Before the IPO, the rating of the IPO is mandatory. Other than that, are there any other ratings that are mandatory for the company?
There are several kinds of ratings. IPO rating is a very small part of the business. First of all, any borrowing programs for bonds and debentures, which is for public issue has to be compulsorily rated.
Company, of course, is rated. But the debenture issue, bond issue, public issue and not the private placements have to be rated compulsorily.
All debentures and bonds that are placed in the market for public issue or if it is already listed, have to be rated compulsorily. All commercial papers have to be rated compulsorily. Then mutual funds, as part of the prudential norms, their instruments have to be rated. As per BASEL 2 norms, which the central bank has now stipulated, all companies, both with limit of fund based, non-fund based all taken together from the banking system as a whole, exceeding Rs 5 crore have to be rated.
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| P K Choudhury Vice-Chairman and Group CEO, ICRA |
When you say rating, what exactly does it mean?
It’s more on debt servicing capability. It is just financial. A person is borrowing an amount. It is just that, with what degree of certainty can he/she pay it back . It measures the probability of default. And everybody can default. There are circumstances beyond everybody’s control and they can ultimately default. But the probability of default can be high or low. So, basically, it measures risk. If somebody is investing or lending money, how risky it is to invest or to lend to that company? If somebody is AAA, that is highest ranking, then even that (AAA) can default but only in the extreme adverse circumstances. So, it is degree of measuring probability of default.
Is it possible that a company could get rated differently by different rating agencies?
Yes. This is because rating is both objective and subjective assessment. For example, management quality is a matter of perception but not necessarily it is identical for two different rating agencies. There could be differences. There are other issues which are subjective issues. For example, the future prospect of the industry. Let us say, steel industry. Different agencies can have different perspective on steel industry. Some may be having the conservative view of the steel industry and some may be having the liberal view of the industry.
Or exports-oriented companies, for example. Somebody may think that the prospects of export destination, that is where the company is exporting may go up and somebody may have the view that it is going to stagnate. So there are subjective issues involved. There are marginal differences here and there. This usually do not go beyond one notch. If somebody gives B+ in one case then it can be BBB in other case. If somebody gives A+ in one case then it can be AAA in other case. So one notch, up and down, does happen.
How do small businesses decide on which rating agency to choose?
There are three issues. One is the reputation. Second is the process. Check up with them that how long does it take, what all processes are there. So if it very rigorous and proper process then it will be more reliable sort of ratings. Take into consideration all the positive and negative facts into much detail. Third is the vicinity factor for small companies. If the office is nearby to rating agency, then it is an advantage.
Once the rating is done, do I need to renew it or re-rate it?
It is subject to subject. If you have borrowed from the market for five years, for entire five year period, you will be constantly under surveillance. We will keep the watch on the company, any change in the circumstances will be reported. Also, one is under surveillance till the amount is offset.
How much does it cost to get rated?
Normally, it is the percentage of the size of the borrowing. The percentage is 0.01% with a minimum and a maximum limit on fees. So for 5 crore, I think it is Rs 75,000. For subsequent monitoring those are lower. These can be annual payments.
What should I be aware of to get a good rating?
There is no such thing as good rating. There is fair rating and not fair rating. It will be a fair on your business and what you are operating in. That are you efficient enough or not. A good business, a good management, good finance, good governance matter.
Other than financial instruments what all get rated?
We have started something called corporate governance rating, which has nothing to do with financial performance. We have another service called corporate governance – stakeholder value and governance. There we test that is the company is creating enough value for all the stake holders and how equitable is the distribution and also the corporate governance.
We have some other products – grading products. Which are more on performance side and not on financial side. For example, we grade construction entities on the basis of construction quality, what is their construction track record in the past and so on. Then we do gradings like of training schools. That how good or bad they are. Then we grade parallel marketers of LPG, kerosene that how good and bad they are.
We grade health care sector, that is for hospitals. That how is the health care delivery system, how proper, how efficient they are. Also we test ethical standards because insurance companies might be interested in that. So we grade them on that.
Coming back to the loan part of it, to get a better interest rate or to qualify for a loan, is there a need for rating?
Ultimately, it may end-up in being that. What happens is banks are required to allocate certain capital. But for the purpose of capital allocation, earlier system was that 8.33% of entire lending is required to be allocated which has changed now. BASEL 2 says that, link it to the risk, give certain risk weightage and risk weightage has to be based on ratings. So if you are AAA, your risk is lower, so capital allocation will be lower. If you are BBB, let us say, then the risk is much higher, so capital allocation will be much higher. So the linkage of risk or risk weightage with capital allocation is BASEL 2. So, as a result, higher you are rated, lower is the capital allocation by the bank. So, as a result, bank will get a capital release consequently on higher rating and bank will pass on that in terms of lower interest rate and not necessarily the value.
Suppose somebody gets a fair rating which is lower than what he has expected, that is non investment grade?
Very large number get non-investment grade. Either they accept it and inform the bank or you don’t accept that. The fact is a fact. If you have failed in exam, study more and work harder. That’s the only solution.
What are some of the major problems?
Major problem we encounter in India is that the delay earlier was never taken seriously by businessmen in India. It should have been taken seriously. If a loan has to be repaid on 5th of March and you pay on 7th of March, then that is a 2 day delay. Banks generally doesn’t bother and accept that. But that’s a delay. So the rating goes down. And people are surprised with this act of downgrading.
We want the culture of timely payments in the country. Most people get the non investment grade because of this culture. They don’t have the discipline. The credit discipline unfortunately was never taken seriously. Now consequently ratings get affected and businessmen knows. Also, no social considerations are taken into account. The fact is that you have delayed.
How serious is a 2 day delay?
This depends. You cannot measure like this minus1 or this minus2. There are other issues. Even that goes with the management culture. If the management speaks like that, then that itself is a negative point.
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