Pratik Tiwari Finance Project

The Effect of Changes in Credit Ratings on Equity Returns
CHAPTER I
INTRODUCTION AND RESEARCH DESIGN
1.1 INTRODUCTION:
The link between credit risk and return patterns on equity markets has
increasingly become an area of interest. In this project we investigate the
existence of a systematic relationship between credit ratings, as indicators of
credit risks, and abnormal equity returns. In particular, we investigate the
announcement effect on equity returns associated with credit rating changes.
Furthermore, we contribute to the understanding of the observed announcement
effects by relating them to various components of the rating process. Through sub
sample and cross-sectional analysis we gain a deeper understanding of the driving
forces behind the characteristics of the observed announcement effects. In
general, we argue that variations in announcement effects are driven by various
event and issuer specific characteristics and that these can be related to the
relevance and implication of the information as well as the degree of market
anticipation. Specifically, rating updates driven by changes in profitability and
market position are more pricing relevant than those motivated by changes in
capital structure. Also, rating events preceded by official opinions of the likely
direction of the rating update have less pricing impact. Based on these two
dimensions we identify several additional aspects of the credit rating process with
implications for the impact on equity returns. These explanatory factors provide
the foundation for a comprehensive analysis of the asymmetric reactions between
upgrades and downgrades as well as for the cross-sectional variations for both
rating events.
However, credit ratings are only opinions and not recommendations to buy, sell,
or hold a security, High ratings are not a guarantee that an entity is a safe
investment. Even an entity with an AAA rating (the highest) has approximately
one chance in 600 of default over a five-year period. The differences in credit
quality increase with each category lower down the scale, which is reflected in
the default frequencies measured of the individual categories. For example, over
an 18-year period, from 1971 to 1988, there were no one-year defaults in the AAA
or AA category.
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
1 | Sydenham College of Commerce and Economics

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.
A poor credit rating indicates a high risk of defaulting on a loan, and thus leads
to high interest rates or the refusal of a loan by the creditor. In countries such as
the United States, an individual's credit history is compiled and maintained by
companies called credit bureaus. In the United States, credit worthiness is usually
determined through a statistical analysis of the available credit data. A common
form of this analysis is a 3-digit credit score provided by independent financial
service companies.
Credit Rating Agencies

Credit rating agencies provide objective analyses and independent assessments
of companies and countries that issue such securities. Here is a basic history of
how the ratings and the agencies developed in the U.S. and grew to aid investors
all over the globe. Credit rating agencies provide investors with information about
whether bond and debt instrument issuers can meet their obligations. Agencies

also provide information about countries' sovereign debt. The global credit rating
industry is highly concentrated, with three agencies: Moody's, Standard & Poor's
and Fitch. CRAs are regulated at several different levels the Credit Rating Agency
Reform Act of 2006 regulates their internal processes, record-keeping, and
business practices.
The agencies came under heavy scrutiny and regulatory pressure because of the
role they played in the financial crisis and Great Recession. The global credit
rating industry is highly concentrated, with three agencies Moody's, Standard &
Poor's and Fitch controlling nearly the entire market. Together, the provide a
much-needed service for both borrowers and lenders, as well as to lenders. They
intend to give the market information that is both reliable and accurate about the
risks associated with certain kinds of debt. Fitch is one of the world's top three
credit rating agencies. It operates in New York and London, basing ratings on
company debt and its sensitivity to changes like interest rates. When it comes to
sovereign debt, countries request Fitch and other agencies to provide an
evaluation of their financial situation along with the political and economic
climates. Investment grade ratings from Fitch range from AAA to BBB. These
letter grades indicate no to low potential for default on debt. Non-investment
grade ratings go from BB to D, the latter meaning the debtor has defaulted. The
credit ratings industry began to adopt some important changes and innovations in
1970. Investors subscribed to publications from each of the ratings agencies and
issuers paid no fees for performance of research and analyses that were a normal
part of the development of published credit ratings. As an industry, credit ratings
agencies began to recognize that objective credit ratings significantly helped
issuers: They facilitated access to capital by increasing a securities issuer's value
in the market place and decreasing the costs of obtaining capital. Expansion and
complexity in the capital markets coupled with an increasing demand for
statistical and analytical services led to the industry-wide decision to charge
issuers of securities fees for ratings services. In 1975, financial institutions such
as commercial banks and securities broker-dealers sought to soften the capital
and liquidity requirements passed down by the Securities and Exchange
Commission (SEC). As a result, nationally recognized statistical ratings
organizations (NRSROs) were created.
Financial institutions could satisfy their capital requirements by investing in
securities that received favourable ratings by one or more of the NRSROs. This
allowance is the result of registration requirements coupled with greater
regulation and oversight of the credit ratings industry by the SEC. The increased
demand for ratings services by investors and securities issuers, combined with
increased regulatory oversight, has led to growth and expansion in the credit

ratings industry. Credit rating agencies came under heavy scrutiny and regulatory
pressure following the financial crisis and Great Recession of 2007 to 2009. It
was believed that CRAs provided ratings that were too positive, leading to bad
investments. Part of the problem was that despite the risk, the agencies continued
to give mortgage-backed securities (MBSs) AAA-ratings. These ratings led many
investors to believe that these investments were very safe with little to no risk.
The agencies were accused of trying to raise profits as well as their market share
in exchange for these inaccurate ratings. This helped lead to the subprime
mortgage market collapse that led to the financial crisis. To add fuel to the fire,
the agencies' European sovereign debt ratings were also cause for scrutiny. After
the calamity caused by the debt crisis of several European countries including
Greece and Portugal, the agencies downgraded the ratings of other nations in the
EU. Some have argued that regulators have helped to prop up an oligopoly in the
credit rating industry, providing rules that act as barriers to entry for small- or
mid-sized agencies. New rules in the EU have made CRAs liable for improper or
negligent ratings that cause damage to an investor. Investors may utilize
information from a single agency or from multiple rating agencies. Investors
expect credit rating agencies to provide objective information based on sound
analytical methods and accurate statistical measurements.
Investors also expect issuers of securities to comply with rules and regulations set
forth by governing bodies, in the same respect that credit rating agencies comply
with reporting procedures developed by securities industry governing agencies.
The analyses and assessments provided by various credit rating agencies provide
investors with information and insight that facilitates their ability to examine and
understand the risks and opportunities associated with various investment
environments. With this insight, investors can make informed decisions as to the
countries, industries and classes of securities in which they choose to invest.

1.2 SIGNIFICANCE OF STUDY:

The aim of this project is to provide further insights to the link between credit
risks and the corresponding impact on equity returns. In particular, our aim is to
study the impact of credit rating changes on abnormal equity returns around the
time of the announcement. For the purpose of identifying the factors of relevance
for potential links between indicators of credit risks and return patterns on equity
markets, various aspects of the credit rating process are analysed and interpreted
with focus on the impact on equity investors to investigate whether there is a
systematic and robust link between indicators of credit risk and to explain the
dynamics of a potential relationship based on observable characteristics.
Also to know how credit rating assesses the credit worthiness of an individual,
corporation, or even a country. Credit ratings are calculated from financial history
and current assets and liabilities. Typically, a credit rating tells a lender or
investor the probability of the subject being able to pay back a loan. However, in
recent years, credit ratings have also been used to adjust insurance premiums,
determine employment eligibility, and establish the amount of a utility or leasing
deposit.
Further, to know how 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.
How 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 own staff prepares investment analysis. Portfolio managers also
use them in security management. Banks depend on them for their investment in
commercial paper. Individual investors depend on them for their decisions to
place fixed deposits. Ratings are bound to assume greater importance with the
institutionalization of investors in the form of unit trusts, mutual funds, pension
and provident funds. The debt has shown considerable buoyancy in 1996 not only
at the wholesale level (institutional investors) but also at retail level in view of
poor offerings of equity in the primary market. This has come about largely on
account of the availability of ratings on debt instruments, which boosted investor
confidence.

1.3 RATIONALE BEHIND SELECTING THE TOPIC:

The purpose behind selecting the topic is that, the effects of changes in credit
rating on equity return is an interesting concept and also would like to study the
relation and roles of credit rating and equity returns. Further, to know about credit
rating agencies, their evolution, regulation, uses and functions. Also, to know
different credit rating agencies and their working.
1.4 OBJECTIVES OF THE STUDY:

1. To study the various aspects of credit ratings and equity returns.
2. To study the impact of changes of credit ratings on equity return.
3. To study the process of credit rating.
4. To get an overview about the credit rating agencies.
5. To find out the solution to the problems and give suggestions.
1.5 SCOPE AND LIMITATION:

1. The survey is limited to Mumbai City.
2. The survey is limited to 50 respondents.

1.6 REVIEW OF LITERATURE:

Sanket Dhanorkar (2019)1: This article explains about how reliable are credit
ratings and also compares the domestic and international ratings of companies. In
the article it is also discussed that credit rating is not a guarantee but simply an
opinion of the rating agency.
Tania Jaleel (2018)2: This article explains about what are credit rating? And how
is it important? It explains the credit rating scale and the how different credit
ratings agencies give ratings. Also the uses of credit ratings during investment
decision is discussed.
Yogita Khatri (2017) 3: This article explains about what leads to the downgrade
of credit ratings? How does it impact companies? How downgrade impacts us?
What should we do? And How should companies anticipate a downgrade?. It is
also discussed that the firms with high debt-equity ratio and firms with poor
interest coverage ratio.
Neeraj Thakur (2017) 4: This article explains about criteria used by international
ratings agencies to rate the debt profile of different countries. Further, also
criticised for methodologies and differential treatment shown towards India.
Gayatri Nayak (2017) 5: This article gives information regarding the Economic
Survey has slammed credit rating companies for their inconsistency in making
projections and criticised the methodologies adopted by them. It is also critical of
the differential treatment they showed towards India.
Economic Times, article on rating shopping (2019) 6: This article explains that
rating agencies have been largely blamed for their lax policies and oversight for
the 2008 global financial crisis, which primarily spawned from junk-type
mortgage bonds and their derivatives worth trillion of dollars that the Wall Street
bankers invented and hawked across the globe to get AAA ratings and finally
imploded.
The Hindu, article on credit ratings (2017) 7: This article explains about What
is a credit rating? Why do countries get credit ratings? What factors decide these

ratings? And Where does India stand now?. It also discusses how India’s credit
rating has been upgraded by Moody’s, a global credit rating agency.
The Hindu, article on reliability of credit ratings (2019) 8: This article explains
that Can we rely on credit ratings? How reliable are these assigned credit ratings?.
It also gives details about mutual incentives and fiduciary duties.
The Hindu, article on credit rating illusions (2018) 9: This article explains how
credit ratings create a illusion in the market and their frequent irregular ratings.
Further, it also discusses about the areas of development in credit ratings industry.
Thomas Bergh & Olof Lennstrom (2006) 10: This is a thesis of Stockholm
School of Economics which demonstrates topics such as credit rating process
and their impacts on equity returns.
National Institute of Securities Markets (2009) 11: This is a research

performed by NISM, Navi Mumbai on long term performance of credit rating
agencies in India. The study discusses topics such as rating symbols,
methodology behind ratings and different credit rating agencies in India.
Rai University (2013) 12: This lesson gives information regarding credit rating
methodologies, process, factors involved in rating, instruments used while rating,
limitation, factors involved in financial decision and various approach towards
credit ratings.
E gordon & Dr. K. Natrajan (2009)13: This is a book which explains various
aspects and types of credit rating, credit rating agencies and their working.
Whereas, it also showcases its roles, drawbacks and benefits.

M Y Khan (2013) 14: This book explains about credit rating agencies and their
credit rating, what they are, how they work, and why they are relevant.
Subsequently, it also explains credit rating foundation and business.
Savita Bodke (2019) 15: This book gives information about various aspects of
credit rating agencies such as its origin, features, advantages, regulatory
framework, rating process, limitations and symbols.

1.7 CHAPTER SCHEME:

1. Chapter I: Introduction and Research Design
Chapter I consists of introduction & significance of the study. Also, purpose
behind selecting the topic and limitations occurred while making the project is
discussed. Further, objectives & research methodology of the study is discussed.
Finally, Review of literature and Bibliography is displayed.
2. Chapter II: Introduction to Credit Rating Agencies

Chapter II is about introduction and history of credit rating agencies. Whereas,
growth, reason for setup and uses of credit rating agencies are demonstrated.
Also, different functions performed by credit rating agencies are discussed.
Moreover, regulations and guidelines are also given. However, criticism towards
credit rating agencies are also discussed. Finally, an overview of four credit rating
agencies in India are given.
3. Chapter III: Working of Credit Rating Agencies

Chapter III contains information regarding working of credit rating agencies. First
of all, how agencies are registered is outlined. Secondly, different types of ratings
and symbols used by the agencies is showcased. Lastly, the methodologies used
by the agencies and the credit rating process is explained.
4. Chapter IV: A Study of Awareness about Credit Rating Agencies

Chapter IV consists of the data analysis and interpretation. In this there is data
collected from 50 respondents through survey or questionnaire and asked them
various questions regarding credit rating and agencies.
5. Chapter V: Summary, Major Observation & Suggestion

Chapter V is about the observations which were noticed throughout the project,
and various suggestions are given to investors and credit rating agencies. Lastly,
the is project concluded by giving various points on credit rating, credit rating
agencies and the effects of ratings on equity returns.

1.8 REFERENCES:
1. Sanket Dhanorkar (2019), ‘How reliable are credit ratings?’, Economic Times
https://economictimes.indiatimes.com/wealth/invest/how-reliable-are-credit-
ratings/articleshow/68122355.cms
2. Tania Jaleel (2018), ‘What is credit rating and how important is it while making
an investment decision?’, Economic Times
https://economictimes.indiatimes.com/wealth/invest/what-is-credit-rating-and-
how-important-is-it-while-making-an-investment-
decision/articleshow/65806143.cms
3. Yogita Khatri (2017), ‘How credit rating downgrade of companies impacts

your investments and what to do’, Economic Times
https://economictimes.indiatimes.com/wealth/invest/why-credit-rating
downgrade-should-concern-you/articleshow/58974383.cms?from=mdr
4. Neeraj Thakur (2017), ‘Economic survey questions rating criteria of Standard

& Poor's’, NDTV Profit
https://www.ndtv.com/business/economic-survey-questions-rating-criteria-of-s-
p-1654576
5. Gayatri Nayak (2017), ‘No credit to global rating agencies’, Economic Times
https://economictimes.indiatimes.com/markets/stocks/news/economic-survey-
no-credit-to-global-rating-agencies/articleshow/56901670.cms?from=mdr
6. Economic Times (2019) website:

https://economictimes.indiatimes.com/markets/stocks/news/rbi-blasts-credit-
rating-agencies-for-allowing-rating-shopping-to-large-
borrowers/articleshow/73016267.cms

7. The Hindu (2017) website:

https://www.thehindu.com/specials/the-hindu-explains-what-are-credit-ratings-
and-how-are-they-given/article20515882.ece
8. The Hindu BusinessLine (2019) website:

https://www.thehindubusinessline.com/opinion/can-we-still-rely-on-credit-
ratings/article28791828.ece

https://www.thehindu.com/opinion/op-ed/the-ratingillusion/article22755006.ece
10. Thomas Bergh & Olof Lennstrom (2006), ‘Credit ratings and equity
returns’, Stockholm School of Economics
http://arc.hhs.se/download.aspx?MediumId=132
11. National Institute of Securities Markets (2009), ‘Long term performance of

credit rating agencies in India’, NISM
https://www.sebi.gov.in/sebi_data/attachdocs/1288587929503.pdf
12. Rai University (2013), ‘Management of Financial Services’, Journal of

Finance, Pg 291-302
http://www.psnacet.edu.in/courses/MBA/Financial%20services/17.pdf
13. E Gordon & Dr. K. Natrajan (2009), ‘Financial Markets and Services’,
Himalaya Publishing House, Pg. 450-466
14. M Y Khan (2013), ‘Financial Services’, McGraw Hill Education

(India), 18.1-18.64

15. Savita Bodke (2019), ‘Innovative Financial Services’, Rishabh Publishing

House, Pg 302-325

CHAPTER II
INTRODUCTION TO CREDIT RATING AGENCIES
2.1 INTRODUCTION:
Credit Rating Agency means any commercial concern engaged in the business of
credit rating of any debt obligation or of any project or programme requiring
finance, whether in the form of debt or otherwise, and includes credit rating of
any financial obligation, instrument or security, which has the purpose of
providing a potential investor or any other person any information pertaining to
the relative safety of timely payment of interest or principal.
It is a company that assigns credit ratings to institutions that issue debt obligations
securities. These institutions can be companies, cities, non-profit organizations,
or national governments, and the securities they issue can be traded on a
secondary market. A credit rating measures credit worthiness, or the ability to pay
back a loan. It affects the interest rate applied to loans - interest rates vary
depending on the risk of the investment. A low-rated security has a high interest
rate, in order to attract buyers to this high-risk investment. Conversely, a highly-
rated security (carrying a AAA rating, like a municipal bond which is backed by
stable government agencies) has a lower interest rate, because it is a low-risk
investment. These low risk bonds are available to a wide range of investors,
whereas high-risk bonds cater to a narrow investing demographic. Companies
that issue credit scores for individuals are usually called credit bureaus and are
distinct from corporate ratings agencies.
Each rating agency has developed its own system of rating grades for sovereign
and corporate borrowers. They are the main authority to assign rate of credit for
the companies who issue debt. Any investor can measure the risk of bad debt after
analysis these credit rates. These credit rates are fixed on the basis of ability to
pay back the loan.
In capital market, its importance is not less than SEBI because credit rating
agencies protect different investors from risk of financial loss by providing them
up to date information of credit rate. To compare the loan on the basis of quality
of credit and loan. Suppose X, Y and Z are three companies offering debentures
to investors. Credit rating agencies will assign their credit rate because these are
financial expert and assign rate on the basis of analysis of past financial records.

2.2 ORIGIN OF CREDIT RATING AGENCIES:

The origins of credit rating can be traced to the 1840's. Following the financia l
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.
The 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 market’s needs, John Moody
and Company published Moody’s Manual of Industrial and Miscellaneous
Securities in 1900, the company’s 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 Moody’s Manual was known from coast to coast.
When the stock market crashed in 1907, Moody’s 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 analysed 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 analysing the stocks and bonds of
America’s railroads, and with this endeavour, he became the first to rate public
market securities. In 1909, Moody’s Analyses of Railroad Investments described
for readers the analytic principles that Moody used to assess a railroad’s
operations, management, and finance. The new manual quickly found a place in
investors’ hands. In 1913, he expanded his base of analysed 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.

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.

2.3 GROWTH OF CREDIT RATING AGENCIES:

1. 1841- Mercantile Credit Agency (USA)
2. 1900- Moody’s Investors Services (USA)
3. 1916- Poor Publishing Company (USA)
4. 1922- Standard Statistics Company (USA)
5. 1924- Pitch Publishing Company (USA)
6. 1941- Standard and Poor (USA)
7. 1974- Thomson Bank Watch (USA)
8. 1975- Japanese Bond Rating Institution (JAPAN)
9. 1987- CRISIL by ICICI (INDIA)
10. 1991- ICRA by IFCI (INDIA)
11. 1994- CARE by IDBI (INDIA)
2.4 REASONS FOR THE SETUP OF CREDIT RATING AGENCIES

1.The increasing role of capital and money markets consequent to
disintermediation.
2. Increased securitization of borrowing and lending consequent to
disintermediation.
3. Globalization of the credit market.
4. The continuing growth of information technology.
5. The growth of confidence in the efficiency of the market mechanism.
6. The withdrawal of Govt safety nets and the trend towards privatization

2.5 USES OF CREDIT 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, start-up companies, hospitals and universities.
A wide range of industries also use credit ratings to improve fairness,
effectiveness and efficiency. Financial companies use credit ratings to predict the
risk of delinquencies and losses, which enables them to better allocate costs.
Insurance companies use specialized credit scores to make fairer underwriting
decisions. Credit ratings even provide benefits at the macroeconomic level by
helping small enterprises attain the funds they need and by facilitating the
securitization and sale of financial products in the secondary markets,
substantially increasing the influx of capital into a country.

2.6 FUNCTIONS OF CREDIT RATING AGENCIES:

1. Provides Superior Information:
It provides superior information on credit risk because 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, Due to
professional and highly trained staff, their ability to assess risk is better, and
finally, 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 corporates.
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. Formation of Public Policy

Public policy guidelines on what kinds of securities are eligible for inclusions in
different kinds of institutional portfolios can be developed with greater
confidence if debt securities are rated professionally.

2.7 REGULATIONS & GUIDELINES FOR CREDIT RATING

AGENCIES IN INDIA:
The capital market regulator regulates rating agencies in most regions. In India,
the capital markets regulator, the Securities and Exchange Board of India (SEBI),
regulates the rating agencies in the country. SEBI laid down an extensive set of
regulations for rating agencies in 1999.
SEBI Issued Regulations to Credit Rating Agencies
1. SEBI vide CIR/MIRSD/CRA/6/2010 dated May 3, 2010 has provided for
certain transparency and disclosure norms for the Credit Rating Agencies
(CRAs). The major measures taken in this regard are summarized below:
2. CRAs should maintain records of the rating committee, including voting details
and notes of dissent, for a period of five years.
3. It has been made mandatory for CRAs to publish information about the
historical default rates of their rating categories and whether the default rates of
these categories have changed over time.
4. CRAs should ensure that its analysts do not participate in any kind of marketing
and business development, including negotiations of fees with the issuer whose
securities are being rated. Also, the employees involved in the credit rating
process and their dependants cannot own shares of the issuer.
5. CRAs while rating structured finance products, are barred from providing
consultancy or advisory services regarding the design of the structured finance
instrument. This prohibition would apply to the subsidiaries of CRAs too. While
publishing the ratings of structured finance products and their movements, CRAs
apart from following all the applicable requirements in case of non-structured
ratings should also disclose the track record of the originator and details of nature
of underlying assets while assigning the credit rating.
6. In case of unsolicited credit ratings (the credit ratings not arising out of the
agreement between the CRAs and the issuer), credit rating symbol should be
accompanied by the word “UNSOLICITED” in the same font size.
2.7.1 GUIDELINES:
The Securities and Exchange Board of India (Credit Rating Agencies)
Regulations, 1999 offers various guidelines with regard to the registration and
functioning of the credit rating agencies in India. The registration procedure
includes application for the establishment of a credit rating agency, matching the

eligibility criteria and providing all the details required. They have to undergo the
strict examination procedure with regard to the details furnished by them. They
are required to prepare internal procedures, abidance with circulars. They are
offered guidelines regarding the credit rating procedure, by the Act. The credit
rating agencies are provided with compliance officers. They are required to show
their accounting records.

2.8 CREDIT RATING AGENCIES IN INDIA:

Credit Rating Agencies assess creditworthiness of organisation and different
entities. In simple words, these agencies analyse a debtor’s ability to repay the
debt and also rate their credit risk. All the credit rating agencies in India are
regulated by SEBI Regulations, 1999 of the Securities and Exchange Board of
India Act, 1992.
The Credit Rating Agencies in India are:

1. Credit Rating Information Services of India Limited (CRISIL)
2. Investment Information & Credit Rating Agency (ICRA)
3. Credit Analysis & Research Ltd. (CARE)
4. FITCH (India Ratings & Research)

2.8.1 CREDIT RATING INFORMATION OF INDIA LIMITED (CRISIL):

Credit Rating Information Services of India Limited (CRISIL) has been
promoted by Industrial 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 comprehensive offerings include ratings for long-term
instruments such as debentures/bonds and preference shares, structured
obligations (including asset-backed securities) and fixed deposits; it also rates
short-term instruments such as commercial paper programmes and short-term
deposits. As part of bank loan ratings, CRISIL also rates credit facilities extended
to borrowers by banks. In addition, CRISIL undertakes credit assessments of
various entities including state governments. CRISIL also assigns financial
strength ratings to insurance companies.

2.8.2 INVESTMENT INFORMATION AND CREDIT RATING AGENCY

(ICRA):
ICRA Ltd. (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. ICRA’s 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 gradings, 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. ICRA’s major
shareholders include Moody's Investors Service and leading Indian financial
institutions and banks. With the growth and globalisation 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 gradings, specialised performance
gradings 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.

2.8.3 CREDIT ANALYSIS & RESEARCH LTD. (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 Information and Advisory services group prepares credit reports on
specific requests from banks or business partners, conducts sector studies and
provides advisory services in the areas of financial restructuring, valuation and
credit appraisal systems. CARE was retained by the Disinvestment Commission,
Government of India, for assistance in equity valuation of a number of state
owned companies and for suggesting divestment strategies for these companies.

2.8.4 FITCH (INDIA RATINGS & RESEARCH):

Fitch (India Ratings and Research) is India's most respected credit rating agency
committed to providing India's credit markets accurate, timely and prospective
credit opinions. Built on a foundation of independent thinking, rigorous analytics,
and an open and balanced approach towards credit research, Ind-Ra has grown
rapidly during the past decade, gaining significant market presence in India's
fixed income market. Ind-Ra currently maintains coverage of corporate issuers,
financial institutions (including banks and insurance companies), finance and
leasing companies, managed funds, urban local bodies, and structured finance
and project finance companies Headquartered in Mumbai, Ind-Ra has seven
branch offices located in Ahmedabad, Bengaluru, Chennai, Delhi, Hyderabad,
Kolkata and Pune. Ind-Ra is recognised by the Securities and Exchange Board of
India, the Reserve Bank of India and National Housing Bank. Ind-Ra is a 100%
owned subsidiary of the Fitch Group.

2.9 PRACTICAL PROBLEMS OF CREDIT RATING AGENCIES IN

INDIA:
1. The absence of widespread branch network of the rating agency may limit its
skill in rating.
2. Inexperienced, unskilled or overload staff may not do justice to their job and
the resulting ratings may not be perfect.
3. Since rating agencies involve a number of factors, a rigid mathematical formula
cannot be applied to finalise rating and some element of subjectivity creeps in,
thereby giving scope for bias.
4. The time factor greatly affects rating and gives misleading conclusions. A
company which experiences adverse condition temporarily will be given a low
rating judged on the basis of temporary phenomenon.
5. Since the rating agencies receive a sizeable fee from the companies for
awarding ratings, a tendency to inflate the ratings may develop.
6. The rating is not permanent but subject to changes and moreover the agencies
cannot give any guarantee for the investors.
7. Investments which have the same rating may not have identical investment
quality because the number of rating categories is limited and hence can not
reflect small but meaningful differences in the degree of risk.
8. Borrowing entities give misleading advertisements about the rating symbols of
their instruments. For example, ‘X’ Co. Ltd. which has got AAX for its debenture
may mobilise fixed deposits instead of revealing the low rating for fixed deposits.
Such kind of window dressing should be curtailed.

2.10 FUTURE OF CREDIT RATING AGENCIES IN INDIA:

At present, commercial bonds, k bonds and debenture with maturities exceeding
18 months and fixed deposits of large non-banking companies registered with
RBI are to be compulsorily rated. There are moves to make rating compulsory for
other types of borrowings such as the fixed deposit programme of manufacturing
companies. In addition, the rating agencies are expected to be called upon to
enlarge volumes of securitisation of debt and structuring of customized
instruments to meet the needs of issuers or different class of investors. There are
number of areas where rating agencies will have to cover new ground in the
coming years. The rating of municipal bands, state government borrowings,
commercial banks and public sector undertakings etc. will be covered in the near
future. So, the outlook for the credit rating industry is positive.
The experience of Indian rating agencies so far is that about 30% of their ratings
are not accepted or used. Instances are there when companies with poor ratings
assigned by one company have gone to another for better rating. These raise
doubts about the efficacy of credit rating agencies in serving the investors.
Various constraints are faced by the credit rating agencies. The major constraint
is the low level of disclosure by Indian companies. Rating agencies have
complained of inadequate access to information, poor quality of audit and long
time lags in the availability of data. The companies often do not co-operate
whenever they feel that disclosure of a particular piece of information might not
be in their interest. All these act as systematic constraint on the rating service.
The Indian credit rating agencies have made strategic alliance with reputed
international agencies. They adopt, to a large extent, the rating methodologies
adopted by their western counterparts. The suitability of rating methods and
models formulated in well developed markets in the west is highly doubtful in
Indian conditions. The rating agencies in India have to evolve their own
methodologies within the context of macroeconomic environment.

CHAPTER III
WORKING OF CREDIT RATING AGENCIES IN INDIA
3.1 INTRODUCTION:
A credit rating agency is a private company whose purpose is to assess the ability
of borrowers, either governments or private enterprises, to repay their debt. To
do this, these agencies issue credit ratings based on the borrower’s solvency. The
three biggest global rating agencies control 95% of the market. They include Fitch
Rating Ltd, Moody’s and Standard and Poor’s. Since 2011, these independent
companies have had to obtain certification from the European Securities and
Markets Authority (ESMA) in order to operate in Europe. ESMA performs
regular inspections to ensure that the rating agencies are following European
regulations and the authority can issue sanctions for any infractions. Credit rating
agencies collect a fee either from the entity seeking to receive a rating or from the
entity seeking to use and analyse the rating. To evaluate the solvency of
borrowers, rating agencies issue credit ratings corresponding to the credit risk
represented by the borrower, or in other words, the risk that the borrower will
default on the loan. Credit ratings place this risk on a scale ranging from low risk
investment category to high risk speculative category. Though there is no
standard scale, credit ratings are typically expressed by letters corresponding to
the potential risk, with the highest rating represented by AAA and the lowest
rating by C or D, according to the agency. In addition to the letter grade, a credit
rating might also consist of a “forecast” that describes how a particular rating may
change in the future. For example, a credit rating with a negative outlook may
indicate a future downgrade. Each rating agency uses its own method to calculate
its ratings. These methods take into account quantitative, qualitative, business
strategy for a company or political stability for a country and contextual criteria
like changes in industry for a company or public finances for a country. The final
rating represents the credit agency’s evaluation of a borrower’s credit risk at a
given time. It does not constitute investment advice.
Along with other criteria, investors take credit ratings into account to help manage
their portfolios. A rating downgrade indicates a greater risk for the lender.
Depending on the sensitivity of the market, investors may require a higher return
to protect against this risk, which in turn raises financing costs for the borrower.

3.2 REGISTRATION OF CREDIT RATING AGENCIES:

1. Application of Certificate
i. Any 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 Board for the grant of a certificate of registration for the purpose.
ii. A non- refundable application fee shall accompany an application for the grant
of a certificate.
2. Promoter of Credit Rating Agency

The Board shall not consider an application under unless a person belonging to
any of the following categories promotes the applicant:
i. A Public Financial Institution.
ii. A Scheduled Commercial Bank.
iii. A Foreign Bank operating in India.
iv. A foreign credit rating agency having at least five years experiences in rating
securities.
v. Any company or a body corporate, having continuous net worth of minimum
rupees of one hundred crores for the previous five years prior to filling of the
application with the board for the grant of certificate under these regulations.
3. Eligibility Criteria
The Board shall not consider an application for the grant of a certificate unless
the applicant satisfies the following condition:
i. The applicant is set up and registered as a company under the Companies Act,
1956.
ii. The applicant has, in its memorandum of Association, specified rating activity
as one of its main objects.
iii. The applicant has a minimum net worth of rupees five crores.
iv. The applicant has adequate infrastructure, to enable it to provide rating service.
v. 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 Board. f) Neither the applicant,

nor its promoter, nor any director of the applicant or its promoter, s involved in
any legal proceeding connected with the securities market, which may have an
adverse effect on the interest of the investors.
vi. Neither 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.
vii. The applicant has, in its employment, persons having adequate professional
and other relevant experience to the satisfaction of the Board.
viii. The applicant in all other respects is a fit and a proper person for the grant of
a certificate.
ix. The grant of certificate to the applicant is in the interest of the investors and
the securities market.
4. Application to Confirm to the Requirements

The Board shall reject any application for a certificate, which is not complete in
all aspects or does not confirm to the requirements of regulation or instructions.
Providing that, before rejecting any such application, the applicant shall be given
an opportunity to remove. Within thirty days of the date of receipt of relevant
communication, from the Board such objections as may be indicated by the
Board. Provided further, that the Board may, on sufficient reason being shown,
extend the time for removal of objections by such further time, not exceeding
thirty days, as the Board may consider fit to enable the applicant to remove such
objections.
5. Furnishing of Information, Clarification and Personal Representation

i. The Board may require the applicant to furnish such further information or
clarification, as the Board may consider necessary, for the purpose of processing
of the application.
ii. The Board, if it so desires, may ask the applicant or its authorized
representative to appear before the Board, for personal representation in
connection with the grant of a certificate.

6. Grant of certificate
i. The Board. On being satisfied that the applicant is eligible for the grant of a
certificate of registration, shall grant a certificate.
ii. The grant of certificate of registration shall be subject to the payment of the
registration fee specified.
7. Conditions of Certificate and Validity Period

The certificate shall be granted subject to the following conditions, namely:
i. The credit rating agency shall comply with the provisions of the Act, the
regulations made there under and the guidelines, directives, circulars and
instructions issued by the Board from time to time on the subject of credit rating.
ii. Where any information furnished to the Board by a credit rating agency: is
found to be false or misleading in any material particular; or has undergone
change subsequently to its furnishing at the time of the application for the
certificate; the credit rating agency shall forthwith inform the Board in writing.
iii. The period of validity of the certificate of registration shall be three years.
8. Renewal of certificate
A credit rating agency, if it desires renewal of the certificate granted to it, shall
make to the Board an application for the renewal of the certificate or registration
within 3 months before expiry of the period of the validity of the certificate. The
application for the renewal shall be accompanied by a renewal fee.

3.3 TYPES OF CREDIT RATINGS:

1. Bond/Debenture Rating
Rating the debentures/ bonds issued by corporates, government etc. is called
debenture or bond rating. This is popular in certain cases for bonds and
debentures. Practically, all credit rating agencies are doing rating for debentures
and bonds.
2. Equity Rating
Rating of equity shares issued by a company is called equity rating. Rating of
equity shares is not mandatory in India but credit rating agency ICRA has
formulated a system for equity rating. Even SEBI has no immediate plans for
compulsory credit rating of initial public offerings (IPOs).
3. Preference Share Rating

Rating of preference share issued by a company is called preference share rating.
In India preference shares are not being rated, however Moody's Investor Service
has been rating preference shares since 1973 and ICRA has provision for it.
4. 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.
5. Fixed Deposits Rating

Fixed deposits programmes are medium term unsecured borrowings. Rating of
such programmes is called as fixed deposits rating.
6. Borrowers Rating
Rating of borrowers is referred as borrower rating. It can also be referred as
borrowers, may be an individual or a company is known as borrower’s rating.

7. Chit Funds Rating

Chit funds collect monthly contributions from savers and give loans to those
participants who offer highest rate of interest. Chit funds are rated on the basis of
their ability to make timely payment of prize money to subscribers. CRISIL does
credit rating of chit funds.
8. Insurance Companies Rating

With the entry of private sector insurance companies, credit rating of insurance
companies is also gaining ground. Insurance companies are rated on the basis of
their claim paying ability (whether it has high, adequate, moderate or weak claim -
paying capacity). ICRA is doing the work of rating insurance companies.
9. Bank Rating
Private and cooperative banks have been failing quite regularly in India. People
like to deposit money in banks which are financially sound and capable of
repaying back the deposits. CRISIL and ICRA are now doing rating of banks.
10. Sovereign Rating

Foreign investors and lenders are interested in knowing the repaying capacity and
willingness of the country to repay loans taken by it. They want to make sure that
investment in that country is profitable or not. While rating a country the factors
considered are its industrial and agricultural production, gross domestic product,
government policies, rate of inflation, extent of deficit financing etc. Moody’s,
and Morgan Stanley are doing rating of countries.

3.4 CREDIT RATING SYMBOLS:

Rating agencies use symbols such as AAA, AA, BBB, B, C, D, to convey the
safety grade to the investor. Ratings are classified into three grades:
1. High Investment Grades
2. Investment Grades
3. Speculative Grades.
In all, ratings are classified into 14 or 15 categories. Signs “+” or “-” are used to
show the certainty of timely payment. The suffix + or – may be used to indicate
the comparative position of the instrument within the group covered by the
symbol. Thus FAA- lies one notch above FA+. To provide finer gradations, rating
industry attach + or – to their ratings. The rating symbols for different instruments
of the same company need not necessarily be the same.
1. High Investment Grades

i. AAA: Triple A 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.
ii. AA: Double A denotes high safety in terms of timely payment of interest and
principal. The issuer differs in safety from AAA issue only marginally.
2. Investment Grades
i. A: Denotes adequate safety in terms of timely payment of interest and principal.
Changes in circumstances can adversely affect such issues.
ii. BBB: Triple B denotes moderate safety in terms of timely payment of interest
and principal speculative grades.
3. Speculative Grades
i. BB: Double B denotes inadequate safety terms of timely payment of interest
and principal. Uncertain changes can lead to inadequate financial capacity to
make timely payments in the immediate future.

ii. B: denotes high risk. Adverse changes could lead to inability or unwillingness
to pay timely payment.
iii. C: denotes substantial risk.
iv. D: denotes default in terms of timely payment of interest and principal.
These symbols are just 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.
Ratings for CRISIL ICRA CARE FITCH

NCDs
Highest Safety CRISIL AAA ICRA AAA CARE AAA FITCH AAA
High Safety CRISIL AA ICRA AA CARE AA FITCH AA
Adequate Safety CRISIL A ICRA A CARE A FITCH A
Moderate Credit CRISIL BBB ICRA BBB CARE BBB FITCH BBB
Risk
Moderate CRISIL BB ICRA BB CARE BB FITCH BB
Default Risk
High Default CRISIL B ICRA B CARE B FITCH B
Risk
Very High CRISIL C ICRA C CARE C FITCH C
Default Risk
Default CRISIL D ICRA D CARE D FITCH D

3.5 CREDIT RATING METHODOLOGY:

The rating methodology involves an analysis of the industry risk, the issuer’s
business and financial risks. A rating is assigned after assessing all the factors
that could affect the credit worthiness of the entity. Typically, the industry risk
assessment sets the stage for analysing more specific company risk factors and
establishing the priority of these factors in the overall evaluation. For instance, if
the industry is highly competitive, careful assessment of the issuer’s market
position is stressed. If the company has large capital requirements, the
examination of cash flow adequacy assumes importance. The ratings are based
on the current information provided by the issuer or facts obtained from reliable
sources. Both qualitative and quantitative criteria are employed in evaluating and
monitoring the ratings.
1. Business Risk Analysis

The rating analysis begins with an assessment of the company’s environment,
focusing on the strength of the industry prospects, pattern of business cycles as
well as the competitive factors affecting the industry. The vulnerability of the
industry to government controls is assessed.
The nature of competition is different for different industries, based on price,
product quality, distribution capabilities, image, product differentiation, service
and so on. The industries characterised by a steady growth in demand, ability to
maintain margins without impairing future prospects, flexibility in the timing of
capital outlays, and moderate capital intensity are in stronger position.
When a company participates in more than one business, each segment is
analysed separately. A truly diversified company does not have a single business
segment that is dominant, and the company’s ability to manage diverse operations
is a significant factor. As part of the industry analysis, key rating factors are
identified into key to success and areas of vulnerability. The main industry factors
assessed include:
i. Industry Risk:
Nature and basis of competition, key success factors, demand and supply
position, structure of industry, cyclical factors, government policies and so on.
ii. Market Position of the Issuing Entity Within the Industry:

Market share, competitive advantages, selling and distribution arrangements,

product and customer diversity and so on.
iii. Operating Efficiency of the Borrowing Entity:
Locational advantages, labour relationships, cost structure, technological
advantages and manufacturing efficiency as compared to competitors and so on.
iv. Legal Position
Terms of the issue document, trustees and their responsibilities, systems for
timely payment and for protection against fraud and so on.
2. Financial Risk Analysis

After evaluating the issuer’s competitive position and operating environment, the
analyst proceed to analyse the financial strength of the issuer. Financial risk is
analysed largely through quantitative means, particularly by using financial
ratios. While the past financial performance of the issuer is important, emphasis
is placed on the ability of the issuer to maintain its future financial performance.
i. Accounting Quality:
Overstatement of profits, auditor qualifications, method of income recognition,
inventory valuation and depreciation policies, off-balance sheet liabilities and so
on.
ii. Earnings Prospects:
Sources of future earnings growth, profitability ratios, earnings in relation to fixed
income charges and so on.
iii. Adequacy of Cash Flows:
In relation to debt and working capital needs, stability of cash flows, capital
spending flexibility, working capital management and so on.
iv. Financial Flexibility
Alternative financing plans in times of stress, ability to raise funds and so on.

3. Management Risk
A proper assessment of debt protection levels requires an evaluation of the
management philosophies and its strategies. The analyst compares the company’s
business strategies and financial plans to provide insights into a management’s
abilities, with respect to forecasting and implementing of plans. Specific areas
reviewed include:
i. Track record of the management, planning and control systems, depth of
managerial talent, succession plans.
ii. Evaluation of capacity to overcome adverse situation and
iii. Goals, philosophy and strategies.
4. Fundamental Analysis
Fundamental analysis should include:
i. Capital Adequacy:
Assessment of the true net worth of the issuer, its adequacy in relation to the
volume of business and the risk profile of the assets.
ii. Resources:
Overview of funding sources, funding profile, cost and tenor of various sources
of funds.
iii. Asset Quality:
Quality of the issuer’s credit risk management, systems for monitoring credit,
sector risk, exposure to individual borrowers, management of problems credits
and so on.
iv. Liquidity Management:
Capital structure, term matching of assets and liabilities, policy on liquid assets
in relation to financing commitments and maturing deposits.
v. Profitability and Financial Position:
Historic profit, spreads on funds deployment, revenues on fund-based services,
accretion to reserves and so on.

3.6 CREDIT RATING PROCESS:

The rating process begins with the receipt of formal request from a company
desirous of having its issue obligations rated by credit rating agency. A credit
rating agency constantly monitors all ratings with reference to new political,
economic and financial developments and industry trends. The process/procedure
followed by all the major credit rating agencies in the country is almost similar
and usually comprises of the following steps:
1. Receipt of the Request

The rating process begins, with the receipt of formal request for rating from a
company desirous of having its issue obligations under proposed instrument rated
by credit rating agencies. An agreement is entered into between the rating agency
and the issuer company.
The agreement spells out the terms of the rating assignment and covers the
following aspects:
i. It requires the CRA (Credit Rating Agency) to keep the information
confidential.
ii. It gives right to the issuer company to accept or not to accept the rating.
iii. It requires the issuer company to provide all material information to the CRA
for rating and subsequent surveillance.
2. Assignment to Analytical Team

On receipt of the above request, the CRA assigns the job to an analytical team.
The team usually comprises of two members/analyst who have expertise in the
relevant business area and are responsible for carrying out the rating
assignments.
3. Obtaining Information
The analytical team obtains the requisite information from the client company.
Issuers are usually provided a list of information requirements and broad
framework for discussions. These requirements are derived from the experience
of the issuers business and broadly confirms to all the aspects which have a
bearing on the rating.

4. Plant Visit and Meeting with Management

To obtain classification and better understanding of the client’s operations, the
team visits and interacts with the company’s executives. Plants visits facilitate
understanding of the production process, assess the state of equipment and main
facilities, evaluate the quality of technical personnel and form an opinion on the
key variables that influence level, quality and cost of production. A direct
dialogue is maintained with the issuer company as this enables the CRAs to
incorporate non-public information in a rating decision and also enables the rating
to be forward looking. The topics discussed during the management meeting are
wide ranging including competitive position, strategies, financial policies,
historical performance, risk profile and strategies in addition to reviewing
financial data.
5. Presentation of Findings
After completing the analysis, the findings are discussed at length in the Internal
Committee, comprising senior analyst, of the credit rating agency. All the issue
having a bearing on rating are identified. An opinion on the rating is formed. The
findings of the team are finally presented to Rating Committee.
6. Rating Committee Meeting

This is the final authority for assigning ratings. The rating committee meeting is
the only aspect of the process in which the issuer does not participate directly.
The rating is arrived at after composite assessment of all factors concerning the
issuer, with the key issuer getting greater attention.
7. Communication of Decision
The assigned rating grade is communicated finally to the issuer along with
reasons or rationale supporting the rating. The ratings which are not accepted are
either rejected or reviewed in the light of additional facts provided by the issuer.
The rejected ratings are not disclosed and complete confidentiality is maintained.
8. Dissemination to the Public

Once the issuer accepts the rating, the CRAs disseminate it, along with the
rationale, through the print media.

9. Monitoring for Possible Change

Once the company has decided to use the rating, CRA’s are obliged to monitor
the accepted ratings over the life of the instrument. The CRA constantly monitors
all ratings with reference to new political, economic and financial developments
and industry trends. All this information is reviewed regularly to find companies
for major rating changes. Any changes in the rating are made public through
published reports by CRAs.

CHAPTER IV
A STUDY OF AWARNESS ABOUT CREDIT RATING AGENCIES
4.1 INTRODUCTION:
In this chapter, data is analysed and interpreted through various sources. Data is
collected through 50 respondents in the city of Mumbai and then the answers
collected through the questionnaire is analysed and interpreted. The questions
which were included in the questionnaire consisted of different fundamental of
credit rating and agencies such as awareness about credit rating agencies,
knowledge and sources of credit rating, preference of agencies, investment
decision, additional purposes, are ratings given by agencies easy to understand
and reliable, does it affect equity returns, is the process transparent, does it affect
corporate image, are agencies in foreign better than agencies in India, are ratings
time saving, does it enables accompany to grow and lastly, does it affect
consumer preference is discussed in the questionnaire. Overall, the output was
positive and people were aware of the various aspects in the credit rating industry.
Preparation is vital and it only focuses on the aims of the investigation and
consider how the data is to be analysed before collecting it. Failure to do this may
result in data being collected that is incomplete or that is not adequate for
satisfying the research aims. The means of analysis is also decided before the
questionnaire is delivered, not after the data is collected, this is to ensure that the
questions are in a format which is suitable for analysis by the package chosen. A
lot of skill is involved in designing a good statistically sound questionnaire. Data
Protection legislation is complied with it and only data that is essential should is
collected and is only be used for the purposes declared on the questionnaire.

4.2 DATA ANALYSIS & INTERPRETATION:

1. Age
Chart 1: Chart 1 showing the age of the respondents.
Table 1: Table 1 showing the number of respondents and age of people.
Age No. of Respondents

17 1
18 1
19 4
20 21
21 12
22 1
23 1
25 2
27 3
28 3
29 1
Total 50

Interpretation:
The above given Table 1 shows that there was 1 respondent in the age of 17, 18,
22,23,29. 2, 3 & 4 respondents in the age of 25,28 & 19 respectively. There are
12 respondents in the age of 21 and 20 respondents in the age of 20.

2. Gender
Chart 2: Chart 2 showing the gender of respondents.
Table 2: Table 2 showing the no. of respondents among Male and Female.
Gender No. of Respondents

Male 46
Female 4
Total 50
Interpretation:
The above given Table 2 shows that there were 46 Male and 4 Female respondents
among the total 50 respondents.

3. Are you aware of Credit Rating?
Chart 3: Chart 3 showing the how many respondents are aware of credit rating.
Table 3: Table 3 showing no. of respondents who are aware of credit rating.
Responses No. of Respondents

Yes 42
No 8
Total 50
Interpretation:
The above given Table 3 shows that 42 respondents were aware of credit rating
which is 84% and 8 respondents were unaware of credit rating which is 16%

4. Are you aware of Credit Rating Agencies?
Chart 4: Chart 4 showing the how many respondents are aware of credit rating
agencies.
Table 4: Table 4 showing no. of respondents who are aware of credit rating
agencies.

Yes 38
No 12
Total 50
Interpretation:
The above given Table 4 shows that 38 respondents were aware of credit rating
agencies which is 76% and 12 respondents were unaware of credit rating agencies
which is 24% among the total 50 respondents.

5. Sources of knowledge about Credit Ratings?
Chart 5: Chart 5 showing how many respondents get knowledge about credit
ratings from.
Table 5: Table 5 showing no. of respondents using the following sources of

knowledge for credit rating.

Newspapers 10
Magazines 9
Internet 26
Other 5
Total 50
Interpretation:
The above given Table 5 shows that 10 respondents used newspapers which is
20%, 9 respondents used magazines which is 18%, 26 respondents used internet
which is 52% and 5 respondents used other sources for getting knowledge about
credit rating among the 50 respondents.

6. Which Credit Rating Agency do you prefer?
Chart 6: Chart 6 showing which credit rating agency respondents prefer.
Table 6: Table 6 showing no. of respondents preference towards credit rating

agencies.

CRISIL 17
ICRA 13
CARE 13
FITCH 7
Total 50
Interpretation:
The above given Table 6 shows that 17 respondents prefer CRISIL which is 34%,
13 respondents prefer ICRA which is 26%, 13 respondents prefer CARE which
is 26% and 7 respondents prefer FITCH which is 14% among the 50 respondents.

7. Do you think Investment decisions are taken on the basis of Credit

Rating?
Chart 7: Chart 7 showing how many respondents take investment decisions

on the basis of Credit Rating.
Table 7: Table 7 showing no. of respondents taking investment decisions on

the basis of Credit Rating.

Strongly Agree 8
Agree 24
Neutral 13
Disagree 3
Strongly Disagree 2
Total 50
Interpretation:
The above given Table 7 shows that 8 respondents choose strongly agree which
is 16%, 24 respondents choose agree which is 48%, 13 respondents choose
neutral which is 26%, 3 respondents choose disagree which is 6% and 2
respondents choose strongly disagree which is 1% among the 50 respondents.

8. Are there any additional purpose other than investment decisions to

check Credit Rating?
Chart 8: Chart 8 showing how many respondents have any additional

purpose other than investment decisions to check Credit Rating.
Table 8: Table 8 showing no. of respondents having any additional purpose

other than investment decisions to check Credit Rating.

Strongly Agree 7
Agree 24
Neutral 13
Disagree 6
Strongly Disagree 0
Total 50
Interpretation:
neutral which is 26% and 6 respondents choose disagree which is 12% among
the 50 respondents.

9. Are Credit Rating given by agencies easy to understand?
Chart 9: Chart 9 showing how many respondents find Credit Rating given
by agencies easy to understand.
Table 9: Table 9 showing no. of respondents finding Credit Rating given by

agencies easy to understand.

Strongly Agree 6
Agree 19
Neutral 19
Disagree 5
Strongly Disagree 1
Total 50
Interpretation:

10. Are Credit Rating given by agencies reliable?
Chart 10: Chart 10 showing how many respondents find Credit Rating given
by agencies reliable.
Table 10: Table 10 showing no. of respondents finding Credit Rating given
by agencies reliable.

Strongly Agree 11
Agree 20
Neutral 12
Disagree 6
Strongly Disagree 1
Total 50
Interpretation:

11. Do changes in Credit Rating affect equity return?
Chart 11: Chart 11 showing how many respondents think changes in Credit
Rating affect equity return.
Table 11: Table 11 showing no. of respondents think changes in Credit

Rating affect equity return.

Strongly Agree 8
Agree 18
Neutral 20
Disagree 3
Strongly Disagree 1
Total 50
Interpretation:

12. Do you think there is transparency the agencies in the Credit rating
process?
Chart 12: Chart 12 showing how many respondents think there is

transparency the agencies in the Credit rating process.
Table 12: Table 12 showing no. of respondents think there is transparency

the agencies in the Credit rating process.

Strongly Agree 6
Agree 21
Neutral 16
Disagree 7
Strongly Disagree 0
Total 50
Interpretation:
neutral which is 32%, and 7 respondents choose disagree which is 14% among
the 50 respondents.

13. Do you think that the agencies in foreign are better than the agencies
in India?
Chart 13: Chart 13 showing how many respondents think that the agencies
in foreign are better than the agencies in India.
Table 13: Table 13 showing no. of respondents think that the agencies in
foreign are better than the agencies in India.

Strongly Agree 5
Agree 19
Neutral 21
Disagree 4
Strongly Disagree 1
Total 50
Interpretation:

14. Do you think Credit Rating helps in improving the corporate image of
a company?
Chart 14: Chart 14 showing how many respondents think Credit Rating
helps in improving the corporate image of a company.
Table 14: Table 14 showing no. of respondents think Credit Rating helps in
improving the corporate image of a company.

Strongly Agree 11
Agree 27
Neutral 7
Disagree 4
Strongly Disagree 1
Total 50
Interpretation:
is 22%, 27 respondents choose agree which is 54%, 7 respondents choose neutral
which is 14%, 4 respondents choose disagree which is 8% and 1 respondents
choose strongly disagree which is 1% among the 50 respondents.

15. Do you think Credit Rating helps in saving time and effort in
analysing the financial strength of a company?
helps in saving time and effort in analysing the financial strength of a
company.
Table 15: Table 15 showing no. of respondents think Credit Rating helps in
saving time and effort in analysing the financial strength of a company.

Strongly Agree 7
Agree 24
Neutral 13
Disagree 3
Strongly Disagree 3
Total 50
Interpretation:

16. Does Credit Rating enable a company to grow and expand?
enable a company to grow and expand.
Table 16: Table 16 showing no. of respondents think Credit Rating enable a
company to grow and expand.

Strongly Agree 8
Agree 25
Neutral 11
Disagree 5
Strongly Disagree 1
Total 50
Interpretation:

17. Please indicate to which extent you agree or disagree with the
following statements
Chart 17: Chart 17 showing how many respondents agree or disagree with
the following statements.
Table 17: Table 17 showing no. of respondents agree or disagree with the
following statements.

Strongly Agree 24
Agree 15
Neutral 9
Disagree 2
Strongly Disagree 0
Total 50
Interpretation:
The above given Table 17 shows that 24 respondents choose strongly agree, 15
respondents choose agree, 9 respondents choose neutral, 2 respondents choose
disagree and 0 respondents choose strongly disagree among the 50 respondents.

18. Do you think Credit Rating will be useful in the future?
Chart 18: Chart 18 showing how many respondents think Credit Rating will
be useful in the future.
Table 18: Table 18 showing no. of respondents think Credit Rating will be
useful in the future.

Strongly Agree 14
Agree 20
Neutral 14
Disagree 2
Strongly Disagree 0
Total 50
Interpretation:
neutral which is 86% and 2 respondents choose disagree which is 6% which is
1% among the 50 respondents.

CHAPTER V
SUMMARY, MAJOR OBSERVATION & SUGGESTION
5.1 SUMMARY:
A Credit Rating is a useful tool not only for the investor, but also for the entities
looking for investors. An investment grade rating can put a security, company or
country on the global radar, attracting foreign money and boosting a nation's
economy. Indeed, for emerging market economies, the credit rating is key to
showing their worthiness of money from foreign investors, and because the credit
rating acts to facilitate investments, many countries and companies will strive to
maintain and improve their ratings, hence ensuring a stable political environment
and a more reliable.
It is an undisputed fact that Credit Rating Agencies play a key role in financial
markets by helping to reduce the informative gap between lenders and investors,
on one side, and issuers on the other side, about the creditworthiness of
companies. An investment grade rating can put a security, company or country
on the global radar, attracting foreign money and boosting a nation's economy.
Indeed, for emerging market economies, the credit rating is the key to showing
their worthiness of money from foreign investors. Credit rating helps the market
regulators in promoting stability and efficiency in the securities market. Ratings
make markets more efficient and transparent.
It is also seen that, there is no systematic link between indicators of credit risk
and equity market returns which applies to all credit rating events. However, the
information associated with credit rating changes may be pricing relevant for
equity investors depending on several issuer and event specific characteristics. In
particular, we find that the major explanatory factors for the magnitude of the
announcement effect as well as the differential effect between rating events are
related to indicators of information relevance and implications for shareholders
as well as the degree of market anticipation.
Lately, a series of recent spectacular studies, have put an increasing focus on the
link between bond and equity markets. This thesis provides insights to the
dynamics of the relationship between bond market risks and stock market returns.
By studying the announcement effects associated with credit rating updates as
well as various aspects of the rating process, this study confirms the role of the
CRAs as effective information providers and that the information is of interest
for a broader clientele than merely bond market investors.

5.2 MAJOR OBSERVATION:

The following chapter wise observations are made from the above study:
1. CHAPTER II
In this chapter it is observed that, from where CRA’s are originated and how they
grew over the period, also the reason of setup of CRA’s is observed. Different
uses, functions and how CRA’s are regulated by SEBI is observed. Following
that, the top 4 CRA’s in India are analysed, the practical problems faced by them
and the need of CRA’s in future is observed.
2. CHAPTER III
In this chapter it is observed the overall working of credit rating agencies. It starts
with the registration of CRA’s. Then, different types of credit rating involved is
observed. Further, different credit rating symbols and methodology is observed.
Lastly, the credit rating process practiced by various CRA’s is observed.
3. CHAPTER IV
The observations of this chapter is done based on primary data collected through
questionnaire:
i. It is observed that, there were 46 Male and 4 Female respondents among the
total 50 respondents.
ii. It is observed that, 42 respondents were aware of credit rating which is 84%
and 8 respondents were unaware of credit rating which is 16% among the total 50
respondents.
iii. It is observed that, 38 respondents were aware of credit rating agencies which
is 76% and 12 respondents were unaware of credit rating agencies which is 24%
iv. It is observed that, 10 respondents used newspapers which is 20%, 9
respondents used magazines which is 18%, 26 respondents used internet which is
52% and 5 respondents used other sources for getting knowledge about credit
rating among the 50 respondents.

v. It is observed that, that 17 respondents prefer CRISIL which is 34%, 13

respondents prefer ICRA which is 26%, 13 respondents prefer CARE which is
26% and 7 respondents prefer FITCH which is 14% among the 50 respondents.
vi. It is observed that, people take investment decisions on the basis of Credit
Rating.
vii. It is observed that, people have an additional purpose other than investment
decisions to check Credit Rating.
viii. It is observed that, people find Credit Rating given by agencies easy to
understand.
ix. It is observed that, people find Credit Rating given by agencies reliable.
x. It is observed that, there is transparency the agencies in the Credit rating
process.
xi. It is observed that, Credit Rating helps in improving the corporate image of
a company.
xii. It is observed that, Credit Rating helps in saving time and effort in analyzing
the financial strength of a company.
xiii. It is observed that, Credit Rating enable a company to grow and expand
xiv. It is observed that, Credit Rating will be useful in the future.

5.3 SUGGESTION:
1. For Investors
i. Investors should not forget the Contract Law principle of ‘Caveat Emptor’.
Caveat Emptor means ‘let the buyer beware’. It should be forgotten that
everything including returns cannot be guaranteed and investments cannot be
risk-free.
ii. Investors should observe caution while investing their money and be aware
themselves before taking their investment decisions. Investors should self study
the facts and information available about the investment products and the
creditability of the issuers, before zeroing on their decisions.
iii. It is equally important for individual investors to maintain their good credit
history by repaying loans on time and not breaching any rules of law in respect
of investments, taxation, etc. that will go a long way in making the individual’s
future secure and smooth.
iv. Investors must understand that the objective of assessment for IPO Grading
and Credit Rating are very different; though the basis elements of the analysis are
same. Credit Rating assesses factors from debt-holders perspective and usually
requires recurring surveillance over the life of the instrument.
2. For Credit Rating Agencies

i. CRISIL, ICRA, CARE & FITCH the three major rating agencies are handling
90%-95% of the business of credit rating promoted by financial institutions who
while advancing loans take the help of credit rating agencies to get the company
rated. All these agencies have continued to expand their activities in recent years.
They must also be updated about the reforms in the financial sector which can
have a impact on the businesses of these agencies as the market is volatile in
nature especially in case of debt instrument like bonds.
ii. Another aspect is regarding the procedure or the methodology that these rating
agencies follow for rating. Sometimes companies not satisfied with rating of one
agency approach use another rating agency for better rating. For this purpose the
rating process or procedure followed for rating must be relevant and accurate.
Rating agencies should not only take into consideration past & present
performance; the projected future performance must not be ignored. This could
be a Cost Saving measure for both the parties.

iii. The rating agencies make public only those ratings which are accepted by the
issuer companies. They should also publish even those ratings which are not
accepted by the given companies
iv. The credit rating agencies also follow qualitative aspects for rating which may
not be more reliable and accurate. Therefore, they should lay more emphasis on
quantitative factors.
v. Besides the given factors considered by the credit rating agencies, they should
also take into consideration other issues regarding investment like, liquidity risk,
prepayment risk, interest rate risk, taxation aspects, risk of securities market loss,
exchange loss risk, etc.

APPENDIX:
1. Name:
2. Age:
3. Gender:
⚫ Male
⚫ Female
⚫ Other
4. Are you aware of Credit Rating?

⚫ Yes
⚫ No
5. Are you aware of Credit Rating Agencies?

⚫ Yes
⚫ No
6. Sources of knowledge about Credit Ratings

⚫ Newspapers
⚫ Magazines
⚫ Internet
⚫ Other
7. Which Credit Rating Agency do you prefer?

⚫ CRISIL
⚫ ICRA
⚫ CARE
⚫ FITCH

⚫ Other
8. Do you think Investment decisions are taken on the basis of Credit Rating?
⚫ Strongly Agree
⚫ Agree
⚫ Neutral
⚫ Disagree
⚫ Strongly Disagree
9. Are there any additional purposes other than investment decisions to check
Credit Rating?
⚫ Strongly Agree
⚫ Agree
⚫ Neutral
⚫ Disagree
10. Are Credit Rating given by agencies easy to understand?

⚫ Strongly Agree
⚫ Agree
⚫ Neutral
⚫ Disagree
11. Are Credit Rating given by agencies reliable?

⚫ Strongly Agree
⚫ Agree
⚫ Neutral

⚫ Disagree
12. Do changes in Credit Rating affect equity return?

⚫ Strongly Agree
⚫ Agree
⚫ Neutral
⚫ Disagree
13. Do you think there is transparency by the agencies in the Credit Rating
process?
⚫ Strongly Agree
⚫ Agree
⚫ Neutral
⚫ Disagree
14. Do you think that the agencies in foreign are better than the agencies in India?
⚫ Strongly Agree
⚫ Agree
⚫ Neutral
⚫ Disagree
15. Do you think Credit Rating helps in improving the corporate image of a
company?
⚫ Strongly Agree

⚫ Agree
⚫ Neutral
⚫ Disagree
16. Do you think Credit Rating helps in saving time and effort in analysing the
financial strength of a company?
⚫ Strongly Agree
⚫ Agree
⚫ Neutral
⚫ Disagree
17. Does Credit Ratings enable a company to grow and expand?

⚫ Strongly Agree
⚫ Agree
⚫ Neutral
⚫ Disagree
18. Do you think Credit Rating will be useful in the future?

⚫ Strongly Agree
⚫ Agree
⚫ Neutral
⚫ Disagree

BIBLIOGRAPHY:
1. Sanket Dhanorkar (2019), ‘How reliable are credit ratings?’, Economic Times
https://economictimes.indiatimes.com/wealth/invest/how-reliable-are-credit-
ratings/articleshow/68122355.cms
2. Tania Jaleel (2018), ‘What is credit rating and how important is it while making
an investment decision?’, Economic Times
https://economictimes.indiatimes.com/wealth/invest/what-is-credit-rating-and-
how-important-is-it-while-making-an-investment-
decision/articleshow/65806143.cms
3. Yogita Khatri (2017), ‘How credit rating downgrade of companies impacts

your investments and what to do’, Economic Times
https://economictimes.indiatimes.com/wealth/invest/why-credit-rating
downgrade-should-concern-you/articleshow/58974383.cms?from=mdr
4. Neeraj Thakur (2017), ‘Economic survey questions rating criteria of Standard

& Poor's’, NDTV Profit
https://www.ndtv.com/business/economic-survey-questions-rating-criteria-of-s-
p-1654576
5. Gayatri Nayak (2017), ‘No credit to global rating agencies’, Economic Times
https://economictimes.indiatimes.com/markets/stocks/news/economic-survey-
no-credit-to-global-rating-agencies/articleshow/56901670.cms?from=mdr
6. Economic Times (2019) website:

https://economictimes.indiatimes.com/markets/stocks/news/rbi-blasts-credit-
rating-agencies-for-allowing-rating-shopping-to-large-
borrowers/articleshow/73016267.cms


https://www.thehindu.com/specials/the-hindu-explains-what-are-credit-ratings-
and-how-are-they-given/article20515882.ece
8. The Hindu BusinessLine (2019) website:

https://www.thehindubusinessline.com/opinion/can-we-still-rely-on-credit-
ratings/article28791828.ece

https://www.thehindu.com/opinion/op-ed/the-ratingillusion/article22755006.ece
10. Thomas Bergh & Olof Lennstrom (2006), ‘Credit ratings and equity
returns’, Stockholm School of Economics
http://arc.hhs.se/download.aspx?MediumId=132
11. National Institute of Securities Markets (2009), ‘Long term performance of

credit rating agencies in India’, NISM
https://www.sebi.gov.in/sebi_data/attachdocs/1288587929503.pdf
12. Rai University (2013), ‘Management of Financial Services’, Journal of

Finance, Pg 291-302
http://www.psnacet.edu.in/courses/MBA/Financial%20services/17.pdf
13. E Gordon & Dr. K. Natrajan (2009), ‘Financial Markets and Services’,
Himalaya Publishing House, Pg. 450-466
14. M Y Khan (2013), ‘Financial Services’, McGraw Hill Education

(India), 18.1-18.64

15. Savita Bodke (2019), ‘Innovative Financial Services’, Rishabh Publishing

House, Pg 302-325

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The Effect of Changes in Credit Ratings on Equity Returns

1 | Sydenham College of Commerce and Economics

of days to 30 years or more. In addition, long term rating incorporates an

Credit Rating Agencies

2 | Sydenham College of Commerce and Economics

3 | Sydenham College of Commerce and Economics

4 | Sydenham College of Commerce and Economics

1.2 SIGNIFICANCE OF STUDY:

5 | Sydenham College of Commerce and Economics

1.3 RATIONALE BEHIND SELECTING THE TOPIC:

1.4 OBJECTIVES OF THE STUDY:

1.5 SCOPE AND LIMITATION:

6 | Sydenham College of Commerce and Economics

1.6 REVIEW OF LITERATURE:

7 | Sydenham College of Commerce and Economics

National Institute of Securities Markets (2009) 11: This is a research

8 | Sydenham College of Commerce and Economics

9 | Sydenham College of Commerce and Economics

1.7 CHAPTER SCHEME:

2. Chapter II: Introduction to Credit Rating Agencies

3. Chapter III: Working of Credit Rating Agencies

4. Chapter IV: A Study of Awareness about Credit Rating Agencies

5. Chapter V: Summary, Major Observation & Suggestion

10 | Sydenham College of Commerce and Economics

3. Yogita Khatri (2017), ‘How credit rating downgrade of companies impacts

4. Neeraj Thakur (2017), ‘Economic survey questions rating criteria of Standard

6. Economic Times (2019) website:

11 | Sydenham College of Commerce and Economics

7. The Hindu (2017) website:

8. The Hindu BusinessLine (2019) website:

9. The Hindu (2018) website:

11. National Institute of Securities Markets (2009), ‘Long term performance of

12. Rai University (2013), ‘Management of Financial Services’, Journal of

14. M Y Khan (2013), ‘Financial Services’, McGraw Hill Education

12 | Sydenham College of Commerce and Economics

15. Savita Bodke (2019), ‘Innovative Financial Services’, Rishabh Publishing

13 | Sydenham College of Commerce and Economics

14 | Sydenham College of Commerce and Economics

2.2 ORIGIN OF CREDIT RATING AGENCIES:

15 | Sydenham College of Commerce and Economics

16 | Sydenham College of Commerce and Economics

2.3 GROWTH OF CREDIT RATING AGENCIES:

2.4 REASONS FOR THE SETUP OF CREDIT RATING AGENCIES

17 | Sydenham College of Commerce and Economics

2.5 USES OF CREDIT RATINGS BY CREDIT RATING AGENCIES:

18 | Sydenham College of Commerce and Economics

2.6 FUNCTIONS OF CREDIT RATING AGENCIES:

2. Low Cost Information

3. Basis for a Proper Risk and Return

4. Healthy Discipline on Corporate Borrowers

5. Greater Credence to Financial and Other Representation

19 | Sydenham College of Commerce and Economics

6. Formation of Public Policy

20 | Sydenham College of Commerce and Economics

2.7 REGULATIONS & GUIDELINES FOR CREDIT RATING

21 | Sydenham College of Commerce and Economics

22 | Sydenham College of Commerce and Economics

2.8 CREDIT RATING AGENCIES IN INDIA:

The Credit Rating Agencies in India are:

23 | Sydenham College of Commerce and Economics