The chapter comprises of The Depositories Act, 1996; SEBI Depositories and Participants Regulations 1996 and 2012; Types of Depositories - NSDL, CDSL and Depository Participant; Dematerialization - International Securities Identification Number (ISIN) - Procedure for Dematerialization and Rematerialization; Settlement of Off- Market Transactions: Insider Trading - Legal Framework for Investor Protection in India; Internet Initiatives at Depository services; Credit Rating- Meaning and Necessity, Methodology of Credit Rating, Credit Rating Agencies in India.
What is Depository?
An organization where the securities of an investor are held in electronic form at the request of the investor and which carries out the securities transactions by book entry through the medium of a depository participant.
What is a Depository System?
A system whereby transfer of securities takes place by means of book entry on the ledgers of the Depository without physical movement of scripts.
Problems Resulted in Formation of Depository
Before introduction of Depository system, the problems faced by investors and corporates in handling large volume of paper were as follows:
1)Bad deliveries, 2) Fake certificates, 3) Loss of certificates in transit
4) Mutilation of certificates, 5) Delays in transfer Long settlement cycles, 6), Mismatch of signatures, 7) Delay in refund and remission of dividend etc.
Code of Conduct for Participants
1. A participant shall make all efforts to protect the interests of investors.
2. A participant shall always endeavour to—
(a) render the best possible advice to the clients having regard to the clients needs and the environments and his own professional skills;
grievances of investors are redressed without any delay
3. A participant shall maintain high standards of integrity in all its dealings with its clients and other intermediaries, in the conduct of its business.
4. A participant shall be prompt and diligent in opening of a beneficial owner account, dispatch of the dematerialisation request form, rematerialisation request form and execution of debit instruction slip and in all the other activities undertaken by him on behalf of the beneficial owners.
5. A participant shall endeavour to resolve all the complaints against it or in respect of the activities carried out by it as quickly as possible, and not later than one month of receipt.
6. A participant shall not increase charges/fees for the services rendered without proper advance notice to the beneficial owners.
7. A participant shall not indulge in any unfair competition, which is likely to harm the interests of other participants or investors or is likely to place such other participants in a disadvantageous position while competing for or executing any assignment.
8. A participant shall not make any exaggerated statement whether oral or written to the clients either about its qualifications or capability to render certain services or about its achievements in regard to SE.
1. Stock Market Operations
Unit IV – Depository Services
The Depositories Act, 1996; SEBI Depositories and Participants
Regulations 1996 and 2012; Types of Depositories - NSDL, CDSL and
Depository Participant; Dematerialization - International Securities
Identification Number (ISIN) - Procedure for Dematerialization and
Rematerialization; Settlement of Off- Market Transactions: Insider
Trading - Legal Framework for Investor Protection in India; Internet
Initiatives at Depository services; Credit Rating- Meaning and Necessity,
Trading - Legal Framework for Investor Protection in India; Internet
Initiatives at Depository services; Credit Rating- Meaning and Necessity,
Methodology of Credit Rating, Credit Rating Agencies in India.
Prepared by
Mr. Dayananda Huded M.Com JRF, NET 3 Times, & KSET
Teaching Assistant
Rani Channamma University, PG Centre, Jamkhandi
E-mail: dayanandch65@gmail.com
2. The Depositories Act, 1996
• What is Depository?
• An organization where the securities of an investor are held in electronic
form at the request of the investor and which carries out the securities
transactions by book entry through the medium of a depository participant.
• What is a Depository System?
• A system whereby transfer of securities takes place by means of book entry
on the ledgers of the Depository without physical movement of scripts.
• Problems Resulted in Formation of Depository
• Problems Resulted in Formation of Depository
• Before introduction of Depository system, the problems faced by investors
and corporates in handling large volume of paper were as follows:
• 1)Bad deliveries, 2) Fake certificates, 3) Loss of certificates in transit
• 4) Mutilation of certificates, 5) Delays in transfer Long settlement cycles, 6),
Mismatch of signatures, 7) Delay in refund and remission of dividend etc
• https://lakshmishree.com/blog/depository-participant/
3. • History
• The first depository was set up way back in 1947 in Germany.
• In India it is a relatively new concept introduced in 1996 with the enactment of
Depositories Act 1996
• Their operations are carried out in accordance with regulations made by SEBI
,bye-laws and rules of Depositories Act and SEBI (Depositories and Participants)
Regulations Act 1996
• Meaning
• The term Depository means a place where a deposit of money, securities,
property etc is deposited for safekeeping under the terms of depository agreement
• A depository is an organisation, which assists in the allotment and transfer of
• A depository is an organisation, which assists in the allotment and transfer of
securities and securities lending.
• The shares here are held in the form of electronic accounts i.e dematerialised
form and the depository system revolves around the concept of paper-less or
scrip-less trading.
• It holds the securities of the investors in the form of electronic book entries
avoiding risks associated with paper
• It is not mandatory and is left to the investor to decide
• Depositories carry out its operations through various functionaries called business
partners
4. Legal Framework for a Depository
• A depository system is governed by the following acts
• Securities & Exchange Board of India Act 1992
• The SEBI(Depositories and Participants) Regulations, 1996
• Bye –laws of depository
• Business rules of depository
• The Companies Act 1956
Who Can Be a Depository
• Depository Act, 1996 provides that - Depository means:
• Depository Act, 1996 provides that - Depository means:
– A company formed and registered under the companies Act, 1956, and
– Which has got a Certificate of Registration from the SEBI.
Constituents of Depository System
• There are basically four participant:
– The Depository
– The Depository Participant
– The Issuing Company
– The Investor
5. Chapter I of Depositories Act, 1996
• Deals with Preliminaries
• Section 2. Definitions.—(1) In this Act, unless the context otherwise requires,
• (a) “beneficial owner” means a person whose name is recorded as such with a depository;
• (b) “Board” means the Securities and Exchange Board of India established under section
3 of the Securities and Exchange Board of India Act, 1992 (15 of 1992);
• (c) “bye-laws” means bye-laws made by a depository under section 26;
• (e) “depository” means a company formed and registered under the Companies Act, 1956
(1 of 1956) and which has been granted a certificate of registration under sub-section
(1 of 1956) and which has been granted a certificate of registration under sub-section
(1A) of section 12 of the Securities and Exchange Board of India Act, 1992 (15 of 1992);
• (f) “issuer” means any person making an issue of securities;
• (g) “participant” means a person registered as such under sub-section (1A) of section 12
of the Securities and Exchange Board of India Act, 1992 (15 of 1992);
• (h) “prescribed” means prescribed by rules made under this Act;
• (i) “record” includes the records maintained in the form of books or stored in a computer
or in such other form as may be determined by regulations;
• (j) “registered owner” means a depository whose name is entered as such in the register
of the issuer;
6. • Chapter II Deals with Certificate of Commencement of Business
• Section 3. Certificate of commencement of business by depositories.—(1)
No depository shall act as a depository unless it obtains a certificate of
commencement of business from the Board.
• (2) A certificate granted under sub-section (1) shall be in such form as
may be specified by the regulations.
• (3) The Board shall not grant a certificate under sub-section (1) unless it
is satisfied that the depository has adequate systems and safeguards to
prevent manipulation of records and transactions: Provided that no
certificate shall be refused under this section unless the depository
certificate shall be refused under this section unless the depository
concerned has been given a reasonable opportunity of being heard.
• Chapter III Deals with: Rights and Obligations of Depositories,
Participants, Issuers and Beneficial Owners
• 4. Agreement between depository and participant.—(1) A
depository shall enter into an agreement with one or more
participants as its agent.
7. • Section 4: DP is an agent of the Depository: A DP is an agent of the
depository, who provides various services of the depository to investors.
The DP has to enter into an agreement with the depository to this effect.
Any investor who would like to avail the services of a depository has to
enter into an agreement with any DP of his choice. The DP will then
make the depository services available to the investor.
• Section 7: Free Transferability : The securities held by an investor in the
depository are freely transferable from one beneficial owner to another.
• Section 8: Option to hold securities in demat form : In the depository
system, every investor subscribing to securities offered by an issuer has
an option to receive the same in physical form or dematerialised form. If
an investor opts for receiving the securities in dematerialised form, the
issuer intimates the depository the details of allotment of security. On
receipt of this information, the depository enters the name of the allottee
as the beneficial owner of that security in its record.
8. • Section 9: Securities held in a depository are fungible : All securities
held by the depository are in dematerialised and fungible form.
• Section 10: Registered Owner and Beneficial Owner : The depository is
deemed to be the registered owner for the purpose of effecting transfer of
ownership of security on behalf of a beneficial owner. But as a registered
owner, it does not have any voting rights or any other rights in respect of
those securities. The beneficial owner is entitled to all rights and benefits
as well as subject to all liabilities in respect of his securities held in the
depository.
depository.
• Section 14: Option to opt out of depository : A beneficial owner may opt
out of a depository in respect of any security by requisite intimation to
the depository.
• Section 16: Depository to indemnify losses : A depository shall
indemnify a beneficial owner, any loss caused due to negligence of the
depository or its participant.
9. Chapter IV Deals with Enquiry and Inspection
• 18. Power of Board to call for information and enquiry.
• 19. Power of Board to give directions in certain cases.
– 19A. Penalty for failure to furnish information, return, etc.
– 19B. Penalty for failure to enter into an agreement
– 19C. Penalty for failure to redress investors’ grievances
– 19D. Penalty for delay in dematerialisation or issue of certificate of
securities
– 19E. Penalty for failure to reconcile records
– 19F. Penalty for failure to comply with directions issued by Board
– 19F. Penalty for failure to comply with directions issued by Board
under section 19 of the Act.
– 19G. Penalty for contravention where no separate penalty has been
provided
– 19H. Power to adjudicate
– 19-I. Factors to be taken into account by adjudicating officer
• 19-IA. Settlement of Administrative and Civil Proceedings
• 19-IB. Recovery of amounts
– 19J. Crediting sums realised by way of penalties to Consolidated Fund
of India.
10. • Chapter V Deals with Penalties
• Section 20: Offences: (1) if any person contravenes or attempts to
contravene or abets the contravention of the provisions of this Act or of
any rules or regulations or bye-laws made thereunder, he shall be
punishable with imprisonment for a term which may extend to ten years,
or with fine, which may extend to twenty-five crore rupees, or with both.
• (2) If any person fails to pay the penalty imposed by the adjudicating
officer or fails to comply with any of his directions or orders, he shall be
punishable with imprisonment for a term which shall not be less than one
month but which may extend to ten years, or with fine, which may extend
to twenty-five crore rupees, or with both.
to twenty-five crore rupees, or with both.
• 21. Offences by companies.—(1) Where an offence under this Act has
been committed by a company, every person who at the time the offence
was committed was in charge of, and was responsible to, the company
for the conduct of the business of the company, as well as the company,
shall be deemed to be guilty of the offence and shall be liable to be
proceeded against and punished accordingly .
• Chapter VI Deals with Miscellaneous.
11. SEBI Depositories and Participants Regulations, 1996
Registration of Depository
3
• Application for grant of certificate of registration
4
• Application to conform to the requirements
5
• Furnishing of information, clarification and personal representation
• Consideration of application for grant of certificate of registration
6
• Consideration of application for grant of certificate of registration
6A
• Requirement of fit and proper
7
• Grant of certificate of registration
8
• Payment of annual fee (₹ 1 Crore) [₹ 15,000 for Participant]
12. Code of Conduct for Participants
• 1. A participant shall make all efforts to protect the interests of investors.
• 2. A participant shall always endeavour to—
– (a) render the best possible advice to the clients having regard to the clients needs and the environments and his own
professional skills;
– grievances of investors are redressed without any delay
• 3. A participant shall maintain high standards of integrity in all its dealings with its clients and other intermediaries,
in the conduct of its business.
• 4. A participant shall be prompt and diligent in opening of a beneficial owner account, dispatch of the
dematerialisation request form, rematerialisation request form and execution of debit instruction slip and in all
the other activities undertaken by him on behalf of the beneficial owners.
• 5. A participant shall endeavour to resolve all the complaints against it or in respect of the activities carried out
by it as quickly as possible, and not later than one month of receipt.
• 6. A participant shall not increase charges/fees for the services rendered without proper advance notice to the
• 6. A participant shall not increase charges/fees for the services rendered without proper advance notice to the
beneficial owners.
• 7. A participant shall not indulge in any unfair competition, which is likely to harm the interests of other
participants or investors or is likely to place such other participants in a disadvantageous position while
competing for or executing any assignment.
• 8. A participant shall not make any exaggerated statement whether oral or written to the clients either about its
qualifications or capability to render certain services or about its achievements in regard to services rendered to
other clients.
• 9. A participant shall not divulge to other clients, press or any other person any information about its clients
which has come to its knowledge except with the approval/authorisation of the clients or when it is required to
disclose the information under the requirements of any Act, Rules or Regulations.
• 10. A participant shall co-operate with the Board as and when required.
• A participant shall ensure that the Board is promptly informed about any action, legal proceedings, etc., initiated
against it in respect of material breach or non-compliance by it, of any law, Rules, regulations, directions of the
Board or of any other regulatory body. Etc.
13. Types of Depositories in India
• Presently there are two Depositories working in India:
• 1. National Securities Depository Limited (NSDL)
• NSDL was formed and registered under the Companies’ Act 1956 during
December 1995 and commenced operations during november1996.
• NSDL was promoted by Industrial Development Bank of India (IDBI)-the
largest development bank in India, Unit trust of India (UTI)-the largest
mutual fund in India and National stock exchange (NSE)- the largest
stock exchange in India.
• Some of the prominent banks in the country also have a stake in NSDL.
• 2. CDSL Central Depository Services (India) Limited
• Central Depository services (India) limited which commenced operations
during February 1999.
• CSDL was promoted by Stock Exchange, Mumbai in association with
Bank of Baroda, Bank of India, State Bank of India and HDFC Bank.
14. • DP : DP is an agent of the depository and functions as the interacting
medium between the depository and the investor
• He should be registered with the SEBI
• Must possess requisite qualifications prescribed by the concerned
depository of which he is a participant
• He is responsible for maintaining the investors’ securities a/c with
the depository and handles them as per the investors written
instructions
• He is linked to a broker who trades on behalf of investors
• He is linked to a broker who trades on behalf of investors
• To avail their services an account similar to a bank a/c has to be
opened with the DP
• As per SEBI Regulations , financial institutions, banks, custodians,
stock brokers etc can become DP’s
• However investors may choose DP’s of their choice and also deal
with 1 or more DP;s at a time
15. Dematerialization
• Dematerialization is the process of conversion of shares or
other securities held in physical form into electronic form.
• Dematerialisation: Introduced in India through the enactment
of the Depositories Act, 1996
• It is not mandatory
• One may keep its holding partly in physical form and partly in
• One may keep its holding partly in physical form and partly in
Demat form
• A select list of securities announced by SEBI can be delivered
only in demat form in the stock exchanges connected to
NSDL/CDSL
16.
17.
18. Rematerialization
• The process of getting the securities in an electronic form, converted back into
the physical form is known as Rematerialisation. An investor can rematerialize
his shares by filling in a Remat Request Form (RRF).
Rematerialization Process
19. International Securities Identification Number (ISIN)
• An arrangement of characters and numbers representing a
particular security listed on an exchange or otherwise traded
publicly.
20. • The ISIN standard is used worldwide to identify specific securities such as
bonds, stocks (common and preferred), futures, warrant, rights, trusts,
commercial paper and options.
• ISINs are assigned to securities to facilitate unambiguous clearing and
settlement procedures. They are composed of a 12-digit alphanumeric code
and act to unify different ticker symbols “which can vary by exchange and
currency” for the same security. In the United States, ISINs are extended
versions of 9-character CUSIP (Committee on Uniform Security
Identification Procedures) numbers; ISINs can be formed by adding a
country code and check digit to the beginning and end of a CUSIP,
respectively.
respectively.
Issuer Type (the Third Character)
Issuer Type Code Allotted
Central Govt. A
State Govt. B
Municipal Corporation C
Union Territories D
Company, Statutory Corporation, Banking Company E
Mutual Funds including UTI F
21. • Security Type (the Eight and Ninth Characters)
Security Type Code Security Type Code
Equity Shares 1 Certificates of Deposits 10
Postal Savings Scheme 2 Securitized Instruments 11
Preference Shares 3 Debentures 12
Bonds 4 Units 13
Deep Discount Bonds 5 Government Securities 14
Floating Rate Bonds 6 Warrants 15
Commercial Papers 7 Commodities 16
• Example: Infosys
• BSE: 500209 | NSE: INFY | ISIN: INE009A01021
• In this IN stands for India (HO of the company), E for Issuers type, eight
and ninth character indicates 01- type of security, rest are the alpha
numeric identifier and the final single acts as check digit.
Commercial Papers 7 Commodities 16
Step Discount Bonds 8 RBI Relief Bonds (Incl. NSC VII Issue 17
Regular Return Bonds 9
22. Settlement of Off Market Transactions
• An off-market transaction is settled between two parties on mutually
agreed terms and the clearing corporation or the stock exchange is not
involved. These include legacy transfers, gifts, transfer of shares between
two demat accounts, shifting of securities between a client and a sub-
broker, and transactions in unlisted securities. One party is the transferor,
while the other is the transferee.
23. • The selling client will have to give a delivery instruction to his DP
to transfer securities from his depository account to the buying
client's depository account.
• To receive securities from the selling client's depository account,
the buying client must give a receipt instruction if he has not
already given a standing receipt instruction to his DP.
• The details in the "delivery" and "receipt" instructions must match
else the transfer will not take place. The transfer will take place on
else the transfer will not take place. The transfer will take place on
the "execution date" indicated in the instructions. If the buying
client has given a standing receipt instruction, this may be ignored.
• The payment aspect is handled outside the NSDL environment
between the selling and buying clients
24. Insider Trading
• Insider trading involves trading in a public company's stock by
someone who has non-public, material information about that stock for
any reason. Insider trading can be either illegal or legal depending on
when the insider makes the trade.
• "The buying or selling a security, in breach of a fiduciary (trust) duty
or other relationship of trust and confidence, on the basis of material,
nonpublic information about the security."
• Insider trading is the buying or selling of a publicly traded company's
• Insider trading is the buying or selling of a publicly traded company's
stock by someone who has non-public, material information about that
stock
• Material nonpublic information is any information that could
substantially impact an investor's decision to buy or sell the security
that has not been made available to the public.
• This form of insider trading is illegal and comes with stern penalties
including both potential fines and jail time.
25. Legal Framework for Investor Protection in India
• The SEBI has issued and published detailed guidelines on rights and responsibilities of
investors and also various aspects of capital market dealings and operations. It enables
the investors to be aware of their rights and responsibilities.
• SEBI has also formed a separate investors grievances and guidance division at its head
office.
• An automated complaint handling system has been introduced to deal with all types of
investors’ complaints.
• The disclosure norms for public issues have been made more stringent and to simply the
issue process and abridged prospectus has been permitted.
• The promoter’s contribution for each public issue has been fixed by SEBI. The minimum
contribution should be 20% of the total issue of the shares.
• All risk factors involved in an issue should be disclosed prominently in the prospectus so
that an investor can evaluate that issue before taking any investment decision.
• To avoid all malpractices connected with allotment of shares a representative of the SEBI
supervises the allotment process. He must be present at the time of finalisation of the
basis of allotment.
• It has been made mandatory for the brokers to disclose the transaction price as well as
their brokerage in the contract notes issued by them to their clients.
• To prevent the fraudulent practices in physical handling of shares, dematerialisation has
been introduced.
26. Internet Initiatives at Depository services
Initiatives taken by NSDL
• 1. NSDL Speede
• With mobile being omnipresent in today’s life, NSDL has developed a Mobile App named ‘NSDL Speede’ for
investors.
– You may use NSDL Speede App to -
– View balances in your NSDL demat account anytime, anywhere.
– Give confirmation of e-DIS.
– Participate in e-Voting.
– Register for IDeAS.
• 2. IDeAS
• 2. IDeAS
• IDeAS (Internet-based Demat Account Statement) is the facility for viewing balances and transactions in the demat
account updated on an online basis with a delay of maximum 30 minutes. This facility is available to the Users
of SPEED-e, Clearing Members who have subscribed to IDeAS and to those clients whose Participants are
registered for IDeAS.
• 3. e-Voting
• e-Voting is voting through an electronic system on resolutions of company requiring members/shareholder’s
consent. The need for e-Voting arises when a company wishes to pass a resolution by Postal Ballot or Annual
General Meeting or Extraordinary General Meeting.
• Ministry of Corporate Affairs, Government of India has authorized NSDL for setting up an electronic platform to
facilitate members / shareholders to cast vote in electronic form. e-Voting system created by NSDL is certified by
Standardization Testing and Quality Certification (STQC) Directorate, Department of Information Technology,
Ministry of Communications & IT, Government of India.
27. • Who can use e-Voting facility?Any company which wants to facilitate e-Voting
can use NSDL’s e-Voting system. This system is available for all the
shareholders including those holding shares in demat form with NSDL or other
depository and also those shareholders holding shares in physical form.
• 4. NSDL Demat Gateway e-DIS (Electronic Delivery Instruction Slip)
• e-Delivery Instruction Slip facility is an integration between the brokers and
NSDL Demat Gateway which facilitates Clients to provide mandate/consent to
debit and transfer securities from their demat accounts towards the obligation at
exchange(s) arising out of trades. Using this facility, demat account holders can
fulfil their pay-in obligations without having the need to submit Power of
Attorney to their stock broker.
• 5. STeADY
• 5. STeADY
• STEADY is a facility which enables the brokers to deliver/submit contract notes
to custodians/ fund managers electronically by transmitting digitally signed
trade information with encryption. It further enables fund managers to enrich
the contract note and convert it into instructions for the custodian.
• Why STEADY?
• Introduction of on line trading and the removal of inefficiency in settlement
process through the depository system are the most significant changes that
have changed the face of Indian Capital Markets.
28. Initiatives taken by CDSL
• At present, client’s authorization to debit its Demat account can be given
in any one of the following ways:
• a) Power of Attorney (POA)
• b) Delivery Instruction Slip (DIS)
• c) Electronic Instruction Platforms of Depository (easiest)
• d) Electronic Instruction Platforms of Stock Brokers / Depository
Participants (DPs) (eDIS)
Participants (DPs) (eDIS)
• Currently, CDSL has set up an electronic instruction platform. Beneficial
Owners (Bos) or their POA holders can submit electronic instructions on
the electronic instruction platform of the depository. CDSL has a facility
called easiest. This facility is available on the internet in CDSL website
as well as on CDSL mobile app called myeasi. These platforms allow
electronic instructions to be given by a client anytime, anywhere.
29. Credit Rating
• Meaning
• Rating is the process by which an alphabetic or numerical rating is
assigned to a credit facility extended by a bank to a borrower based on a
detailed analysis of his character and matching it with the characteristics
of facility that is extended to him.
• A credit rating is an evaluation of the credit risk of a prospective debtor,
predicting their ability to pay back the debt, and an implicit forecast of the
likelihood of the debtor defaulting.
• The term credit rating refers to a quantified assessment of a
borrower's creditworthiness in general terms or with respect to a
borrower's creditworthiness in general terms or with respect to a
particular debt or financial obligation. A credit rating can be assigned to
any entity that seeks to borrow money—an individual, a corporation, a
state or provincial authority, or a sovereign government.
• Credit ratings determine whether a borrower is approved for credit as well
as the interest rate at which it will be repaid.
• A credit rating or score is assigned to any entity that wants to borrow
money—an individual, a corporation, a state or provincial authority, or a
sovereign government.
30. How Credit Rating and Credit Scores are Different?
• Sometimes, the terms credit score and credit rating are used
interchangeably, but they are not the same thing.
• As mentioned above, a credit rating is used to determine the
creditworthiness of a business or a company rather than individuals. This
essentially means the probability of them defaulting on payments. The
rating is usually shown as a series of alphabetical symbols, and it is
calculated using corporate financial instruments.
calculated using corporate financial instruments.
• Credit rating agencies typically assign letter grades to indicate ratings.
• However, a credit score is a number, usually between 300 and 900, that is
given to individuals to rate their creditworthiness. It is calculated by
credit bureaus based on the person’s credit information report, and plays
a role in determining whether or not they are approved for loans and
credit cards.
• Reported as a number, generally ranging from 300 to 900
31. Necessity of Credit Rating
• For understanding the credit worthiness of companies
• For approving loan
• To determine interest rate at which the loan will be repaid.
• A borrower's credit rating should play a role in determining which
lenders to apply to for a loan.
• Credit ratings also play a large role in a potential investor’s decision
as to whether or not to purchase bonds.
as to whether or not to purchase bonds.
• Credit ratings are never static, which means borrowers must remain
diligent in maintaining a high credit rating. They change all the time
based on the newest data, and one negative debt will bring down
even the best score.
• Provide superior information to the investors at a low cost
• Provide a sound basis for proper risk-return structure
32. Methodology of Credit Rating
• The process of credit rating begins with the prospective issuer
approaching the rating agency for evaluation.
• The experts in analyzing banks should be given a free hand and
they will collect data and informant and will investigate the
business strength and weaknesses in detail.
• The entire process of rating stands on the for of confidentiality and
hence even the most confidential business strategies, marketing
plans, future outlook etc., are revealed to the steam of analysis.
• The rating is based on the investigation analysis, study and
interpretation of various factors.
• The key factors generally considered are listed as follows:
33. • 1. Business Analysis or Company Analysis
– Industry risk: Nature and basis of competition, key success factors; demand supply
position; structure of industry; government policies, etc.
– Market position of the company within the Industry: Market share; competitive
advantages, product and customer diversity etc.
– Operating efficiency of the company: Locational advantages; labor relationships;
cost structure etc.
– Legal Position: Terms of prospectus; trustees and responsibilities;
• 2. Economic Analysis
– Industry analysis, growth rate, GDP, interest rate, national income etc.
• 3. Financial Analysis
• 3. Financial Analysis
– Accounting Quality: Overstatement/under statement of profits; auditors
qualification; methods of income recognition’s inventory valuation and depreciation
policies, off balance sheet liabilities etc.
– Earnings Protection: Sources of future earnings growth; profitability ratios;
earnings in relation to fixed income changes.
– Adequacy of cash flows: In relation to dept and fixed and working capital needs;
variability of future cash flows; capital spending flexibility working capital
management etc.
– Financial Flexibility: Alternative financing plans in ties of stress; ability to raise
funds asset redeployment.
34. • 4. Management Evaluation
– Track record of the management planning and control system, depth of
managerial talent, succession plans.
– Evaluation of capacity to overcome adverse situations
– Goals, philosophy and strategies.
• 5. Geographical Analysis
– Location advantages and disadvantages
– Backward area benefit to the company/division/unit
• 6. Fundamental Analysis
• Fundamental analysis is essential for the assessment of finance companies. This
• Fundamental analysis is essential for the assessment of finance companies. This
includes an analysis of liquidity management, profitability and financial position
and interest and tax sensitivity of the company.
– Liquidity Management: Capital structure;
– Asset Quality: Quality of the company’s credit-risk management; system for
monitoring credit etc.
– Profitability and financial position: Historic profits, spread on fund
deployment revenue on non-fund based services accretion to reserves etc.
35. Credit Agencies in India
• Credit ratings are evaluated by credit agencies. In India, credit rating agencies are regulated by the SEBI
(Credit Rating Agencies) Regulations, 1999, part of the Securities and Exchange Board of India Act, 1992.
• Some of the top credit rating agencies in India are:
• 1. Credit Rating Information Services of India Limited (CRISIL)
• This was one of the first credit rating agencies in India, established in 1987. It rates companies, banks, and
organizations using their strengths, market share, market reputation board, etc. The company also operates in
the USA, UK, Hong Kong, Poland, Argentina and China and offers 8 types of credit ratings ranging from
AAA – D.
• 2. Investment Information and Credit Rating Agency of India (ICRA) Limited
• Established in 1991, ICRA offers comprehensive ratings to corporates for a variety of situations, such as
bank loans, corporate debt, mutual funds, and more.
• 3. Credit Analysis and Research Limited (CARE)
• From April 1993, CARE has been offering a range of credit rating services. These include areas like debt,
bank loans, corporate governance, recovery, financial sector and more. Their rating scale also includes two
categories – long term debt instruments and short-term debt ratings.
• 4. India Rating and Research Private Limited
• Known formerly as Fitch Ratings India Pvt. Ltd., this company offers credit ratings to evaluate the
credibility of corporate issuers, financial institutions, project finance companies, managed funds, urban local
bodies, etc.
• 5. Acuité Ratings & Research
• Formerly Small Medium Enterprises Rating Agency of India Limited or (SMERA Ratings Ltd.) this
credit rating agency was established in 2011. It has two divisions – SME Ratings and Bond Ratings, and also
offers 8 formats of credit rating ranging from AAA – D.
• 6. Brickwork Ratings India Private Limited
• This credit rating agency rates bank loans, municipal corporations, real estate investments, NGOs, capital
market instruments, SMEs, etc.
36. Formats of Credit Ratings/Scores
• For Corporate
• For Individuals
• 750 and Above -Excellent
• 700 to 749 -Good
• 650 to 699 -Fair
• 550 to 649 -Poor
• 550 & Below -Bad