Rating Agencies:
Rating agencies assess the financial strength of companies particularly their ability to meet the interest and principal payments on their debts and other securities. Rating agencies also study the terms and conditions of each specific security issue.
After assessing the financial strength and terms and conditions of the security to be issued by a company, the rating agency expresses its assessment by way of ‘rating’ for that specific security.
The rating for a given security issue reflects the agency’s degree of confidence that the issuer (i.e. the company) will be able to meet its promised payments of interest and principal as scheduled. The rating is technically an ‘opinion’ on the relative degree of risk associated with timely payment of interest and principal on a security instrument.
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Thus, rating given by an agency is:
(a) An opinion on probability of default on the rated obligation.
(b) Forward looking.
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(c) Specific to the obligation being rated.
It must be noted that a rating is not:
(a) A comment on the issuer’s general performance.
(b) An indication of the potential price of the issuers’ bonds or equity shares.
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(c) Indicative of the suitability of the issue to the investor.
(d) A recommendation to buy/sell/hold a particular security.
(e) A statutory or non-statutory audit of the issuer.
(f) An opinion on the associates, affiliates, or group companies, or the promoters, directors, or officers of the issuer.
In India, credit ratings started with the setting up of the Credit Rating Information Services of India (now CRISIL Limited) in 1987. CRISIL was promoted by premier financial institutions like ICICI, HDFC, UTI, SBI, LIC and Asian Development Bank.
Now CRISIL is an S&P company with a majority shareholding of the latter. Apart from CRISIL, four more rating agencies have been registered by SEBI in India. These are ICRA, promoted by IFCI and now controlled by Moody’s; CARE promoted by IDBI;
Fitch India a 100% subsidiary of Fitch; and Brickworks. Credit rating agencies in India rate a large number of financial products. These are:
a. Bonds/ debentures- [the main product]
b. Commercial paper
c. Structured finance products
d. Bank loans
e. Fixed deposits and bank certificate of deposits
f. Mutual fund debt schemes
g. Initial Public Offers (IPOs)
In India, rating agencies that rate capital market instruments are governed by Securities and Exchange Board of India (Credit Rating Agencies) Regulations, 1999. The regulation provides detailed requirements that a rating agency needs to fulfill to be registered with SEBI.