The Credit Rating Information Services of India Limited

Corporate Governance & Value Creation RatingsCRISIL GVC RatingsR Ravimohan, Managing Director & CEO

ravimohan@crisil.comPh. (+91 22) 56913333

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Contents

? Corporate Governance PerspectiveGood governance produces tangible results

? Introduction to CRISIL GVC RatingsGlobally unique methodology, measures:

Strong governance practicesBalanced and consistent value creation for diverse stakeholder classesTrack record of sound wealth management

? Criteria? The CRISIL GVC Experience

Measuring outcomes of good governance enhances value of final evaluation

? Assignment Execution and Deliverables? Benefits

Raises the bar for the market

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? Corporate Governance PerspectiveGood governance produces tangible results

? Introduction to CRISIL GVC Ratings? Criteria? The CRISIL GVC Experience? Assignment Execution and Deliverables? Benefits

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What is Corporate Governance?

? Definition“Corporate Governance is concerned with holding the

balance between economic and social goals and between individual and communal goals. The corporate governance framework is there to encourage the efficient use of resources and equally to require accountability for the stewardship of those resources. The aim is to align as nearly as possible the interests of individuals, corporations and society”

- Sir Adrian Cadbury

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Ensuring good practices

? Voluntary Disclosure? Voluntary Adoption of codes? Mandation of codes? External Certification

Carried out by expertsThorough processBenchmarking possibleMaps path for continuous improvementCRISIL GVC Ratings are a step in this direction

Increasing RegulationIncreasing Rigour

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? Corporate Governance Perspective? Introduction to CRISIL GVC Ratings

Globally unique methodology, measures: Strong governance practicesBalanced and consistent value creation for diverse stakeholder classesTrack record of sound wealth management

? Criteria? The CRISIL GVC Experience? Assignment Execution and Deliverables? Benefits

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The Key Stakeholders

Suppliers Customers Employees

Shareholders(minority)

Shareholders(majority)

Lenders

Capital Providers

Business Stakeholders

The Context

MARKETS

S O C I E T Y

Board

Management

CRISIL GVC Evaluation

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CRISIL GVC Ratings: business success with responsibility

? A globally unique initiative? Evolved in conjunction with industry associations

and market regulator? Evaluates companies’ effectiveness in sustained

value creation for all stakeholders? Forward-looking model? Measures linkage between good governance and

wealth creation? Provides true 3600 evaluation

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3600

Corporate Governance –

Analytical Perspective

3600

Corporate Governance –

Analytical Perspective

A 3600 Evaluation

SocietySociety

BoardBoard

EmployeesEmployees

MajorityShareholders

MajorityShareholders

MinorityShareholders

MinorityShareholders

CreditorsCreditors

CustomersCustomers

SuppliersSuppliers

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CRISIL’s GVC Rating Model

CRISIL Corporate Governance and Value Creation Rating

Wealth Creation Measures (for individual stakeholders)

Corporate Governance Practice (Processes)

Wealth Management Measures (for all stakeholders)

Evaluates balanced wealth creation and management, and sound Corporate Governance practices

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CRISIL’s GVC Rating Model

? Appropriate balance of qualitative & quantitativeparameters; past performance & future expectation

? Will differentiate two well governed companies with materially different financial performance

? Will differentiate companies who take care of all stakeholders vis-à-vis those addressing only one/two stakeholders

? GVC Ratings will be an useful input for equity investment decisions or counter-party assessments

? However, they are not in themselves a stock recommendation

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? Corporate Governance Perspective? Introduction to CRISIL GVC Ratings? Criteria? The GVC Experience? Assignment Execution and Deliverables? Benefits

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? Financial transparency & disclosure? Independence and standing of the auditor? Disclosure standards

? Completeness and quality of financial reporting? Timeliness of disclosures.? Accessibility of information to all investors

? Influence of Majority/large stakeholders? Influence in decision making processes? Collusion between management and certain stakeholders

? Evaluation of sources of receivables/destination of payables? Affiliate/group company transaction etc.

? Access to information on ownership structure

Criteria - Corporate Governance and Wealth Management Practices

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? Board composition and effectiveness? Board structure

? Composition of board and strength of independent directors? Board composition –criteria

? Effectiveness of Board? Board meeting processes, information availability, timeliness? Role and effectiveness of independent directors? Board evaluation, compensation and succession policies etc.

? Assessment of management capabilities? Past track record of management

? Success of strategies, ability to re-strategise with changes in market conditions

? Track record of innovation and consistency of performance? Experience of management

Criteria - Corporate Governance and Wealth Management Practices

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Criteria - Wealth Creation/Distribution

? Shareholders? Returns to shareholders

? Return on invested capital compared to weighted average cost ofcapital.

? Payout ratio, particularly for firms with low returns

? Debt Holders? High debt protection measures

? Current credit rating? Stability in rating

?Maintaining a consistently high rating in past ? Upgrades in ratings

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Criteria - Wealth Creation/Distribution

? Customers? Customer satisfaction level

? Market Share in competitive industries: current and past trends? Number of service / customer support centers

? Cost savings passed on to customers.? Employees

? Compensation? Absolute Salary levels? Real growth in average annual salaries? Provision of ESOPs

? Employee satisfaction level? Attrition rates? Intangibles such as working conditions, training of employees.

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Criteria - Wealth Creation/Distribution

? Suppliers ? Relative change in credit terms? Passing on increased realization? Support/Intangibles to suppliers

? Society ? Total direct taxes paid? Employment generated? Expenditure on social infrastructure? Environmental/Social impact cost? Fair practices followed

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? Corporate Governance Perspective? Introduction to CRISIL GVC Ratings? Criteria? The GVC Experience

Measuring outcomes of good governance enhances value of final evaluation

? Assignment Execution and Deliverables? Benefits

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Results of Sample CRISIL Study

? Companies creating wealth for the largest number of stakeholders did well on all parameters? Companies at the highest level score highly on all

counts? A company at the second level scores low for suppliers

and society, but high for all other stakeholders? Companies lower down score low for suppliers,

customers, society and shareholders? The company with the lowest score in our sample

scores low on all parameters? Inclusion of wealth creation and management

parameters enhances the value of the final evaluation

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Case Study from GVC Ratings: HDFC Bank

? Strong wealth management patterns ? Optimised value creation for all segments of

stake-holders? Anticipated improvements in ? Information disclosure? Board structure

? Assigned CRISIL GVC Level 1

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Case Study from GVC Ratings: Hero Honda Motors Ltd

? Very high levels of value creation for all stakeholders:? High shareholder returns, strong credit fundamentals, strong

volume growth and improved credit terms for suppliers, growing benefits for employees, steady customer satisfaction levels

? Capable management ? Corporate governance operationally sound, but can

improve in context of global best practices? Assigned CRISIL GVC Level 1

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Case Study from GVC Ratings: HDFC Ltd

? Transparent and well-diversified ownership structure

? High levels of financial transparency and disclosure standards

? Sound board processes? Sets pricing benchmarks for customers and

depositors; however also exhibits high service standards

? Strong wealth management practices? Assigned CRISIL GVC Level 1

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Case Study from GVC Ratings: Dabur India Ltd

? Evolving governance practices? Scope for further improvement in structure,

composition, and functioning of board? Strong value creation for debt holders, employees

and customers offset by low, but improving, shareholder value

? Disclosures adequate, can improve? Assigned CRISIL GVC Level 2

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? Corporate Governance Perspective? Introduction to CRISIL GVC Ratings? Criteria? Sample CRISIL study? Assignment Execution and Deliverables? Benefits

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Assignment Execution

? Information required? Company annual and intra year reports? Company Charter/by laws? Filings with government / regulatory agencies? Records of AGM/EGMs/Board Meetings? New Share Issuance details for company/subsidiary? Records of penalties, fines etc. wrt investors rights? Major transactions over last 3 years? Details of Board Structure, policies pertaining thereto? Details of assistance provided to suppliers, benefits to

employees, attrition rates, social projects undertaken etc.

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Assignment Execution

? Meetings/discussions with? Chief Executive, Whole Time Directors? Head of Finance? Company Secretary/Corporate Counsel? Board Directors (particularly independent directors)? Shareholders relations personnel? Key shareholders and creditors? Company Auditors ? Key suppliers, customers, human resources personnel

? Total time 3-4 weeks from receipt of information

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Deliverables

? CRISIL GVC Ratings assigned on 8 levels (GVC Level 1-8); each level represents a band of scores.

? Detailed write-up providing analysis and conclusions

? Rating valid for one year, annual surveillance ? Evaluation only upon receipt of mandate from

company; confidential till accepted by company. (May change if regulations change)

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? Corporate Governance Perspective? Introduction to CRISIL GVC Ratings? Criteria? Sample CRISIL study? Assignment Execution and Deliverables? Benefits

Raises the bar for the market

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Benefits for Market Regulators

? Fosters? Greater transparency? Better disclosures? Stronger governance

? Improves market discipline? Creates culture of voluntary compliance? Sets benchmarks for market participants

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Benefits for Investors

? Identifies companies with effective corporate governance practices

? Differentiates two equally well governed companies on value creation

? Evaluates treatment of various stakeholders by management

? An independent insight into governance practices and their sustainability

? A benchmark support for equity investment decision

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Benefits for Corporates

? Attract investors by highlighting the effectivenessof Corporate Governance practices

? Assess existing status and set up road map for further improvements

? Create visibility across all stakeholders? Broaden appeal of company to investor class

interested in long-term sustainability

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Limitations

? GVC looks at sustainable profit making capacity of a company, rather than profitability per se.

? GVC ratings may therefore display results that are at variance with other measures of earnings.

? In the absence of any mandation, GVC rating will be only done on an invitation basis.

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Current Scenario

? First four ratings released on January 17?Wide interest in CRISIL GVC Ratings from

various segments of the market including corporates and financial institutions

? Negotiations on to adapt this model for European markets, where Sustainable Investment movement is gathering momentum

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