. The applicant has, in its memorandum of #ssociation, specified rating activity as one of its main ob+ects' c. The applicant has a minimum net orth of rupees five crores. d. The applicant has ade$uate infrastructure, to enable it to provide rating service. orth of minimum rupees of one hundred crores for the previous five years prior to filling of the application ith the board for

e. The applicant and the promoters of the applicant have professional competence, financial soundness and general reputation of fairness and integrity in business transactions, to the satisfaction of the 2oard. f. 1either the applicant, nor its promoter, nor any director of the applicant or its promoter, s involved in any legal proceeding connected adverse effect on the interest of the investors' g. 1either the applicant, nor its promoters, nor any director, or its promoter has at any time in the past been convicted of any offence involving moral turpitude or any economic offence. /. The applicant has, in its employment, persons having ade$uate professional and other relevant e"perience to the satisfaction of the 2oard. i. The applicant in all other respects is a fit and a proper person for the grant of a certificate. 8. The grant of certificate to the applicant is in the interest of the investors and the securities market. 9- pp(ication to Confor+ to t/e Re:#ire+ents The 2oard shall re+ect any application for a certificate, hich is not complete in all aspects or does not confirm to the re$uirements of regulation or instructions. 9roviding that, before re+ecting any such application, the applicant shall be given an opportunity to remove. %ithin thirty days of the date of receipt of relevant communication, from the 2oard such ob+ections as may be indicated by the 2oard. 9rovided further, that the 2oard may, on sufficient reason being sho n, e"tend the time for removal of ob+ections by such further time, not e"ceeding thirty days, as the 2oard may consider fit to enable the applicant to remove such ob+ections. ith the securities market, hich may have an

;- F#rnis/ing of Infor+ation< C(arification and %ersona( Representation i. ii. The 2oard may re$uire the applicant to furnish such further information or clarification, as the 2oard may consider necessary, for the purpose of processing of the application. The 2oard, if it so desires, may ask the applicant or its authori?ed representative to appear before the 2oard, for personal representation in connection ith the grant of a certificate.

=- Grant of certificate i. ii. The 2oard. On being satisfied that the applicant is eligible for the grant of a certificate of registration, shall grant a certificate. The grant of certificate of registration shall be sub+ect to the payment of the registration fee specified. >- Conditions of Certificate and ?a(idit& %eriod The certificate shall be granted sub+ect to the follo ing conditions, namely' a. The credit rating agency shall comply ith the provisions of the #ct, the regulations made

there under and the guidelines, directives, circulars and instructions issued by the 2oard from time to time on the sub+ect of credit rating. 0. %here any information furnished to the 2oard by a credit rating agency) i. ii. is found to be false or misleading in any material particular' or has undergone change subse$uently to its furnishing at the time of the application for the certificate' the credit rating agency shall forth ith inform the 2oard in riting' c. The period of validity of the certificate of registration shall be three years. @- Rene.a( of certificate # credit rating agency, if it desires rene al of the certificate granted to it, shall make to the 2oard an application for the rene al of the certificate or registration e"piry of the period of the validity of the certificate. The application for the rene al shall be accompanied by a rene al fee. ithin D months before

STE%S IN CREDIT R TING %ROCESS Rating may differ ith respect to different instrument of same organi?ation . #lso ,

different rating assigned to different instrument of t o different organi?ations does not indicate the superiority or inferiority of the organi?ations . the steps involved in credit rating activity are given belo ) %ROCESS F'O, CH RT OF CREDIT R TING %ROCESS F'O, CH RT OF CREDIT R TING

*#1!#T. I1ITI#B -T#(. #--I(1 R#TI1( T.#* R.,.A. I1ITI#B I13OR*#TIO1, ,O1!/,T 2#I, R.-.#R,< *..TI1( > AI-IT #1#B0-I- > 9R.9#RTIO1 O3 R.9ORT 9R.AI.% *..TI1(
RATING FINALISATI-ON STAGE

3#,T- 3I1!I1( > #1#B0-I-T#(.

R#TI1( *..T1( #-I(1 R#TI1(

3R.-< I19/T ,B#RI3I,#TIO1

REQUEST FOR REVIEW

,O**/1I,#T. T<. R#TI1( > R#TIO1#B. #,,.9T1,. -/RA.IBB#1,.

The entire rating process is normally completed in three stage in practical scenario1- 9rimary Or Initial -tages. 2- 3acts 3inding > #nalysis -tage. 7- Rating 3inali?ation -tage. 1- The rating process begins at the re$uest of the company. 2- The team consisting of professionally $ualified analyst ell versed ith the orkings of the industry in 7- *eeting hich the company operates, first visits the company plants and inspects the ith the meeting ith chief operations first hand. ith different levels of management follo culminating e"ecutive officer. 9- (enerally, middle > top level management meeting cover the field of operations , finance , marketing , pro+ect, etc. ;- In completion of the assignment , the tem interacts ith the back up tem that has separately collected the additional industry information and prepares a report =- The report is then placed before n internal committee consisting of senior e"ecutives of credit rating agency ho themselves have hands on e"perience in rating assignments. >- The internal committee then has an open discussion themselves arrives at rating. @- To avoid any type ort of bias, the ratings proposed are placed before an e"ternal committee consisting of eminent people unconnected ith credit rating agency . A- The e"ternal committee then takes the final decision hich is communicated to the company 1B- The company may volunteer ny further information at this point hich could effect the ratings, it is passed ion to the e"ternal committee again for affirmationEchange. 11- The company has the option to re$uest the agency for revie of the rating. ith the tem member and amongst

TI!E FR !E FOR FOR R TING %ROCESS Fro+ Initial re$uest *eeting ith management Initial rating indication To *eeting ith management Initial rating indication 9ublication of rating Ti+e fra+e =-: eeks =-: eeks Time depends /pon completion of formalities

FUND !ENT ' %RINCI%'E OF R TING & GR DING The basic re$uirement in risk grading is that it should reflect a clear and fine distinction bet een credit grades covering default risks and safe risks in the short run. %hile there is no ideal number of grades covering default raks in the short run . hile there uis no ideal number of grades that ould facilitate achieving this ob+ective, it is e"pected that more granularity may serve the follo ing purpose ) 85 Ob+ective analysis of portfolio risks. ;5 #ppropriate pricing of various risks grade borro ers, term of lo er pricing D5 #llocation of risk capital for high risk graded e"posures =5 #chieving accuracy and consistency. #ccording to the R2I, there should be an ideal balance 4in numbers5 bet een Lacceptable credit risk and unacceptable credit riskK in a grading system. It is suggested that) 85 # rating scale may consisit of @ 6 9 levels. ;5 Of the above, the first levels may represent acceptable credit risks D5 The remaining four levels may represent unacceptable credit risks. ith a focus on lo risk borro er in

!ECH NISI! OF CREDIT R TING The $uantitative > $ualitative factors in the case of hole sale e"posure and four type

factors in the case of retail sector needed to be accorded I eightK or scores. The aggregate outcome ill reflect the rating Egrade of an e"posure against a benchmark. <ence the mechanism must lay do n the follo ing) 85 3or holesale e"posure ) The marks for each parameter, have to be fi"ed . If the gro th in the last completed year compared ith the previous year is ) ;0G > above 8CG to less than ;0G CG to less than 8CG 0G to less than CG 1egative gro th) = marks D marks ; marks 8 marks 0 marks ith a randge of marks for various ranges of a parameter

3or $ualitative factors, also, there can be suitable scoring based on Le"cellent& 4ma"imum marks5 and the lo est one Lnon satisfactory& 4?ero marks5 may be fi"ed. 85 #ggregate marks for all the applicable parameters for each category may then be mapped into various grades taking the ma"imum marks as 800, as sho n belo . ;5 %herever a particular parameter is not applicable for an e"posure , it may be ignored and the aggregate marks be read+usted E graded accordingly

l. 1o. 8 ; D = C : H @

Total e"posure @:-800 H8-@C :8-H0 C8-:0 =8-C0 D:-DC D8-DC 0-D0

score

for

an

(rade accorded ##J ## # 22J 22 2 , !

Implication

of

grade accorded ."cellent safety Aery good safety (ood safety Ordinary safety Bess ordinary safety Bo safety /nsafe safety Boss category

or retail e"posure 4consumer lending5) 85 #s ith the holesale e"posure, ma"imum marks for each parameter can be fi"ed. for

e"ample, age, months, income etc. ;5 -imilarly, aggregate marks for each parameter can be determined the overall grading of the account. %hile there may be eight grades in considered sufficient. holesale e"posure because of the risk related issue in pricing involved, in the case of retail e"posure, fourEfive grades are

D5 The scoring Egrading system in various banks E financial institution may vary substantially depending on inter alia, risk perceptions, thrust area and other allied factors.

CCOUNTING R TIOS FOR RIS3 E? 'UTION # ratio conveys a $uantitative interrelationship bet een t o attributeEvariable for eventual comparison against the bench mar and for trend analysis. in business , accounting ratios facilitate meaningful and purpose 6oriented decision ma,ing . Its utility I determined according to the purpose for hich the ratio is computed. 3rom the age of credit risk valuation , accounting ratios plays significant role for a

lendingEinvestment banks, since the overall computation of type credit rating of their account Ee"posure I aidedE supported by ratio analysis also. <ence, not , not only is it necessary to identify the relevant ratios depending upon the purpose, $uantum, tenure of e"posure etc but also in marketable securities 4 rated by approved e"ternal rating agency 5 , one may focus more on current ratioEnet profitEsales ratio than an long-term solvency ratios.

Internationally, there are no prescribed accounting ratios for risk evaluation. In India, too, the banking regulatory authorities have left such matter to the the +udgments and discretion of the banksEfinancial institution to go by established financial practices and frame an accounting ratio policy that is relevant to the purpose of its credit risk evaluation .

R TIOS FOR CREDIT E? 'U TION For identification criteria C for e6a+p(e< ite+s of c#rrent asset < c#rrent (ia0i(ities< etcDone is to 0e g#ided 0& standard acco#nting practices 1- s/ort ter+ so(*enc& ang(e ) a- ,urrent ratio) ,urrent asset ,urrent liabilities *inimum e"pected level) 8.D)8 3or financing orking capital re$uirement based on the turnover method for small >

medium enterprise 4sme5 and others, the mininmum e"pected level may be 8.80)8. 0- #cid test ratios) Muick assets Muick liabilities *inimum e"pected level ) 8)8 3or -*.&s the minimum e"pected level may be 0.@)8 c- ,ash ratio) ,ash J2ank 2alanceJ*arketable -ecurities ,urrent liabilities *inimum e"pected level) 0.C)8 3or -*. the minimum may be lo er

2- 'ong ter+ so(*enc& ang(e) d- !ebt e$ity ratio ) Total e"ternal liabilities .$uity 4o ned funds5 *a"imum allo able level) ;)8

e- !ebt servicing coverage ratio) .arning available for debt service One year debt installment payment J interest thereon .arning includes)

1et 9rofit ) 4J5 depreciation on fi"ed asset , 4-5 loss on the sale of fi"ed assets Interest on debt for one year

NNNN NN NN NN NNNN

*inimum e"pected level) 8.C)8 3or the priority sector. -*. etc, the minimum may be allo ed at 8)D0)8 7- %rofita0i(it& ang(e) a- Operating profit ratio ) 9rofit before deduction of depreciation ,ta" > finance charges -alesEincome

the e"pected level ill depend upon the nature of the industryEbusiness, operational area, si?e of the unit, the duration of the business being carried on, trend analysis and other relevant factors. <o ever, a good unit is likely to sho at least a margin of ;C-D0 G 0- Return on capital employed ratio 4RO,.5 ) Operating profit O ned fundsJlong term loan funds The e"pected level ill depend upon the nature of the industry Ebusiness, operational area, si?e of the unit, the duration of the business being carried on, trend analysis and other relevant factors, ho ever, a good unit is likely to sho at least a margin of 8C-;0G c- Interest coverage ratio ) Operating profit Interest liability -ub+ected to the factor as stated above) d- 9rofit asset ratio ) Operating profit Total tangible asset -ub+ected to the factor as stated e- Indirect overhead ratios finance chargesJ depreciation J selling and administrative cost -alesEincome The ma"imum allo able unit as stated above , ho ever , it might be 80-8CG . 3rom the asset movement angle a- Inventory holding ND00 daysNN sales

0- Trade debtorsND00 daysNN 49referably average outstanding in a year 5 -alesEincome

c- Trade creditorsND00 daysNN 4preferably average outstanding in a year 5 ,redit purchase of current assets 4preferably average level in a year5 NN computation based on D00 days in a year is advisable in Indian conte"t keeping in the vie the usual C; eekly offs, national holidays,etc The e"pected level varies from case to case as stated above , ho ever ,generally , the ma"imum level in terms of days may be bet een 90 and 8;0 .

Fro+ t/e stress ang(e) 4the 2asel committee states ) stress testing has been adopted as a generic term describing various techni$ue used by banks to gauge their potential vulnerability to e"ceptional , but plausible, events.K5

-tress tested cash flo !ebt payment Jpreference dividendJinterest

3or this purpose, cash flo

ould include only operating cash flo 4ignoring investing cash flo

O financing cash flo 5. #s a point of the stress testing scale, a reduction of a certain percentage in incomesEsales ith the simultaneous increase in the e"penses 4for e"ample. !irect costs etc 5

may result in charge 4 reduction5 in cash flo . There is no minimum or ma"imum. The stress percentage depends upon the industry, operating envoirment and also the overall business envoirment at the time of analysis. The above cluster is only indicative of the ratios that a commercial bankEfinancial institution may find usefull from the credit risks evaluation angle. There, may be other important ratios as ell, such as ) 1- 3inished (ood <olding 2- ,ash 3lo Interest ,overage 7- ,apital (earing Ratio 9- 9roprietary Ratio.

1.2 NEED FOR THE CREDIT R TING

It is necessary in vie of the gro ing number of cases of defaults in payment of interest ay of fi"ed deposits, issue of debentures

and repayment of principal sum borro ed by or preference shares or commercial papers.

*aintenance of investors& confidence, since defaults shatter the confidence of investors in corporate instruments.

9rotect the interest of investors company.

ho cannot into merits of the debt instruments of a

*otivate savers to invest in industry and trade.

1.7 O"EECTI?ES OF THE STUDY

The main ob+ective is to provide superior and lo ays' Improves a healthy discipline on borro ers, Bends greater credence to financial and other representations, 3acilitates formulation of public guidelines on institutional investment, <elps merchant bankers, brokers, regulatory authorities, etc., in discharging their functions related to debt issues, .ncourages greater information disclosure, better accounting standards, and improved financial information 4helps in investors protection5, *ay reduce interest costs for highly rated companies, #cts as a marketing tool cost information to investors for taking a

decision regarding risk-return trade off, but it also helps to market participants in the follo ing

1.9 'I!IT TIONS OF THE STUDY The study has follo ing limitations P P P P P P P P 2iased rating and misrepresentation, -tatic study, ,oncealment of material information, 1o guarantee for soundness of the company, <uman bias, Reflection of temporary and adverse conditions, 9resent rating may change 4do n grade5, !ifferences in rating of t o agencies.

1.; RESE RCH !ETHODO'OGY & D T CO''ECTION

The meaning of research as Ia careful investigation or in$uiry specially through search for ne facts in any branch of kno ledge.K Redman and *ory define research as a Isystemati?ed effort to gain ne kno ledge.K -ome people consider research as a movement, a movement from the kno n to the unkno n. It is actually a voyage of discovery. 0-The study is descriptive research study. The main purpose of descriptive research is description of the state of affairs as it e"ists at present. In the present study, descriptive method is used to kno the organi?ation. D T CO''ECTION !ETHOD) The primary data as collected through a ell structured $uestionnaire for the pro+ect as collected from the company records and Internet. ith close-ended the level of employee&s engagement ith

$uestions measures at C-point liker type scale and suggestion $uestions. -econdary data re$uired

1.= CH %TER SCHE!E

,hapter I deals the study. ,hapter II presents the profile of the industry ,hapter III presents the conceptual frame ork of the topic ,hapter IA analyses and interprets the collected secondary data. ,hapter A concludes the findings derived from the present study and the suggestions based on the findings ere presented. ith the meaning introduction to the topic, need for the study, statement

of problem, ob+ective of the study, period of study, research methodology, limitations of

2. RE?IE, OF 'ITER TURE 2.1 DEFINITIONS

#ccording to t/e !ood&4s< I# rating on the future ability and legal obligation of the issuer to make timely payments of 9rincipal and interest on a specific fi"ed income security. The rating measures the probability that the issuer ill default on the security over its life, hich depending on the instrument of the e"pected monetary loss, should a default occur. #ccording to Standard & poor4s< Iit helps investors by providing #n easily recogni?able, simple tool that couples a possibly /nkno n issuer of credit $uality. #ccording to C RE) I,redit ratings is essentially, the opinion of the rating agency on the relative ability and illingness of the issuer of a debt instrument to meet the debt service obligation as and hen they ariseK. #ccording to CRIS') I,redit rating is an unbiased, ob+ective and independent opinion to an issuer&s capacity to meet financial obligation, it is the current opinion as to the relative safety of timely payment of interest and principal on a particular debt instruments. Thus, rating applies to a particular debt obligation of the company and is not a rating for the company as a holeK #ccording to ICR )K credit rating is a simple and easy to understand symbolic indicator of the opinion of the credit rating agency about the risk involved in a borro ing program of an issuer of the company nor the recommendation to buy, hold or sell a debt instrument.K Thus, precisely, rating is a measure of credit risks and is only element in the investment decision making. ,redit rating does not indicate market risks or predict prices or yield of credits instrument. It evaluates only a specific instrument and indicates risk associated evaluation of the issuer business or operations. ith such instrument only. It is general purpose ith reverence to the capability of the issuer to repay the debt as per terms of issues. This is neither a general purpose evaluation ith an informative and meaningful symbol

C/apter III na(&sis and Interpretation

#s reported earlier, the ob+ective of the research is to get an idea regarding the credit rating. Through e"ploratory study data collection as done. It is based on the main parameter namely credit rating. 3re$uency distribution method is used for data analysis. Grap/ s/o.ing t/e age of respondents) GE No. of Respondent s F B B 1B 2 = 7= 9= B B ; 1 7 1@ 27 2BD2; 2=D7B 71D7; 7=D9B 91D9; 9=D;B ;B & 0o*e

Grap/ s/o.ing t/e rea of "#siness of t/e respondents) "#siness No. of Respondents F Food %rocessing 1B 2B C/e+ica( & ((ied %rod#cts ; 1B Cotton Rice S/e(ter 1B 2B Ot/ers

> 19

1@ 7=

40 35 30 25 20 15 10 5 0

Food Processing

C otton

Others

7. Do &o# $no. a0o#t credit ratingG NS,ER No. of Respondents F YES 9; AB NO ; 1B

Inferences) 3rom the above table and chart e can say that 90G of the respondents agree they kno about credit rating hile the 80G says they don&t kno about the credit rating.

9. If, yes than to, hich you have heard aboutQ

NS,ER No.of Respondents F

,risil

Icra

,are

3itch Onicra

-mera

2B 9B

1B 2B

12 29

7 =

7 =

2 9

Inferences) 3rom the above table and chart e can say that =0G of respondents kno s ,risil, ;0G kno s I,ra, ;=G kno s ,are, :G kno s 3itch, :G kno s Onicra and only =G kno s smera.

C. <ave you got your company rated by any rating agencyQ

NS,ER No. of Respondents F

YES 9B @B

NO 1B 2B

40 35 30 25 20 15 10 5 0 YES
Inferences) 3rom the above table and chart

No. of Respondents

NO
e can say that @0G of the respondents agree they have

got their company rated by any rating agency hile the 80G says they have not rated.

:. To, ith hich bank your credit limit isQ NS,ER No.of Respondents F -2I 7B =B O2, @ 1= 912 9 @ -2O9 7 = ,2I 7 = #nd others 2 9

30 25 20 15 10 5 0 S! O C PN S OP C! "nd others No.of Respondents

Inferences) 3rom the above table and chart e can say that :0G of respondents has their credit limit is -2I, 8:G has in O2,, @G has in 912, :G in -2O9, :G has in ,2I and only =G has in other banks.

H. <o much ould be your credit limit ith the banksQ 4In rupees5 HC to 8 NS,ER No.of Respondents F Bess than 80 lakh 27 9= 80 to D0 lakh 12 29 D0 to C0 lakh 17 2= C0 to HC lakh = 12 crore and above > 19

25 20 15 10 5 0 #ess th$n 10 %$&h 30 to 50 %$&h '5 to 1 crore $nd $(o)e No.of Respondents

Inferences) 3rom the above table and chart e can say that ;0G of respondents has their credit limit ith the banks Bess than 80 lakhs, ;=G has 80 to D0 lakhs, ;:G has D0 to HC lakh, 8;G has C0 to HC lakh and 8=G of them has HC to 8 crore and above.

@ <o much ould be appro"imate annual sales turnoverQ 4In rupees5 NS,ER No.of Respondents F Bess than =0 lakh 1; 7B =0 to H0 lakh > 19 H0 to 8 crore @ 1= 8 crore to ; crore 1; 7B ; crore and above ; 1B

1* 14 12 10 + * 4 2 0

No.of Respondents
#ess 40 to '0 to 1 2 th$n '0 1 crore crore 40 %$&h crore to 2 $nd %$&h crore $(o)e

Inferences) 3rom the above table and chart the appro"imate annual sales turn over that D0G of respondents has less than =0 lakhs, 8=G has =0 to H0 lakhs, @G has H0 to 8 crore, 8CG has8 crore to ; crore, 80G has ; crore and above as annual sales turnover.

9 <o much of your products are actually e"portedQ 4In percentage5 NS,ER No.of Respondents F 1o e"ports 2; ;B /p to CG 1B 2B 2et een CG 80G @ 1= 80G and over > 19

25 20 15 10 5 0 No e,ports -p to 5% et.een 5% / 10% 10% $nd o)er

No.of Respondents

Inferences) 3rom the above table and chart the products actually e"ported are that C0G of respondents have no e"ports, ;0G have upto CG, 8:G have bet een CG - 80G, 8=G have 80G and over.

80. !o you intend to e"pand the overall capacity in the futureQ If yes, to hat e"tent of present overall capacity do you plan to increaseQ 4In percentage5 NS,ER No.of Respondents F

0-CG 2; ;B

C-80G 1B 2B

80G - D0G @ 1=

#bove D0G > 19

25 20 15 10 5 0 0/5% 5/10% 10% / 30% "(o)e 30%

No.of Respondents

Inferences) 3rom the above table and chart intend to e"pand the overall capacity in the future are that C0G of respondents have 0-CG, ;0G have C-80G, 8:G have 80-D0G, 8=G have #bove D0G.

88 !o you avail loans for managing businessQ 3acilities including non-fund based. If yes, purpose of funds NS,ER No.of Respondents F %orking ,apital 2; ;B ; 1B ."pansion *achinery !iversification *aintenance @ 1= > 19 *achinery 9urchase ;

1B

CH %TER I?
9.1 Genera( Finding 8. ,lause =9 of the Bisting #greement to the Indian stock e"change comes into effect from D8 !ecember ;00C. It has been formulated for the improvement of corporate governance in all listed companies. ;. #s per ,lause =9, for a company ith an ."ecutive ,hairman, at least C0 per cent of

the board should comprise independent directors. D. In the case of a company ith a non-e"ecutive ,hairman, at least one-third of the

board should be independent directors. =. It ould be necessary for chief e"ecutives and chief financial officers to establish and maintain internal controls and implement remediation and risk mitigation to ards deficiencies in internal controls, among others. C. ,lause AI 4ii5 of ,lause =9 re$uires all companies to submit a $uarterly compliance report to stock e"change in the prescribed form. The clause also re$uires that there be a separate section on corporate governance in the annual report compliance report. :. # company is also re$uired to obtain a certificate either from auditors or practicing company secretaries regarding compliance of conditions as stipulated, and anne" the same to the directorRs report. H. The clause mandates composition of an audit committee' one of the directors is re$uired to be Sfinancially literateS. @. ,lause =9, hen it as first added, as intended to introduce some basic corporate ith a detailed

governance practices in Indian companies and brought in a number of key changes in governance and disclosures 4many of hich e take for granted today5. 9. It specified the minimum number of independent directors re$uired on the board of a company.

80. The setting up of an #udit committee, and a -hareholders& (rievance committee, among others, ere made mandatory as ere the *anagement&s !iscussion and #nalysis 4*!>#5 section and the Report on ,orporate (overnance in the #nnual Report, and disclosures of fees paid to non-e"ecutive directors. 88. # limit as placed on the number of committees that a director could serve on. 8;. In late ;00;, -.2I constituted the 1arayana *urthy ,ommittee to assess the ade$uacy of current corporate governance practices and to suggest improvements. 2ased on the recommendations of this committee, -.2I issued a modified ,lause =9 on October ;9, ;00= 4the Lrevised ,lause =9&5 8, ;00:. 8D. The revised ,lause =9 has suitably pushed for ard the original intent of protecting the interests of investors through enhanced governance practices and disclosures. 8=. 3ive broad themes predominate. The independence criteria for directors have been clarified. The roles and responsibilities of the board have been enhanced. The $uality and $uantity of disclosures have improved. The roles and responsibilities of the audit committee in all matters relating to internal controls and financial reporting have been consolidated, and the accountability of top managementTspecifically the ,.O and ,3OThas been enhanced. %ithin each of these areas, the revised ,lause =9 moves further into the realm of global best practices 4and sometimes, even beyond. 9 hich came into operation on 7anuary

.2 Specific Findings 8. The company has optimum combination of e"ecutives and non-e"ecutive directors less than fifty percentage of the 2oard of directors comprising of non-e"ecutive directors. ;. The #udit committee of the board of directors is constituted in compliance governance. D. In continuation of practices of good corporate governance, the board has constituted the remuneration committee of !irectors of the company. =. The -hareholders& (rievance committee of the board, inter-alia, approves issue of duplicate share certificates and oversees. C. The 2oard of directors has delegated the po er of approving transfer of securities to the Registrar sub+ect to notification of the same to the company secretary. :. ,ompany has disclosed the status of total no. of re$uestsEcomplaints and general shareholders information. H. The financial results on ebsite. @. ,ompany has disclosed !irectors& responsibility statement. 9. ,ompany has received proceeds from public issues, right issues, preferential issues etc. 80. !etails of fi"ed component and performance linked incentives' along criteria are disclosed. 88. ,ompany has separate policy for human resource department, community services, health and safety. ith the performance ere published in business standardsE3inancial e"press and also posted ith corporate ith not

9.7 S#ggestions to i+pro*e o*era(( str#ct#re of corporate go*ernance 8. ,urrent norms of corporate governance are efficient but at Initial level. There must be improvement in terms of code of conduct of corporate governance. ;. *ore and more development programmes should be conduct to improve the a areness level of Investors. D. Implementation of current norms should be made efficient. =. ,ompany should appoint more internal auditor for audit committee. C. ,ross check step should be implemented for betterment of investors. :. -takeholders value enhancement steps should be considered at large. H. *ore and *ore programmes should be arranged to educate shareholder about corporate governance.

9.9 CONC'USION ,orporate governance is a ay of life and not a set of rules, a ay of life that necessitates taking into account the stakeholder&s interest in every business decision. In this pro+ect demonstrated ho scenario under mechanisms. corporate governance system has direct correlation e have ith e"isting business

hich the corporate is operating. There is continuous need of alignment and

improvement of corporate governance system to maintain and e"ercise the right control

The vastness of the scope under impossible to sub+ectively I-elf Rating 3rame orkK -ystem. ork on areas

hich the corporate governance operates makes it here improvement is needed. #t that instance our ill give the

ill not only measure the fitment $uantitatively but also

indicative directions and task list to

ork on get the right alignment of ,orporate (overnance

Thus, corporate governance largely depends on the follo ing) The $uality of the promoters, the intentions of the promoters, the systems and procedures adopted, the transparency in the activities, and the $uality of persons at the helm of day-to-day affairs. .very person associated ith the company must appreciate the need for corporate governance, hich cannot be achieved by merely asking the company to do various things. ,orporate governance is a selfregulation and cannot be imposed.

"I"'IOGR %HY ,e0sites

http)EE http)EE http)EE http)EE http)EE http)EE http)EE

.sebi.org .bseindia.com .adityabirlachemicals.com .adityabirlachemicalsindia.com .corpfiling.co.in .google.com .moneycontrol.com

"oo$s

,orporate governance #rya 9. 9. Tandon 2. 2. Aashint #. U.

,orporate (overnance-1e paradigm (opalsamy 1

,orporate (overnance 9utting Investors first

-cott ,. 1e $uist, *a" 2. Russell