CHAPTER 1- INTRODUCTION TO CREDIT RATING

1.1 DEFINITION OF CREDIT RATING

The evaluation of a people or business ability and past performance in paying debts.A credit rating is generally established by a credit bureau and used by merchants, suppliers, and bankers to determine whether a loan should be granted or credit extended.

A rating is an opinion on the future ability and legal obligation of the issuer to make timely payments of principal and interest on a specific fixed income security. The rating measures the probability that the issuer will default on the security over its life, which depending on the instrument may be a matter of days to 30 years or more. In addition, long term ratings incorporate an assessment of the expected monetary loss should a default occur.

"Credit ratings help investors by providing an easily recognizable, simple tool that couples a possibly unknown issuer with an informative and meaningful symbol of credit quality." Standard and Poors

1.2 MEANING OF CREDIT RATING

Ratings, usually expressed in alphabetical or alphanumeric symbols, are a simple and easily understood tool enabling the investor to differentiate between debt instruments based on their underlying credit quality. The credit rating is thus a symbolic indicator of the current opinion of the relative capability of the issuer to service its debt obligation in a timely fashion, with specific reference to the instrument being rated. It is focused on communicating to the investors, the relative ranking of the default loss probability for a given fixed income investment, in comparison with other rated instruments.

In fact, the rating is an opinion on the future ability and legal obligation of the issuer to make timely payments of principal and interest on a specific fixed income security. The rating measures the probability that the issuer will default on the security over its life, which depending on the instrument may be a matter of days to 30 years or more. In addition, long-term rating incorporates an assessment of the expected monetary loss should a default occur. Credit rating helps investors by providing an easily recognizable, simple tool that couples a possible unknown issuer with an informative and meaningful symbol of credit quality. Credit rating can be defined as an expression, through use of symbols, of the opinion about credit quality of the issuer of security/instrument. Credit rating does not amount to any recommendation to purchase, sell or hold that security. It is concerned with an act of assigning values by estimating worth or reputation of solvency, and honesty to repose trust in a person's ability and intention to repay.The ratings assigned are generally regarded in the investment community as an objective evaluation of the probability that a borrower will default on a given security issue. Default occurs whenever a security issuer is late in making one or more payments that it is legally obligated to make. In the case of a bond, when any interest or principal payment falls due and is not made on time, the bond is legally in default. While many defaulted bonds ultimately resume the payment of principal and interest, others never do, and the issuing company winds up in bankruptcy proceedings. In most instances, holders of bonds issued by a bankrupt company receive only a part amount on his investments, invested, once the company's assets are sold at auction. Thus, the investor who holds title to bankrupt bonds typically loses both principal and interest. It is no wonder, then, that security ratings are so closely followed by investors. In fact, many investors accept the ratings assigned by credit agencies as a substitute for their own investigation of a security's investment quality.

1.3 OBJECTIVES OF CREDIT RATING

The main objective is as follows:

ToUnderstand Why Credit Rating Is Done, How It Is Helpful for The Organization, Investors & Brokers and Financial Inter -me diaries? How Credit Rating Is Assign to the Company? What Are The Criteria Is Measures To Give Rating To The Company? What Are The Different Rating Firms? What Are The Methodology Are Used? What Are The Limitations Of The Credit Rating? How The Rating Firm Overcomes This Limitation?

1.4 SCOPE OF CREDIT RATING In future when I am going to start my own enterprise then credit rating is helpful for getting loan from banks, financial institutions. Credit rating is important for tracing any malpractices & any unfair trade practices is going into my origination. In future I am going for trading in shares then it is helpful for me like if I want select an any firm then it is helpful for me to see the rating of that firm & according to rating I am going to invest in this firm If I am going for investment in some company so, Informationis supplied by rating agencies can beeasily understood by me. Then I need not go intodetails of the financial statements. It provide the information at the low cost to me1.5 RESEARCH METHODOLOGYData Sources and Data Collection MethodsThere are two methods of data collection one is primary data & second is Secondary data.my project is depends upon secondary data.Secondary data:Secondary data is second hand data published data and the data collected in the past or by other parties is called secondary data. It is less reliable as compared to primary data; it is easily available, less expensive as compared to the primary data& seeks modification.Source Of Secondary Data Are:Internet, Books, Articles.1.6 RESEARCH LIMITATIONS: Inadequacy of required data is another constraint.

Even if actual data was gathered, it is often against the company policy to disclose many such data in the project report. In that case the actual data was then slightly modified and then utilized for the project. We cannot do comparisons with other companies unless and until we have the data of other companies on the same subject. Only the printed data about the company will be available and not the backend details. Lastly, due to shortage of time it is not possible to cover all the factors and details regarding the subject of study. The latest financial data could not be reported as the companys websites have not been updated.

CHAPTER 2: CREDIT RATING SYSTEM

2.1 EVOLUTION OF CREDIT RATING AGENCIES

a) ORIGIN OF CREDIT RATINGThe origins of credit rating can be traced to the 1840's. Following the financial crisis of 1837, Louis Tappan established the first mercantile credit agency in New York in 1841. The agency rated the ability of merchants to pay their financial obligations. Robert Dun subsequently acquired it and its first rating guide was published in 1859. John Bradstreet set up another similar agency in 1849, which published a rating book in 1857. These two agencies were merged together to form Dun and Bradstreet in 1933, which became the owner of Moody's Investors Service in 1962.

b) HISTORY OF MOODYSThe history of Moody's itself goes back about 100 years. John Moody (1868 - 1958) was a self-taught reformer who had a strong entrepreneurial drive and a firm belief about the needs of the investment community - as well as considerable journalistic talent. Relying on his assessment of the markets needs, John Moody and Company published Moodys Manual of Industrial and Miscellaneous Securities in 1900, the companys founding year. The manual provided information and statistics on stocks and bonds of financial institutions, government agencies, manufacturing, mining, utilities, and food companies. Within two months, the publication had sold out. By 1903, circulation had exploded, and Moodys Manual was known from coast to coast.

When the stock market crashed in 1907, Moodys company did not have adequate capital to survive, and he was forced to sell his manual business. Moody returned to the financial market in 1909 with a new idea. Instead of simply collecting information on the property, capitalization, and management of companies, he now offered investors an analysis of security values. His company would publish a book that analyzed the railroads and their outstanding securities. It offered concise conclusions about their relative investment quality. He expressed his conclusions using letter-rating symbols adopted from the mercantile and credit rating system that had been used by the credit-reporting firms since the late 1800s.Moody had now entered the business of analyzing the stocks and bonds of Americas railroads, and with this endeavor, he became the first to rate public market securities. In 1909, Moodys Analyses of Railroad Investments described for readers the analytic principles that Moody used to assess a railroads operations, management, and finance. The new manual quickly found a place in investors hands. In 1913, he expanded his base of analyzed companies, launching his evaluation of industrial companies and utilities. By that time, the "Moody's ratings" had become a factor in the bond market. On July 1, 1914, Moody's Investors Service was incorporated. That same year, Moody began expanding rating coverage to bonds issued by US cities and other municipalities.

c) EXPANSION OF CREDIT RATING

Further expansion of the credit rating industry took place in 1916, when the Poor's Publishing Company published its first rating followed by the Standard Statistics Company in 1922, and Fitch Publishing Company in 1924. The Standard Statistics Company merged in 1941 to form Standard and Poor's, which was subsequently taken, over by McGraw Hill in 1966. For almost 50 years, since the setting up of Fitch Publishing in 1924, there were no major new entrants in the field of credit rating and then in the 1970s, a number of credit rating agencies commenced operations all over the world. These included the Canadian Bond Rating Service (1972), Thomson Bankwatch (1974), Japanese Bond Rating Institute (1975), McCarthy Crisani and Maffei (1975 acquired by Duff and Phelps in 1991), Dominican Bond Rating Service (1997), IBCA Limited (1978), and Duff and Phelps Credit Rating Company (1980). There are credit rating agencies in operation in many other countries such as Malaysia, Philippines, Mexico, Indonesia, Pakistan, Cyprus, Korea, Thailand and Australia.

In India, the Credit Rating and Information Services of India Ltd. (CRISIL) was set up as the first rating agency in 1987, followed by ICRA Ltd. (formerly known as Investment Information and Credit Rating Agency of India Limited) in 1991, and Credit Analysis and Research Ltd. (CARE) in 1994. The ownership pattern of all the three agencies is institutional. Duff and Phelps has tied up with two Indian NBFCs to set up Duff and Phelps Credit Rating India (P) Limited in 1996.

2.2 TYPES OF RATING

Following are the different kinds of rating:

A. Bond/Debenture Rating

Rating the debentures/ bonds issued by corporate, government etc. is called debenture or bond rating.

B. Equity Rating

Rating of equity shares issued by a company is called equity rating.

C. Preference Share Rating

Rating of preference share issued by a company is called preference share rating.

D. Commercial Paper Rating

Commercial papers are instruments used for short-term borrowing. Commercial papers are issued by manufacturing companies, finance companies, banks and financial institutions and rating of these instruments is called commercial paper rating.

E. Fixed Deposits Rating

Fixed deposits programs are medium term unsecured borrowings. Rating of such programs is called as fixed deposits rating.

F. Borrowers Rating

Rating of borrowers is referred as borrower rating.

G. Individuals Rating

Rating of individuals is called as individual's credit rating.

H. Structured Obligation Rating

Structured obligations are also debt obligations and are different from debenture or bond or fixed deposit programs and commercial papers. Structured obligation is generally asset-backed security. Credit rating agencies assessed the risk associated with the transaction with the main trust on cash flows emerging from the asset would be sufficient to meet committed payments, to the investors in worst case scenario.

I. Sovereign Rating

Is a rating of a country, which is being considered whenever a loan is to be extended, or some major investment is envisaged in a country.

2.3CREDIT RATING FUNCTION

1) Credit rating plays an important role in developed and developing capital markets throughout the world.

2) The use of ratings fosters growth in local and international markets, and streamlines their functioning.

3) Capital markets currently include bonds and other bond-like instruments guaranteeing a fixed income amounting to an aggregate total of over $80 trillion.

4) Ratings serve a wide array of players in the capital market.

5) The service is designed first and foremost to provide reliable ratings to fulfill the needs of investors interested in obtaining a reliable, independent estimate of a companys credit risk, of issuers and borrowers seeking flexible sources of financing on the capital market and brokering entities enjoying this service namely: savers, governments, economists, the financial media and other observers.

2.4 CLIENTS FOR CREDIT RATING

Clients comprise manufacturing companies, non-banking finance companies, nationalized and private banks, financial institutions, public sector units, utilities, real estate developers, state governments, municipal corporations, stock brokers and others.

CHAPTER 4: REGISTRATION, ELIGIBILITY CRITERIA OF CREDIT RATING

3.1 REGISTRATION Credit rating agencies are regulated by sebi. Registration with sebi is mandatory for carrying out the rating business. A registration fee of Rs. 25000 should be paid to sebi

3.2 PROMOTERA credit rating agency can be promoted by: Public financial institution Scheduled bank Foreign bank operating in India with RBI approval Foreign credit rating agency having at least five years experience in rating securities Any company having a continuous net worth of maximum 100 cores for the previous five years

3.3 ELIGIBILITY CRITERIA Is set up and registered as a company Has specified rating activity as one of its main objects in its memorandum of association Has a minimum net worth of Rs 5 Crore. Has adequate infrastructure Promoters have professional competence, financial soundness and a general reputation of fairness and integrity in business transactions, to the satisfaction of SEBI. Has employed persons with adequate professional and other relevant experience, as per SEBI directions.

3.4 GRANT OF CERTIFICATE OF REGISTRATION

SEBI will grant to eligible applicants a certificate of registration on the payment of a fee of Rs. 5, 00,000 subject to certain conditions.

3.5 AGREEMENT WITH THE CLIENTS

The CRA should enter into a written agreement with each client containing Rights & liabilities of each party w.r.t. rating of securities Fee charged A periodic review of the rating during the tenure Clients agreement to cooperate & provide true, adequate, & timely information Disclosure by CRA to client regarding the rating assigned Clients agreement to disclose the rating assigned in the offer document for the last 3 years

CHAPTER 3: BENEFITS OF CREDIT RATING

For different classes of persons different benefits accrue from the use of rated instruments. The benefits directly accruing to investors through rated instruments are:

3.2 Benefits To Investors

Investors are benefited in many ways if the corporate security in which they intend to invest their saving has been rated. Some of the benefits are:

A. Safeguards Against Bankruptcy

Credit rating of an instrument done by a credit rating agency gives an idea to the investors about the degree of financial strength of the issuing company, which enables him to decide about the investment. A highly rated instrument of a company gives an assurance to the investors of the safety of that instrument and a minimum risk of bankruptcy.

B. Recognition Of Risk

Credit rating provides investors with rating symbols that carry information in easily recognizable manner for the benefit of investors to perceive the risk involved in the investment. It becomes easier for the investors by looking at the symbol to understand the worth of the issuing company. The rating symbol gives them the idea about the risk involved or the expected advantages from the investment.

C. Credibility Of Issuer

Rating gives a clue about the credibility of the issuing company. The rating agency is quite independent of the issuer company and has no business connections or any relationship with it or its Board of Directors, etc. Absence of business links between the rater and the rated firm establishes ground for credibility and attract investors.D. Easy Understandability Of Investment Proposal

An investor needs no analytical knowledge on his part and can understand the rating symbol. The investor can take quick decisions about the investment to be made in any particular rated security of a company.

E. Independence Of Investment Decisions

For making investment decisions, investors have to seek advice of financial intermediaries, the stockbrokers, merchant bankers, the portfolio managers etc. about the good investment proposal. For rated instruments, investors need not depend upon the advice of these financial intermediaries as the rating symbol assigned to a particular instrument suggests the credit worthiness of the instrument and indicates the degree of risk involved in it.

F. Choice of Investments

G. Benefits of Rating Surveillance

H. Other Advantages

3.3 Benefits Of Rating To The Company

Company which had its credit instrument or security rated by a credit rating agency is benefited in many ways as summarized below:

A. Lower Cost of Borrowing

A company with highly rated instrument has the opportunity to reduce the cost of borrowing from the public by quoting lesser interest on fixed deposits or debentures or bonds as the investors with low risk preference would come forward to invest in safe securities though yielding marginally lower rate of return.

B. Wider Audience For Borrowing

A company with a highly rated instrument can approach the investors extensively for the resource mobilization using the press media. Investors in different strata of the society could be attracted by higher rated instrument, as the investors understand the degree of certainty about timely payment of interest and principal on a debt instrument with better rating.C. Rating as Marketing Tool

Companies with rated instruments improve their own image and avail of the rating as a marketing tool to create better image in dealing with its customers feel confident in the utility products manufactured by the companies carrying higher rating for their credit instruments.

D. Reduction Of Cost In Public Issues

A company with higher rated instrument is able to attract the investors and with least efforts can raise funds. Thus, the rated company can economize and minimize cost of public issuesby controlling expenses on media coverage, conferences and other publicity stunts and gimmicks. Rating facilitates best pricing and timing of issues.

E. Motivation for Growth

Rating provides motivation to the company for growth as the promoters feel confident in their own efforts and are encouraged to undertake expansion of their operations or new projects. With better image created though higher credit rating the company can mobilize funds from public and instructions or banks from self-assessment of its own status, which is subject to self-discipline and self-improvement, it can perceive and avoid sickness3.4 BENEFITS TO BROKERS AND FINANCIAL

INTERMEDIARIES

Rating is a useful tool for merchant bankers and other capital market intermediaries in the process of planning, pricing, underwriting and placement of issues. The intermediaries, like brokers and dealers in securities, could use rating as an input for their monitoring of risk exposures. The merchant bankers are also using credit ratings for pre-packing of issues by way of securitization/ structured obligations. Highly rated instruments put the brokers at an advantage to make less effort in studying the company's credit position to convince their clients to select an investment proposal. This enables brokers and other financial intermediaries to save time, energy, costs and manpower in convincing their clients about investment in any particular instrument. Etc.

DISADVANTAGES OF CREDIT RATING

Biased Rating And Misrepresentations

In the absence of quality rating, credit rating is a curse for the capital market industry, carrying out detailed analysis of the company, should have no links with the company or the persons interested in the company so that their reports impartial and judicious recommendations for rating committee. The companies having lower grade rating do not advertise or use the rating while raising funds from the public. In such cases, the investor cannot get information about the riskiness of instrument and hence is at loss.

Static Study

Rating is done on the present and the past historic data of the company and this is only a static study. Prediction of the company's health through rating is momentary and anything can happen after assignment of rating symbols to the company. Dependence for future results on the rating, therefore defeats the very purpose of risk indicative ness of rating. Many changes take place in economic environment, political situation, government policy framework, which directly affects the working of a company.

Concealment Of Material Information

Rating company might conceal material information from the investigating team of the credit rating company. In such cases, quality of rating suffers and renders the rating unreliable. Rating Is No Guarantee For Soundness Of Company

Rating is done for a particular instrument to assess the credit risk but it should not be construed as a certificate for the matching quality of the company or its management. Independent views should be formed by the public using the rating symbol.

Human Bias

Findings of the investigation team, at times, may suffer with human bias for unavoidable personal weakness of the staff and might affect the rating.

Reflection of Temporary Adverse Conditions

Time factor affects rating. Sometimes, misleading conclusions are derived. For example, company in a particular industry might be temporarily in adverse condition but it is given a low rating. This adversely affects the company's interest

Down Grade

Once a company has been rated and if it is not able to maintain its working results and performance, credit rating agencies would review the grade and down grade the rating resulting into impairing the image of the company.

Difference In Rating Of Two Agencies

Rating done by the two different credit rating agencies for the same instrument of the same issuer company in many cases would not be identical. Such differences are likely to occur because of value judgment differences on qualitative aspects of the analysis in two different agencies.

Conservative Rating

Default by an investment-grade firm is seen as the most costly error for the agency. In order to preserve their reputation by avoiding the failure of any investment-grade firm, rating agencies downgrade even "good" firms in response to higher global risk. The downgrades may look self-fulfilling, but in fact, investors rationally ignore them, as they actually convey no information about the relative quality of firms.

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CHAPTER 4: CREDIT RATING AGENCY

A credit rating agency (CRA) is a company that assigns credit ratings for issuers of certain types of debt obligations. In most cases, these issuers are companies, cities, non-profit organizations, or national governments issuing debt-like securities that can be traded on a secondary market. A credit rating measures credit worthiness, the ability to pay back a loan, and affects the interest rate applied to loans. (A company that issues credit scores for individual credit-worthiness is generally called a credit bureau or consumer credit reporting agency.)

4.1 USES OF RATINGS BY CREDIT RATING AGENCIES

Credit ratings are used by investors, issuers, investment banks, broker-dealers, and by governments. For investors, credit rating agencies increase the range of investment alternatives and provide independent, easy-to-use measurements of relative credit risk; this generally increases the efficiency of the market, lowering costs for both borrowers and lenders. This in turn increases the total supply of risk capital in the economy, leading to stronger growth. It also opens the capital markets to categories of borrower who might otherwise be shut out altogether: small governments, startup companies, hospitals and universities.

4.2 FUNCTIONS OF A CREDIT RATING AGENCY

Credit rating serves the following functions:

1. Provides Superior Information:

It provides superior information on credit risk for three reasons:

a. It is an independent rating agency, and is likely to provide an unbiased opinion; unlike brokers, financial intermediaries and underwriters who have a vested interest in the issue,

b. Due to professional and highly trained staff, their ability to assess risk is better, and finally,

c. The rating firm has access to a lot of information, which may not be publicly available.

2. Low Cost Information

A rating firm gathers, analyses, interprets and summarizes complex information in a simple and readily understood formal manner. It is highly welcome by most investors who find it prohibitively expensive and simply impossible to do such credit evaluation of their own.

3. Basis for a Proper Risk and Return

If an instrument is rated by a credit rating agency, then such instrument enjoys higher confidence from investors. Investors have some idea as to what is the risk that he/she is likely to take, if investment is done in that security.

4. Healthy Discipline On Corporate Borrowers

Higher credit rating to any credit investment tends to enhance the corporate image and visibility and hence it induces a healthy discipline on corporate.

5. Greater Credence To Financial And Other Representation

When a credit rating agency rates a security, its own reputation is at stake.

Therefore, it seeks high quality financial and other information. As the issue complies with the demands of the credit rating agency on a continuing basis, its financial and other representations acquire greater credibility.6. Provide basis for investment:

An investment rated by acredit rating enjoys higher confidence from investors.Investors can make an estimate of the risk and returnassociated with a particular rated issue while investingmoney in them.

7. Healthy discipline on corporate borrowers:

Higher creditrating to any credit investment enhances corporate imageand builds up goodwill and hence it induces a healthy/discipline on corporate.

8. Formation of public policy:Once the debt securities arerated professionally, it would be easier to formulate publicpolicy guidelines as to the eligibility of securities to beincluded in different kinds of institutional port-folio.

CHAPTER 5: CREDIT RATING IN INDIA

5.1 INTRODUCTION In the Indian context, the scope of credit rating is limited generally to debt, commercial paper, fixed deposits, mutual funds and of late IPOs as well. Therefore, it is the instrument, which is rated, and not the company. In other words, credit quality is not general evaluation of issuing organization, i.e. if debt of company XYZ is rated AAA and debt of company ABC is rated BBB, then it does not mean firm XYZ is better than firm ABC. However, the issuer company gets strength and credibility with the grade of rating awarded to the credit instrument it intends to issue to the public to raise funds. Rating, in a way, reflects the issuer's strength and soundness of operations and management. It expresses a view on its prospective composite performance and the organizational behavior based on the study of past results.

Further, the rating will differ for different instruments to be issued by the same company, within the same time span. For example, credit rating for a debenture issue will differ from that of a commercial paper or certificate of deposit for the same company because the nature of obligation is different in each case. Credit rating has been made mandatory for issuance of the following instruments:

(1) As per the regulations of Securities and Exchange Board of India (SEBI) public issue of debentures and bonds convertible/ redeemable beyond a period of 18 months need credit rating.

(2) As per the guidelines of Reserve Bank Of India (RBI), one of the conditions for issuance of Commercial Paper in India is that the issue must have a rating not below the P2 grade from CRISIL/A2 grade from ICRA/PR2 from CARE.

(3) As per the guidelines of Reserve Bank of India (RBI), Non

Banking Finance Companies (NBFCs) having net owned funds of more than Rs.2 core must get their fixed deposit programs rated.

(4) As per the regulations of the Ministry of Petroleum, the parallel marketers of Liquefied Petroleum Gas (LPG) and Superior Kerosene Oil (SKO) in India are also subjected to mandatory rating. The three rating agencies have a common approach for such rating and the dealers are categorized into four grades between 1 to 4 indicating good, satisfactory, low risk and high risk

(5) There is a proposal for making the rating of fixed deposit programs of limited companies, other than NBFCs also mandatory, by amendment of the companies Act 1956.

CRAs registered with SEBI.

Name of the CRACommencement of Year

CRISIL1988

ICRA1991

CARE1993

Fitch 1996

India2008

5.2 CREDIT RATING IN INDIA5.2.1CRISILCredit Rating Information Services of India Limited (CRISIL) has been promoted byIndustrial Credit and Investment Corporation of India Ltd. (ICICI) and Unit Trust of India Ltd. (UTI) as a public limited company with its headquarters at Mumbai. CRISIL, incorporated in 1987, pioneered the concept of credit rating in India and developed the methodology for rating of debt in the context of India's financial, monetary and regulatory system. It was the first rating agency to rate Commercial Paper Programme in 1989, debt instruments of financial institutions and banks in 1992 and asset-backed securities in 1992.

The main objective of CRISIL has been to rate debt obligation of Indian companies. Its rating provides a guide to the investors as to the risk of timely payment of interest and principal on a particular debt instrument. Its rating creates awareness of the concept of credit rating amongst corporations, merchant bankers, brokers, regulatory authorities, and helps in creating environment that facilitates the debt rating.

CRISIL provides rating and risk assessment services to manufacturing companies, banks, non-banking financial companies, financial institutions, housing finance companies, municipal bodies and companies in the infrastructure sector.

CRISIL's Rating Process

CRISIL'S Ratings Processes In as given below:

1. Request of the Company

The rating process beings at the request of a company desirous of having its issue obligations under proposed instrument rated by CRISIL

2. Assignment to Analytical Team

On receipt of the above request, CRISIL assigns the job to an analytical team that will be responsible for carrying out the rating assignment.

3. Obtaining and Processing Of Data

The analytical team, which generally contains two experts, obtains requisite information from the client company and analyses the same. To obtain clarification and better understanding of the client's operations, the team meets and interacts with company's executives.4. Findings Presentation

The findings of the team completion of investigation process are presented to Rating committee (which comprises some directors not connected with any CRISIL shareholder) which then decides on the rating.

(5) Communication of Decision

The decision of the Rating committee is communicated to the client company with remarks that the company, if it so likes, may present some additional information for reconsideration of rating grade assigned to the instrument. In case the company has nothing to produce as additional fact, the rating grade is formally confirmed to the company by CRISIL.

(6) Monitoring Of Change of Rating

Once the company has decides to use the rating, CRISIL is obliged to monitor the rating, over the life of the instrument. Depending upon new information, or developments concerning the company, CRISIL may change the rating. Any change, so effected, is made public by CRISIL.

CRISILS RATING SYMBOLS FOR LONG TERM

INSTRUMENTS

Investment Grade Ratings:

AAA

(Triple A) Highest Safety

Instruments rated 'AAA' are judged to offer the highest degree of safety with regard to timely payment of financial obligations. Any adverse changes in circumstances are most unlikely to affect the payments on the instrument

AA

(Double A) High Safety

Instruments rated 'AA' are judged to offer a high degree of safety with regard to timely payment of financial obligations. They differ only marginally in safety from `AAA' issues.

A

Adequate Safety

Instruments rated 'A' are judged to offer an adequate degree of safety with regard to timely payment of financial obligations. However, changes in circumstances can adversely affect such issues more than those in the higher rating categories

BBB(Triple B) Moderate Safety

Instruments rated 'BBB' are judged to offer a moderate safety with regard to timely payment of financial obligations for the present; however, changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal than for instruments in higher rating categories.

Speculative Grade Ratings:

BB

(Double B) Inadequate Safety

Instruments rated 'BB' are judged to carry inadequate safety with regard to timely payment of financial obligations; they are less likely to default in the immediate future than other speculative grade instruments, but an adverse change in circumstances could lead to inadequate capacity to make payment on financial obligations.

B

High Risk

Instruments rated 'B' are judged to have greater likelihood of default; while currently financial obligations are met, adverse business or economic conditions would lead to lack of ability or willingness to pay interest or principal.

C

Substantial Risk

Instruments rated 'C' are judged to have factors present that make them vulnerable to default; timely payment of financial obligations is possible only if favorable circumstances continue.D

Default

Instruments rated 'D' are in default or are expected to default on scheduled payment dates. Such instruments are extremely speculative and returns from these instruments may be realized only on reorganization or liquidation.

NM

Not Meaningful

Instruments rated 'N.M' have factors present in them, which render the rating outstanding meaningless. These include reorganization or liquidation of the issuer, the obligation is under dispute in a court of law or before a statutory authority etc.

RATING SYMBOL FOR SHORT TERM INSTRUMENT

P-1This rating indicates that the degree of safety regarding timely payment on the instrument isvery strong.

P-2This rating indicates that the degree of safety regarding timely payment on the instrument isstrong; however, the relative degree of safety is lower than that for instruments rated 'P-1'.

P-3 - This rating indicates that the degree of safety regarding timely payment on the instrumentis adequate; however, the instrument is more vulnerable to the adverse effects of changing circumstances than an instrument rated in the two higher categories.

P-4 - This rating indicates that the degree of safety regarding timely payment on the instrumentis minimal and it is likely to be adversely affected by short-term adversity or less favorable conditions.

P-5 - This rating indicates that the instrument is expected to be in default on maturity or is indefault.

NM - Instruments rated 'N.M' have factors present in them, which render the rating outstandingmeaningless.

5.2.2 ICRA

ICRA Limited (an Associate of Moody's Investors Service) was incorporated in 1991 as an independent and professional company. ICRA is a leading provider of investment information and credit rating services in India. ICRAs major shareholders include Moody's Investors Service and leading Indian financial institutions and banks. With the growth and globalization of the Indian capital markets leading to an exponential surge in demand for professional credit risk analysis, ICRA has been proactive in widening its service offerings, executing assignments including credit ratings, equity grading, specialized performance grading and mandated studies spanning diverse industrial sectors. In addition to being a leading credit rating agency with expertise in virtually every sector of the Indian economy, ICRA has broad-based its services for the corporate and financial sectors, both in India and overseas, and currently offers its services under the following banners:

ICRA Limited (an Associate of Moody's Investors Service) was incorporated in 1991 as an independent and professional company. ICRA is a leading provider of investment information and credit rating services in India. ICRAs major shareholders include Moody's Investors Service and leading Indian financial institutions and banks. With the growth and globalization of the Indian capital markets leading to an exponential surge in demand for professional credit risk analysis, ICRA has been proactive in widening its service offerings, executing assignments including credit ratings, equity grading, specialized performance grading and mandated studies spanning diverse industrial sectors. In addition to being a leading credit rating agency with expertise in virtually every sector of the Indian economy, ICRA has broad-based its services for the corporate and financial sectors, both in India and overseasICRA'S Rating Process

The Rating Process Follows:

A. Rating Process

Rating is an interactive process with a prospective approach. It involves series of steps. The main points are described as below:

B. Rating Request

Ratings in India are initiated by a formal request (or mandate) from the prospective issuer. This mandate spells out the terms of the rating assignment.

C. Rating Team

The team usually comprises two members. The composition of the team is based on the expertise and skills required for evaluating the business of the issuer.

D. Information Requirements

Issuers are provided a list of information requirements and the broad framework for discussions. These requirements are derived from the experience of the issuers business and broadly conform to all the aspects, which have a bearing on the rating. These factors have been discussed in detail under rating framework.

E. Secondary Information

The credit rating agency also draws on the secondary sources of information including its own research division. The credit rating agency also has a panel of industry experts who provide guidance on specific issues to the rating team

F. Management Meetings and Plant Visits

Rating involves assessment of number of qualitative factors with a view to estimate the future earnings of the issuer. This requires intensive interactions with the issuers management specifically relating to plans, outlook, and competitive position and funding policies.

G. Preview Meeting:

After completing the analysis, the findings are discussed at length in the internal committee, comprising senior analysts of the credit rating agency. All the issues having a bearing on the rating are identified. At this stage, an opinion on the rating is also formed.H. Rating Committee Meeting

This is the final authority for assigning ratings. A brief presentation about the issuers business and the management is made by the rating team. All the issues identified during discussions in the internal committee are discussed. The rating committee also considers the recommendation of the internal committee for the rating. Finally, a rating is assigned and all the issues, which influence the rating, are clearly spelt out.

I. Rating Communication.

J. Rating Reviews

K. Surveillance

Rating Scale of ICRA

Long Term Including Debentures Bonds, Preference Shares

LAAA: Highest Safety:

LAA+, LAA, LAA- : High Safety:

LA+, LA, LA- : Adequate Safety:

LBBB+, LBBB, LBBB- Moderate Safety:

LBB+, LBB, LBB-Inadequate Safety:

LBB+, LB, LB- Risk Prone:

LC+, LC, LC- Substantially Risk:

LD Default. Extremely Speculative:

Medium Term - including Certificates of Deposits and Fixed Deposits programme

MAAA: Highest Safety

MAA+, MAA, MAA- High Safety

MA+, MA, MA-: Adequate Safety

MB+, MB, MB-: Inadequate Safety

Mc+, Mc, Mc- Risk Prone

Md Default

Short Term - including Commercial Papers

Al+, A1 Highest Safety

A2+, A1 High Safety

A3+, A3 Adequate Safety

A4+, A4 Risk Prone

A5 Default

5.2.3 CARE

Credit Analysis & Research Ltd. (CARE), incorporated in April 1993, is a credit rating,information and advisory services company promoted by Industrial Development Bank of India (IDBI), Canara Bank, Unit Trust of India (UTI) and other leading banks and financial services companies. In all CARE has 14 shareholders.

CARE assigned its first rating in November 1993, and up to March 31, 2006, had completed 3175 rating assignments for an aggregate value of about Rs 5231 billion. CARE's ratings are recognized by the Government of India and all regulatory authorities including the Reserve Bank of India (RBI), and the Securities and Exchange Board of India (SEBI). CARE has been granted registration by SEBI under the Securities & Exchange Board of India (Credit Rating Agencies) Regulations, 1999.

The rating coverage has extended beyond industrial companies, to include public utilities, financial institutions, infrastructure projects, special purpose vehicles, state governments and municipal bodies. CARE's clients include some of the largest private sector manufacturing and financial services companies as well financial institutions of India. CARE is well equipped to rate all types of debt instruments like Commercial Paper, Fixed Deposit, Bonds, Debentures and Structured Obligations.

CARE'S RATING PROCESS

The process involves:

(i) Client gives request for rating and submits information and details schedules;

(ii) CARE assigns rating team and team analyses the information;

(iii) The team interacts with the clients, undertakes site visits;

(iv) The client interacts with the Team respond to queries raised and provides any additional data necessary for the analyses;

(v) The team analyses the data submitted by the Client and put up to Internal Committee of CARE for previews analyses;

(vi) Rating Committee of CARE awards rating to the Client;

(vii) Client may ask for review of the rating assigned and furnish additional information for the purpose. Client has the option not to accept the final rating in which case CARE will not publish the rating or monitor it; and, finally,

(viii) If the rating is accepted by the client, CARE gives it for notification and a periodic surveillance is undertaken by CARE. RATING SYMBOLS OF CARE

Long-Term and Medium Term Instrument

CARE AAA (FD)/(CD)/(SO)

Instruments carrying this rating are considered to be of the best quality, carrying negligible investment risk. Debt service payments are protected by stable cash flows with good margin.

CARE AA (FD)/(CD)/(SO)

Instruments carrying this rating are judged to be of high quality by all standards. They are also classified as high investment grade.

CARE A (FD)/(CD)/(SO)

Safety for principal and interest are considered adequate. Assumptions that do not materialize may have a greater impact as compared to the instruments rated higher.

CARE BBB (FD)/(CD)/(SO)

Such instruments are considered to be of investment grade. They indicate sufficient safety for payment of interest and principal, at the time of rating.

CARE BB (FD)/(CD)/(SO)

Such instruments are considered to be speculative, with inadequate protection for interest and principal payments.

CARE B (FD)/(CD)/(SO)

Instruments with such rating are generally classified susceptible to default. While interest and principal payments are being met, adverse changes in business conditions are likely to lead to default.

CARE C (FD)/(CD)/(SO)

Such instruments carry high investment risk with likelihood of default in the payment of interest and principal.CARE D (FD)/(CD)/(SO)

Such instruments are of the lowest category. They either are in default or are likely to be in default soon.

B. Short-Term Instruments

Instruments with maturities of one year or less are classified in this category. These include: CP - Commercial Paper and ICD - Inter-Corporate Deposits

PR-1

Instruments would have superior capacity for repayment of short-term promissory obligation. Issuers of such PR-instruments will normally be characterized by leading market position in established industries, high rates of return on funds employed etc.

PR-2

Instruments would have strong capacity for repayment of short-term promissory obligations

PR-3

Instruments have an adequate capacity for repayment of short-term promissory obligations.

PR-4

Instruments have minimal degree of safety regarding timely payment of short-term promissory obligations

PR-5

The instrument is in default or is likely to be in default on maturity.

5.2.4SME Rating Agency of India Limited (SMERA)

SMERA Ratings Limited (formerly SME Rating Agency of India Ltd.) is a joint initiative of Small Industries Development Bank of India (SIDBI), Dun & Bradstreet Information Services India Private Limited (D&B) and leading public and private sector banks in India. SMERA commenced its operations in 2005 as an exclusive credit rating agency for Micro, Small and Medium Enterprises (MSME) sector in the country. Within a span of 8 years, SMERA has assigned ratings to over 29691 MSMEs pan India.

SMERA is registered with the Securities and Exchange Board of India (SEBI) as a Credit Rating Agency (6th in India). More recently, the Company has received accreditation from the Reserve Bank of India (RBI) as an External Credit Assessment Institution (ECAI) under BASEL - II norms for undertaking bank loan ratings. SMERA is also empanelled as an approved rating agency by the National Small Industries Corporation Ltd. (NSIC) under the "Performance & Credit Rating Scheme for Small Industries", approved by the Ministry of Small Scale Industries, Government of India.

Today, SMERA has achieved the reputation of providing comprehensive, transparent and reliable ratings, thus providing comfort and confidence to lenders and investors alike in decision making. SMERA Ratings have gained wide acceptability and are now an integral part of the risk assessment process within the lending and investing community.

SMERA, which has its Registered and Head Office in Mumbai, currently operates from 13 locations spread across the country.

Rating Process Simplified -

Based on receipt of application form, applicable rating fees and documents from the SME, SMERA will begin its process of evaluation.

A Questionnaire, seeking information on financial and qualitative factors, would be sent to the SME and would need to be filled by an authorized representative of the SME.

A SMERA correspondent will contact the SME to collect a duly filled questionnaire to facilitate the rating process.

The correspondent would also conduct a site visit as part of the evaluation process.

5.2.5 MOODY'S INVESTOR SERVICE

Today, Moody's Investor Service rates thousands of issues of corporate and municipal bonds, commercial paper, short-term municipal notes, and preferred stock. These security ratings are reported in Moody's Bond Record, which is published monthly. In addition to assigning issue ratings, Moody's also notes for its subscribers the essential terms on each security issue; dates when interest, principal or dividend payments are due; call provisions (if any); registration status; bid and asked price quotations; yield to maturity; tax status; coverage; and amount of securities outstanding.

Moody's Corporate Bond Ratings

The credit ratings assigned by Moody's to corporate bonds are listed below with the definitions of each rating category:

AAA - Best Quality

AA- StandardsQuality

A- Upper Medium-GradeObligations

BAA- Medium-Grade Obligations

BA= Speculative Elements

B- Lack of desirable investment

CAA- Poor Standing

CA- Speculative Marked Shortcomings

C- lowest rated

Moody's Commercial Paper Ratings

Prime-1 (or P-l) - Highest quality

Prime-2 (or P-2) - Higher quality

Prime-3 (or P-3) -High quality

Moody's Ratings of Short-Term Municipal Notes

Short-term securities issued by states, cities, counties, and other local governments are rated by Moody's as to their investment quality. For these short-term issues Moody's uses MIG. As shown below the rating categories are as follows:

MIG I (Moody's Investment Grade)

Loans bearing this designation are of the best quality, enjoying strong protection from established cash flows of funds for their servicing or from established and broad-based access to the market for refinancing, or both.

MIG2

Loans bearing this designation are of high quality, with margins of protection ample though not so large as in the preceding group.

MIG3

Loans bearing this designation are of favorable quality, with all security elements accounted for but lacking the undeniable strength of the preceding grades. MIG4

Loans bearing this designation are of adequate quality, carrying specific risk but having protection commonly regarded as required of an investment security and not distinctly or predominantCHAPTER 7 INTRODUCTION OF IPO GRADING

IPO grading (initial public offering grading) is a service aimed at facilitating the assessment of equity issues offered to public. The grade assigned to any individual issue represents a relative assessment of the 'fundamentals' of that issue in relation to the universe of other listed equity securities in India. Such grading is assigned on a five-point point scale with a higher score indicating stronger fundamentals.

IPO Grading Is Different From an Investment Recommendation

Investment recommendations are expressed as 'buy', 'hold' or 'sell' and are based on a security specific comparison of its assessed 'fundamentals factors' (business prospects, financial position etc.) and 'market factors' (liquidity, demand supply etc.) to its price.

On the other hand, IPO grading is expressed on a five-point scale and is a relative comparison of the assessed fundamentals of the graded issue to other listed equity securities in India.

As the IPO grading does not take cognizance of the price of the security, it is not an investment recommendation. Rather, it is one of the inputs to the investor to aiding in the decision making process.

All other things remaining equal, a security with stronger fundamentals would command a higher market price.

How Long Would The Assigned Grade Be Valid?

The assigned grade would be a onetime assessment done at the time of the IPO and meant to aid investors who are interested in investing in the IPO. The grade will not have any ongoing validity.

Main features of SEBI decision

The important features of SEBI's decision on IPO grading are as follows:

The grading exercise will exclude the issue price from its scope;

It will be carried out by recognized credit rating agencies;

The grading will be on a 5-point scale, the lowest grade to be indicated by 1 and the highest by 5; and

The issuing company will be allowed to choose the rating agency for grading its IPO.

7.1 CRISIL IPO GRADINGCRISIL, the originator of this concept, has been at the forefront of developing theIPO grading model into a usable form. The views and feedback of the regulator, Market participants, investors and investor forums have been core inputs in the development of this product. Therefore, CRISIL has a uniquely evolvedunderstanding of this globally revolutionary idea.CRISIL believes that IPO grading provided by an independent agency would be free from bias and add structure to the tools available at present for assessing theInvestment attractiveness of an equity security.The IPO grading will be based on CRISILs proprietary framework that has been developed to help investors arrive at their own judgment on factors that drive Equities as an asset class.The debt market has benefited immensely from the availability of such an assessment in the form of credit rating - a representation of a relative assessment of the fundamentals of the debt security i.e., likelihood of timely repayment of interest and principal.

The IPO grading product of CRISIL is a relative assessment of the fundamentals of the equity security.Investment decisions for IPO are at present based on voluminous and complex disclosure documents, which pose a challenge to investors to arrive at informed decisions. The focus, in these documents is meeting regulatory guidelines on disclosures. Though seemingly there is a lot of information available on IPOs through free Research on websites, media and other sources, investors often look for structured, consistent and unbiased analysis to aid their investment decisions. Moreover, information available on new companies varies with the size of the issue, the market conditions and the industry that the issuing company belongs to. CRISILIPO grading aims to bridge this gap and facilitate more informed investment decisions.

Contents of the CRISIL IPO Grading ReportThe report for each CRISIL IPO grading will contain a summary and a detailed report. Summary- One-page report highlighting the key elements of analysis Detailed report- Comprehensive commentary on the assessment parameters.This report will be a one-time assessment based on the information disclosed in the draft prospectus filed with Securities Exchange Board of India (SEBI); our understanding of the industry and company fundamentals; and interactions with the issuer management and other stakeholders.The report will comprise our assessment on the following parameters:1) Management quality 2) Business prospects: Industry and company 3) Financial performance 4) Corporate governance 5) Project related factors 6) Other factors: a. Compliance track record b. Litigation history c. Capital history. CRISIL IPO Grading: Assessment Scale: The assessment is an overall assessment of fundamentals on a five-point scale. The companies assessed highest will be scored 5/5 and the lowest score will be 1/5. Grading are assigned to various parameters and then aggregated.

CRISIL IPO grading is not to be construed to mean: A valuation of the equity offering; present or future A comment on the issue price or the likely price on listing An assessment of the market risk associated with equity investments An audit or a recommendation to invest A forensic exercise that can detect fraud.

CRISIL IPO Grading - Scale

CRISIL IPO GradeAssessment

5/5Strong fundamentals

4/5Above average fundamentals

3/5Average fundamentals

2/5Below average fundamentals

1/5Poor fundamentals

CHAPTER 8 ARTICLE ON CREDIT RATING SYSTEM IN INDIA

8.1 MAHARASHTRA, CREDIT RATING AGENCIES AT LOGGERHEADS GIRISH KUBER, TNN SEPT 25, 2004, 08.12 AM IST

MUMBAI: Maharashtra, one of India's richest and most industrialized states, has lately had a troubled relationship with the credit rating agencies. And if political parties actually implement all the populist measures they have promised it will only get worse.If their public pronouncements are anything to go by, all political parties are equally oblivious to Maharashtra's rapidly descending rating, which indicates the weakening financial position of the state government.

The last nail in Maharashtra's empty coffer was driven in by the credit rating agency, CARE. In the first week of September, CARE downgraded bonds issued by the debt-ridden government's equally bankrupt entities to speculative grade.The agency revised its rating from CARE BBB (SO) to CARE BB (SO). As the rating revision is a fall out of the deterioration of state finances, it amounts to a downgrade of the state government itself.The downgrade was with regard to the guaranteed bond issue of the five irrigation development corporationsMaharashtra Krishna Valley Irrigation Development Corporation (MKVIDC) (Rs 772 crore), Godavari Marathawada (Rs 654 crore), Konkan (Rs 213 crore), Vidharbha (Rs 460 crore) and Tapi (Rs 439 crore)."Maharashtra government's fiscal position had displayed stress in recent years arising from a growing revenue deficit. This has led to the downgrade of the five state-owned corporations," CARE said while justifying its decision."The state's finances would further worsen if more guarantees or additional sops such as power subsidies are handed out"; the agency noted.In August, another rating agency Fitch India had raised concerns about the state's depleting resources and widening deficit.While rating bonds issued by some of the state-owned corporations, Fitch raised expressed concern about the aggregate debt level, which is budgeted to increase from 21% in 00-01 to 29% of SDP in '04-'05. It also pointed out that the state has extended guarantees for the debt raised by various state-owned undertakings and co-operatives, which added up to 15% of SDP in '02-'03. "The Maharashtra government will have to embark on a fiscal consolidation process for controlling its debt levels" it said. The state government responded to these rating with a slew of populist measures, including free power for farmers and waiver of farm loans.Last year, ICRA had lowered the state's rating. Another set of irrigation corporations, which include the Maharashtra Krishna Valley Development Corporation Limited, Konkan Irrigation Development Corporation, and Godavari Marathawada Irrigation Development Corporation, were affected by ICRA's decision.Along with these irrigation corporations the ratings assigned to bond programs of Maharashtra VikrikarRokhe Pradhikaran Limited, Maharashtra Film Stage and Cultural Development Corporation, Maharashtra Jeevan Pradhikaran Limited, Maharashtra State Electricity Board and Maharashtra Water Conservation Corporation were also downgraded.Another rating agency, CRISIL, last year put the Maharashtra government in the default category. That had enormous impact as it reflected the state government's ability to meet its debt obligations. It also suggested that the bond programme of the state's corporations were non-investment grade.CRISIL'S decision shocked the government. It evoked such rancour that the state finance minister JayantPatil questioned the CRISIL'S judgment.However, the sharp reaction resulted in no action and thus the state's continued its downward march.

8.2 Bank of Maharashtra signs MOU with credit rating agencies

PTI Dec 3, 2007, 09.47pm IST

MUMBAI: Bank of Maharashtra has entered into a Memorandum of Understanding (MOU) with all the four credit rating agencies registered with the Securities and Exchange Board of India (SEBI) and approved by the Reserve Bank of India.

The four agencies are Care, CRISIL, Fitch Ratings India and ICRA.

The existing and potential customers of Bank of Maharashtra, seeking loans in the excess of Rs 50 crore, can get their credit-worthiness rated by any of these agencies, a bank release said here today.

The credit ratings will help the customers not only to get competitive rates of interest/terms on their credit facilities with the bank but will also provide them opportunities to improve their efficiency of operations.

CHAPTER 9CASE STUDY ON CREDIT RATING SYSTEM IN INDIA

9.1 Case study shows Moodys credit rating agency at the heart of the financial crisis starting in 2004.

Weve given much attention to S&P and the prospect of Moodys following S&Ps lead with the second cardinal sin behind a debt default, a downgrade. Historically, however, all this began the other way around when S&P followed Moodys in an act of one-up-man-ship during the last financial meltdown.

Sometime this year, the Kenan Institute for Ethics at Duke University released a case study, Greed, Negligence, or System Failure? Credit Rating Agencies and the Financial CRISIS (2011), as part of its ongoing project, Institutions in CRISIS. This a well-worth-it read; especially in light of Moodys recent downgrade threats. The study places Moodys at the heart of the last financial crisis when in 2004, when Moodys unveiled a new credit-rating model for collateralized debt obligations (CDOs) that began a spiraling-down of its risk standards and set off a market-share war with its rival, Standard & Poors.In August of 2004, Moodys Corporations Managing Director, Gary Witt, unveiled a new credit-rating model for collateralized debt obligations (CDOs). The new model relaxed many of the standards that Moodys had used for years to assess the risk of these complex financial instruments. The move sparked a market-share war that pushed long-time competitor Standard & Poors (S&P) to make similar changes. Internally, each rm would spend the next few years experimenting with their models to ensure that they generated results that pleased their clientele so as not to lose business to competitors.

As the subprime mortgage bubble burst and the market for CDOs dried up, however, it became apparent that Moodys and its competitors had understated the risk the CDOs (many of which derived their value from subprime mortgages) posed to investors. The entire financial industry, which counted on the accuracy of these ratings, was affected.Many financial experts cite conicts of interests as the major contributor to the use of rating standards that undervalued risk. As this case reveals, however, other factors, including competitive pressures, a negative shift in Moodys corporate culture, and decades of inadequate regulatory oversight, contributed to systemic changes that negatively affected Moodys and the entire financial industry. This case considers these factors to better understand how the organizational crisis at Moodys and in the credit ratings sector more generally had such a devastating effect on the global financial system.The innovation of the ABS and CDO transformed the entire mortgage market and eventually reshaped how Wall Street made money. As discussed above, subprime mortgages were originally only a contract between a prospective homeowner and a mortgage lender. However, as Wall Street gained the ability to package fixed-income assets for investors, the subprime supply market expanded, allowing a range of new investors. As described in Appendix A: The Securitization Food Chain, investment rms began buying up subprime contracts from lenders by the thousands and securitizing them into sellable bundles. They would then turn these around and sell them to investors. Whats more, thanks to the Gramm-Leach-Bailey Act of 1998, these new derivative markets were extremely deregulated. The markets were allowed to expand with little or no government oversight.And now Moodys is threatening us to do the same as S&P did!? Hopefully, there are enough people in both parties to publicly recognize the absurdity of these threats in light of the complete lack of credibility either agency has. The real fallout (political and financial) will be our lack of action to revoke Moodys and S&Ps licenses. We need to act decisively and fast before Moodys, S&P or any other culprit of our past financial meltdown, has a chance to do any more damage.What is equally important is that this mess was legislated. We should keep a close eye on the legislature; especially the new super committee. If we dont, we have only ourselves to blame. Its time to rid ourselves of the Tea Party and the blight of humanity and positive growth this party brings.

CONCLUSION

Thus we can say that Credit rating is a qualified assessment and formal evaluation of companys credit history and capability of repaying obligations. It measures the default probability of the borrower, and its ability to repay fully and timely its financial debt obligations.

The main purpose of credit rating is to provide investors with comparable information on credit risk based on standard rating scale, regardless of specifics of companies, separate sector of the economy and country as a whole.

Credit rating has proven itself to be effective instrument of risk assessment in countries with advanced economy since it demonstrates transparency of an enterprise. Credit rating reflects financial, sectorial, operational, legal and organizational sides of companies, which characterize ability and willingness duly and in full amount to repay obligations

In world practice, credit rating can be assigned to sovereign governments, regional and local executive bodies, corporations, financial organizations and etc.

RECOMMENDATIONS OF EXPERTS COMMITTEE:The recommendations are based on Indias own experience with the CRAs till now. India has been proactive in introducing effective and comprehensive regulations for CRAs as early as 1999. In contrast, the US market saw substantial regulations only recently in 2007, and the European Union is still in the process of framing its regulations. SEBIs CRA regulations have been used as a model by other regulators in emerging economies. SEBIs code of conduct for CRAs addresses some of the basic issues relating to conflicts of interest. The Code of Conduct is designed to ensure transparent and independent functioning of CRAs. These regulations have been reasonably effective in ensuring that credible players operate in the industry and there is widespread investor access to ratings. Nevertheless, given the recent global experiences and emerging trends in regulation there is undoubtedly a case for a re-look at the CRA business models and strengthening of regulations.

A lead regulator model for Credit Rating Agencies Restricting the scope of usage of the term credit rating Greater due diligence by the Regulators Disclosure of other activities carried out by CRAs or their subsidiaries Resolving the conflict of interest inherent in the issuer pays model' Norms for governance of CRAs Requirement of process and compliance audit Constitution of a Standing Committee Other suggested areas where SEBI(CRA ) Regulations can be strengthened