CU-MBA-SEM-III-Management of Financial Services-Second draft (1)

2. Explain briefly difference between Leasing and Hire Purchase 151 3. Describe briefly about Leasing Industry in India 4. Explain briefly about Finance Lease 5. Explain briefly about problems of Leasing Industry Long Questions 1. Define leasing. Explain the different kinds of leasing. 2. Discuss the advantages and disadvantages of leasing. 3. Discuss the superiority of lease finance over other alternatives. 4. Discuss the status of income tax and sales tax in context of leasing in India. 5. Define hire purchase. Discuss its features. B. Multi Choice Questions 1. When the lessor receives payment, the credits— a. Lessee account b. Royalty account c. Short workings account d. Savings Account 2. Royalty earned by the lessee is credited to— a. Sub-lessee account b. Profit and loss account c. Current account d. Royalty receivable account 3. The balance of royalty payable account is transferred to a. Profit and loss account b. Current account c. Royalty receivable account d. Royalty suspense account 4. The balance of royalty’s receivable account is transferred to — CU IDOL SELF LEARNING MATERIAL (SLM)

a. Profit and loss account b. Production account c. Royalty receivable account d. Royalty suspense account 5. Tripartite Lease agreement between a. supplier, lessor & lessee b. Seller, Lessee & buyer c. Lessee, lessor & tenet d. Supplier & Lessee Answers 1 – a, 2 – d, 3 – c, 4 – b, 5 – a, 12.13 REFERENCES Text Books:  Bhole, L.M., Financial Institutions & Markets. Tata McGraw Hill, New Delhi  Khan, M.Y.Financial Services Tata McGraw Hill, New Delhi  Meir, Kohn, Financial Institutions & Markets, Tata McGraw Hill, New Delhi  Prasanna Chandra: Financial Management, Tata McGraw Hill. Reference Books:  Kothari, C.R., Investment Banking & Customer Services Arihant Publishers, Jaipur  Pandey, I.M., Financial Management, Vikas Publishing House, New Delhi. 152 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT 13 - DEBT SECURITIZATION Structure 13.0 Learning Objective 13.1 Introduction 13.2 Concept 13.3 Securitization Vs Factoring 13.4 Type of securities 13.5 Benefits 13.6 Securable Assets 13.7 Modus Operandi (Operational Mechanics) 13.8 Summary 13.9 Keywords 13.10 Learning Activity 13.11 Unit End Questions 13.12 References 13.0 LEARNING OBJECTIVES After studying this unit, you will be able to:  Describe nature of Debt Securitization  Identify scope of Debt Securitization  Benefits of Debt Securitization  Process involved in Debt Securitization 13.1 INTRODUCTION The global financial system is undergoing a significant transformation. As a result, the stock market, money market, and debt market are all expanding and becoming more complex. It's worth remembering that the debt market is seeing the introduction of new instruments and goods. In fact, the output of a capital market is boosted by the growth of a debt market. The debt market will rise naturally in tandem with the stock market once more. As a consequence, a debt market would logically comprise both primary and secondary markets. Debt or asset securitization plays an important role in this regard, and it is one of the most innovative debt market strategies for achieving the aforementioned target. Furthermore, the debt market has 153 CU IDOL SELF LEARNING MATERIAL (SLM)

provided more fuel for capital accumulation than the stock market in economically advanced countries. 13.2 CONCEPT OF SECURITISATION Securitization of debt or asset refers to the method of issuing marketable securities against illiquid and long-term assets such as loans and receivables held by financial institutions. In other words, it is a method of converting a long-term, non-negotiable, and high-value financial asset such as an employ purchase into small-value securities that can be traded in the market like bonds. As a result, it is nothing more than the method of removing long-term assets from a lending financial institution's balance sheet and replacing them with liquid cash through the issuance of securities against them. A financial institution pools its illiquid, non-negotiable, and long- term assets, generates securities against them, has them classified, and sells them to investors through securitisation. In the sense that assets are converted into securities, securities are converted into cash, cash is converted into assets, and assets are converted into securities, and so on, it is a continuous operation. Banks and other financial institutions typically treat credit extended in the form of bill buying, discounting, or employ purchase funding as an asset on their balance sheets. Some of these investments are long-term in nature, implying that funds are kept for an excessively long time. As a result, in order to keep their lending operations running smoothly, they must rely on a variety of other sources of funding, which are not only expensive but also difficult to come by. They must once again bear the risk of unpaid credit. For them, securitisation is now a ready-made solution. Securitization allows them to recycle funds at a lower cost and with less chance of default. To put it another way, securitisation helps financial institutions eliminate these assets from their balance sheets by creating liquidity through tradable financial instruments. Securitization is a boon to financial institutions from another perspective as well. In terms of risk control, lending financial institutions must bear the entire collateral risk by retaining outstanding credit in their own portfolio. Risk diversification is possible with securitization. It's important to remember that the whole securitization transaction takes place on the asset side of the Balance Sheet. That is, an illiquid asset is transformed into a liquid asset (cash). As previously mentioned, securitization aids in the liquidity of assets such as medium and long-term loans and financial institution receivables. The following is a description of securitization: “A well-structured procedure for packaging, underwriting, and selling loans and other receivables as asset-backed securities.” 154 CU IDOL SELF LEARNING MATERIAL (SLM)

Yet another simple definition is as follows: “Securitization is nothing but liquifying assets comprising loans and receivables of an institution through systematic issuance of financial instruments”. According to Henderson, J. and Scott, J.P. “Securitisation is the process which takes when a lending institution’s assets are removed in one way or another from the balance sheet of that lending institution and are funded instead, by the investors who purchase a negotiable financial instrument evidencing this indebtedness without recourse, or in some cases with limited recourse, to the original lender”. Thus, financial assets can be made liquid through securitisation i.e., through packaging loans and selling them in the market. It is very clear from the above definitions that securitisation is nothing but the packaging of a pool of financial assets into marketable securities. In brief, illiquid assets are converted into tradable securities. Structured Securities Vs. Conventional Securities Securitization is a form of organised financial transaction. It involves the development of genuinely structured securities by issuing securities against illiquid assets. This is due to the fact that they are backed by both the value of the underlying financial asset and third-party credit support. Structured securities should not be confused with conventional securities such as bonds and debentures at this time. They can be distinguished by the following characteristics: (1) Source of repayment: The issuing company's earning power and cash flow serve as the primary source of repayment in the case of conventional securities. The issuing company, on the other hand, is free of this issue because the risk of redemption is allocated to a pool of assets or a third party in the case of securitization. (2) Structure: Securitisation securities can be structured to achieve a desired level of risk and ranking depending on the type and amount of assets pooled. In the case of traditional securities, such an option is not available. (3) Structured securities are, in essence, derivatives of traditional debt instruments. Of course, the creditworthiness of these securities is backed by a pool of cash, a guarantee, or both. 13.3 SECURITISATION VS. FACTORING The terms ‘securitisation' and ‘factoring' should not be confused at this stage. It's crucial to understand the differences between them since they both deal with capital, such as book debts and receivables. The following are the main differences: I Factoring is primarily associated with manufacturing and trading firms' assets (book debts and receivables), while securitization is primarily associated with financial firms' assets. (ii) Client trade debts and receivables are the main focus of factoring. Securitization, on the other hand, is concerned with loans and the receivables that derive from them, such as hire- 155 CU IDOL SELF LEARNING MATERIAL (SLM)

purchase financing receivables, government department receivables, and so on. (iii) In the case of factoring, the trade debts and receivables in question are short term, while they are medium or long term in the case of securitization. (iv) The question of issuing securities against book debts does not arise in the case of factoring, despite the fact that it is the very basis of securitisation. (v) In securitisation, the factor assumes responsibility for the \"collection work,\" which can be handled by the originator or a separate servicing body. (vi) Factoring entails the factor taking on all of the credit risk. The originator, on the other hand, may bear a portion of the credit risk by selling assets at a discount under securitisation. 13.4 TYPES OF SECURITIES Securitisation is a structured arrangement in which the originator transfers or sells some of its assets to a special purpose vehicle (SPV), which then divides the assets into smaller tradable securities that can be sold to the general public. The best framework for securitization is determined by a number of factors, including the nature of the assets securitized, the original borrowers' default experience, the amount of amortisation at maturity, the originator's financial credibility and soundness, and so on. The general principle is that the securities must be structured such that their maturity coincides with the securitized loans' maturity. However, as mentioned below, there are three essential types of securities: (i) Pass through and pay through Certificates (ii) Preferred stock certificates and (iii) Commercial papers based on assets. Pass through and pay through Certificates In the case of pass through certificates, payments to holders are based on cash flow from the assets backing the certificates. In other words, the SPV collects cash (principal and interest) from the initial creditor and distributes it to certificate holders on a regular basis, with the entire principal returned when the pool's assets are retired. As a consequence, pass through certificates have a single maturity form and a length that matches the existence of the securitized estate. Pay by certificates, on the other hand, have a multiple maturity structure that is dependent on the underlying assets' maturity pattern. As a result, two or three different types of securities can be issued, each with a different maturity pattern, such as short, medium, and long term. The biggest advantage is that they can be published in response to investor demand for different maturity patterns. The yield is often built into the price of the securities, i.e., they 156 CU IDOL SELF LEARNING MATERIAL (SLM)

are sold at a discount to face value, as in deep-discount bonds, making this category more attractive to investors. Certificates in preferred stock: Preferred stocks are debt instruments issued by a subsidiary corporation against the parent company's trade debts and customer receivables. In other terms, subsidiary companies purchase parent companies' trade debts and receivables, turn them into short-term securities, and assist the parent companies in obtaining liquidity. As a result, trade debts may be securitized by issuing preferred stock. These stocks are generally backed by assurances from well-regarded merchant banks, making them appealing to investors. These instruments are often used for a limited period of time. Commercial Papers with Assets: This structure is most commonly seen in mortgage-backed securities. This form of SPV purchases a portfolio of mortgages from a variety of sources (lending institutions) and groups them together based on interest rates, maturity dates, and underlying collaterals. They are then moved to a Trust, which then provides investors with mortgage-backed certificates. These certificates are short-term securities that are granted against the aggregate principal value of the mortgages. To the degree that his investments in the certificates allow it, each certificate holder is entitled to a share of the cash flow from the underlying mortgages. Other Types of Certificates: Apart from the above, there are also the following forms of certificates: (i) Certificates with a fixed rate of interest and (ii) Certificates given solely to the principal The interest income earned on the assets securitized is used to make payments to investors in Interest Only Certificates. Payments to investors are rendered purely by the repayment of principal by the original creditors in the case of principal only certificates. Since speculators are aware that interest rate movements have an immediate effect on bond prices, these certificates allow for risky trading. When interest rates decline, the value of principal only certificates, for example, increases. It's because paying off existing debts and taking out new loans at a lower interest rate is more cost-effective. For buyers, the advantages of early redemption of shares would be greater. Holders of interest-only certificates profit as interest rates increase because more interest is available from the underlying assets. Speculators have a lot of space to play with these certificates because it's difficult to predict future interest trends with certainty. As a result, securitization enables the development of ever-newer instruments to meet the changing needs of investors. Debt securitization offers the general public, as well as financial 157 CU IDOL SELF LEARNING MATERIAL (SLM)

intermediaries such as mutual funds and insurance firms, a diverse selection of investment instruments. 13.5 BENEFITS OF SECURITISATION Debt securitization benefits all parties involved, including the originator, investors, and regulatory authorities. The following are some of the most important advantages: i. Funding from a different source Securitisation provides an alternative source of funds by turning an otherwise illiquid asset into ready liquidity, which benefits the originator (i.e. the lending institution). As a consequence, the originator's cash flow has improved almost immediately. As a result, it serves as a source of liquidity. ii. Improved Profitability Securitization allows financial institutions to obtain liquid cash from medium and long-term assets right away rather than over time. It leads to increased fund recycling, which leads to increased market turnover and profitability. The cash flow could be recycled for higher- yielding assets once more. This translates to increased profitability. Furthermore, economies of scale can be realised because securitization allows for a more efficient use of existing capabilities by supplying liquid cash instantly. It leads to an increase in company turnover. The originator may serve as both the receiving and paying handler. If this is the case, it may receive extra revenue in the form of a maintenance charge. iii. Capital Adequacy Ratio Improvement Financial institutions can improve their capital adequacy ratio through reducing their asset volume by securitization. The financial institutions must pick a pool of assets to be sold or transferred to another institution named spy as part of the securitisation process. The assets are deducted from the originator's balance sheet until they have been passed. As a consequence, the asset volume is reduced, and the capital adequacy ratio rises. The capital adequacy ratio can also be strengthened by substituting lower-risk assets for loan assets. As a result, removing assets from the balance sheet as part of a true sale increases capital adequacy standards. iv. Credit Risk Spreading Securitization allows credit risk to be distributed among multiple parties participating in the securitization process. In the absence of securitisation, the originator must bear the entire 158 CU IDOL SELF LEARNING MATERIAL (SLM)

credit risk associated with a specific financial transaction. The originator may now spread the risk among the different parties involved in the securitisation process. As a result, securitization aids in the diversification of credit risks, which are more prevalent in medium and long term loans. As a result, it is used as a risk control tool. v. Lower Funding Costs Securitisation allows the originator to have direct access to the bond market, which improves cash flows and diversifies risk factors. Since asset-backed securities have a high credit rating, companies with low credit ratings may issue them at a lower interest rate. It is able to secure funds at a lower cost as a result of this. Furthermore, the requirements for selecting the asset pool ensure a low cost of funds. Securitisation offers a decent opportunity for cheap financing in the current environment of lack of funds and higher interest rates. v. Provision of a Variety of Instruments From the perspective of the lender, securitisation offers a variety of new investment tools to meet the diverse needs of the investing public. Some financial intermediaries, such as mutual funds, insurance firms, and pension funds, may use a variety of instruments. Giving them a variety of options. vii. A Higher Return On Investment Securitised securities offer a higher rate of return and more liquidity than conventional debt securities such as bonds and debentures. These instruments are more appealing since they are classified by reputable credit rating agencies. They have more security and a decent return because they are structured assets based securities. The originator's bankruptcy or winding up has no bearing on the outcome. Since the payment is assured by the spy, it has an effect on the investors. viii. Idle Capital Avoidance In the absence of securitisation, capital will sit idle in many lending institutions in the form of illiquid assets such as mortgages, term loans, and so on. Securitisation now assists in fund recycling by turning assets into liquidity, liquidity into assets, assets into liquidity, and so on, by issuing tradable and transferable securities against these assets. As a result, it stimulates capital accumulation. 159 CU IDOL SELF LEARNING MATERIAL (SLM)

ix. Instruments That Outperform Traditional Instruments Investors are given certificates that are backed by assets that have been securitized. The underlying assets are used not only as a form of collateral for the certificates, but also to produce income that is used to pay the investors' principal and interest. It does not necessitate any maintenance and therefore does not incur significant costs. It is superior to mutual fund units since it is issued with the backing of collateral assets, although mutual fund certificates do not have this backing. As structured asset backed securities, these instruments provide investors with greater security. From the investor's perspective, there is a lot of clarity. They can clearly see the collateral pool that a specific problem serves, and this clarity decreases risk ambiguity. x. Additional Advantages If done correctly, securitisation leads to greater productivity and cost effectiveness of both financing and lending. This is also a huge help to regulators, whose primary goal is to avoid capital accumulation where it isn't required. It is also helpful to the borrowers in the long run. They would be able to obtain funds at a lower cost since the originators are likely to pass the savings on to the final borrowers. There's no denying that securitization is a low-cost, creative funding source that ensures capital efficiency. 13.6 SECURABLE ASSETS As previously noted, not all assets are appropriate for securitization. Trade debts and receivables, for example, are not necessarily suitable for securitization but are readily accepted by a factor. They are only securitized under exceptional circumstance s. Financial institutions usually securitize the following assets: (i) Term loans to financially reputable companies (ii) Receivables from Government Departments and Companies (iii)Receivables from credit cards (iv) Hire-purchase loans, such as car loans (v) Lease Financing (vi) Mortgage Loans and Other Financial Instruments 160 CU IDOL SELF LEARNING MATERIAL (SLM)

13.7 MODUS OPERANDI (OPERATIONAL MECHANICS) The following parties are needed for the securitization's operational mechanics: (i) A Special Purpose Vehicle (SPV) or a trust (ii) The originator (iii) An investment banker or a trader (iv) A credit rating organisation (v) A receiving and paying agent for a servicing agent (RPA) (vi) The initial obligors or creditors (vii) Prospective investors, i.e., securities purchasers The following are the different stages involved in the securitisation process: (1) Stage/process of identification (2) Change the stage/process (3) Stage/Process of the issue (4) The stage/process of redemption (5) Credit Rating Process/Stage 1. The Process of Identification The 'originator' is the lending financial entity that chooses to securitize its assets, whether it is a bank or another form of institution. Commercial mortgages, lease receivables, hire purchase receivables, and other forms of receivables may be among the originator's properties. The originator must choose an asset pool that is homogeneous in terms of maturity, interest rates, repayment frequency, and marketability. The process of selecting a pool of loans and receivables for securitization from asset portfolios is known as the \"identification procedure.\" 2. The Transfer Procedure Following the asset recognition process, the selected pool of assets is “passed through” to another agency ready to assist the originator in turning the assets into securities. This organisation is known as a trust or a special purpose vehicle (spy). The pass-through deal between the originator and the spy may be in the form of an outright sale, in which the assets are entirely exchanged for a favourable consideration, or a collateralized loan. In the majority of cases, it is accomplished by an outright sale. The transfer process is the process of transferring assets from the originator's chosen pool to a spy, and once it is done, the assets are removed from the originator's balance sheet. 161 CU IDOL SELF LEARNING MATERIAL (SLM)

3. The Problem-Solving Process The spy takes on the daunting task of converting these properties into different forms and maturities after the transformation process is completed. On this basis, the spy issues securities to investors. The spy breaks down the package into smaller individual securities, which are then sold to the general public. The spy is reimbursed from the transaction proceeds. Pay through certificates, pass through certificates, interest only certificates, principal only certificates, and other terms are used to describe the spv's securities. The securities are structured in such a way that the securitized loans or receivables' maturities correspond with the securities' maturities. 4. The Redemption Procedure The spv's collections from securitised assets make redemption and interest payments on these securities more convenient. The originator is normally in charge of collecting dues, although a special servicing agent may be appointed. This organisation is paid a share of the commission for the collection services it provides. The servicing agent is responsible for collecting principal and interest payments on pooled assets on time, with an emphasis on delinquent accounts. In most instances, the originator and servicer are the same person. If the originator is designated as the spv's collection agent, his status under securitisation is reduced to that of the spv's collection agent. A pass through certificate may be \"with recourse\" to the originator or \"without recourse.\" It is common practise to do so \"without redress.\" As a result, the holder of a pass-through certificate must depend on the spy to pay his certificates' principal and interest. As a result, the primary function of the spy is to arrange the transaction, raise funds through the issuance of pass-through certificates, and prepare for interest and principal payments to the investors. 5. Credit Rating Methodology Since pass through certificates must be publicly issued, they must be given a credit rating from a reputable credit rating agency in order to become more appealing and widely accepted. As a result, on the eve of the securitization, these certificates are classified by at least one credit rating agency. External guarantor institutions, such as merchant bankers, may also guarantee the problems, enhancing the credit worthiness of the certificates and making them more appealing to investors. Of course, this ranking assurance gives the investor peace of mind in terms of the spv's prompt payment of principal and interest. Pass via certificates, like debentures, represent the direct ownership rights in the assets securitized, as well as the repayment schedule, interest rate, and other terms. These certificates are tradable in a secondary market until they mature, ensuring liquidity for investors. They are tradable in the market because they are negotiable securities. 162 CU IDOL SELF LEARNING MATERIAL (SLM)

6. Merchant bankers' Role In asset securitization, merchant or investment bankers may play a significant role. In most cases, they serve as a special-purpose vehicle. Securitisation involves a number of problems, including the timing of the issue of pass through certificates, the pricing of these certificates for marketing, and, most importantly, the underwriting of these issues. In a private placement, they serve as intermediaries between sellers and buyers on behalf of the issuer. They may also assist in the structuring of the problem to ensure that it complies with all applicable legal, regulatory, accounting, tax, and other requirements. Merchant bankers play an important role in many of these areas. The very fact that a problem has been underwritten by a well-known merchant banker lends credibility to the issue and makes it more appealing to investors. As a result, securitization broadens the scope of merchant bankers' activities. 7. Some Parties' Roles The initial creditors and prospective investors are the other players in the securitisation game. The term \"initial borrowers\" refers to those who have taken out a loan from the lending institution, also known as the \"originator.\" Obligors is another name for them. In reality, the original borrowers are crucial to the securitisation process' success. The securitisation process would be jeopardised if they fail to fulfil their obligations on time. In reality, the original borrowers' cash flow receipts are passed on to the investors. The public at large who are willing to buy the pass through certificates are the prospective buyers. 13.8 SUMMARY Asset securitization is the method of converting assets into bonds, which are then exchanged back into cash on a regular basis to maximise business turnover and profit. The technique allows for flexibility in yield, pricing pattern, issue risk, and instrument marketability, which is beneficial to both borrowers and lenders. Marketability of financial claims, limited distribution, homogeneity, and so on are all characteristics of securitization. Small investors profit from securitized financial instruments because they have liquidity. A business called a \"Special Purpose Vehicle\" connects the receivables originator and the end-investors. It also participates actively in the reinvestment or reshaping of cash flows produced by assets transferred to it. Since it usually requires less resources to fund than traditional on-balance-sheet funding, it increases return on capital. It also helps with capital raising when other sources of capital are unavailable, as well as credit risk reduction, and so on. Securitization is beneficial in a number of ways. It enables, for example, off-balance sheet financing. It also helps companies get access to low-cost credit markets. However, as a result of the 163 CU IDOL SELF LEARNING MATERIAL (SLM)

process, banks' importance in the financial intermediation process could diminish. It can also raise asset volatility by allowing non-liquid loans to be converted into liquid securities. With a well-developed capital market, securitization will grow smoothly 13.9 KEYWORD  SPV- Special Purpose vehicle  Capital adequacy ratio-It is the ratio of Bank’s capital to its risk  Securitization- Repacking or bundling of illiquid assets into marketable Securities  Obligors- Parties who are assets in the balance sheet of originator and who owe money to them  PTC- Pass through certificates  PTS- Pay through Security 13.10 LEARNING ACTIVITY 1. Reading comprehension - ensure that you draw the most important information from the related lesson on securitization theory and process. ___________________________________________________________________________ ___________________________________________________________________________ 2. Interpreting information - verify that you can read information regarding an illiquid asset and interpret it correctly. ___________________________________________________________________________ ___________________________________________________________________________ 3. Distinguishing differences - compare and contrast topics from the lesson, such as a disadvantage and advantage of securitization. ___________________________________________________________________________ ___________________________________________________________________________ 13.11 UNIT END QUESTIONS A. Descriptive Questions Short Questions 164 1. Explain what are the various benefits of securitisation? CU IDOL SELF LEARNING MATERIAL (SLM)

2. Discuss problems faced in securitisation especially in Indian context 3. Explain briefly the Assets securitised by Financial institutions Long Questions 1. Define debt securitisation and discuss its modus operandi. 2. Discuss the various structure available for securitisation. Which structure is suitable to Indian condition? 3. Trace out the development in the field of securitisation in abroad and in India and discuss its future prospects in India. B. Multi Choice Questions 1. When an asset rehabilitation company takes over the management of a borrower's business, it is classified as: a. Section 15 b. Section 6 (1) c. Section 9(a) d. Section 13(4)(b) 1. A secured creditor taking over the management of a borrower's company is classified as: a. Section 15 b. Section 6 (1) c. Section 9(a) d. Section 13(4)(b) 3. When will an asset restoration corporation file an application to have its security interest enforced? a. Debt Recovery Tribunal b. High Court c. District Court d. National Company Law Tribunal 165 CU IDOL SELF LEARNING MATERIAL (SLM)

4. Which of the above is not a government-owned financial institution? a. National Bank for Agriculture & Rural Development (NABARD) b. Life Insurance Corporation of India (LIC) c. State Financial Corporations d. Axis Bank Limited 5. The Central Register shall not keep track of transactions involving: a. Securitisation of financial assets b. Reconstruction of financial assets c. Extinguishment of security interest d. Creation of security interest Answers 1 – c, 2 – d, 3 – a, 4 – d, 5 – c, 13.12 REFERENCES Text Books:  Bhole, L.M., Financial Institutions & Markets. Tata McGraw Hill, New Delhi  Khan, M.Y.Financial Services Tata McGraw Hill, New Delhi  Meir, Kohn, Financial Institutions & Markets, Tata McGraw Hill, New Delhi  Prasanna Chandra: Financial Management, Tata McGraw Hill. Reference Books:  Kothari, C.R., Investment Banking & Customer Services Arihant Publishers, Jaipur  Sharpe, William F. etc. Investment. New Delhi, PHI  Pandey, I.M., Financial Management, Vikas Publishing House, New Delhi 166 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT 14 - CREDIT RATING Structure 14.0 Learning Objective 14.1 Introduction 14.2 Concept 14.3 Function 14.4 Benefits 14.5 Rating Process 14.6 Type 14.7 Credit Rating Agencies in India 14.8 Summary 14.9 Keywords 14.10 Learning Activity 14.11 Unit End Questions 14.12 References 14.0 LEARNING OBJECTIVES After studying this unit, you will be able to:  Describe nature of Credit Rating  Identify scope of Credit Rating  Benefits of Credit Rating  Process involved in Credit Rating 14.1 INTRODUCTION The introduction of many new institutions in our country as a result of the changing financial landscape following the liberalisation process has been accompanied by the emergence of many new institutions. As a result of financial engineering, there have been developments in financial instruments in this scene. Regardless of the form of financial instrument, the return and protection have always been the most important factors in evaluating an investment proposal. Debt instruments have long played an important role in raising funds, and they will continue to do so in the future. The basic feature of debt, which is a guaranteed return, is very appealing to investors when planning their portfolio, but it comes with a risk, especially if it 167 CU IDOL SELF LEARNING MATERIAL (SLM)

is unsecured. What is the best way for investors to assess such risks? The solution is a credit rating. Credit Rating is a symbolic measure of a rating agency's current objective evaluation of an issuer's relative capacity and willingness to service debt obligations according to the terms of the contract. It's a current assessment of a borrower's creditworthiness in terms of business and financial danger. Investors may get a sense of the degree of certainty of timely redemption of the debt instrument's principal sum as well as regular payment of returns on it, i.e. interest, based on this evaluation. As a result, credit rating is neither a general purpose appraisal of a business enterprise nor an aggregate measure of the credit risk associated with the instruments issued or to be issued by the concerned company. It only represents the characters of a specific security and does not constitute a recommendation to buy, sell, or keep that security. 14.2 CONCEPT OF CREDIT RATING To understand the concept of credit rating it is worth to have an idea of different credit rating agencies what they consider credit rating as: Investment Information and Credit Rating Agency of India Ltd. (ICRA) Rating is a representative measure of the current perception of the corporate entity's relative ability to timely service debt and obligations with regard to the rated instrument. Credit Rating Information Services of India Ltd. (CRISIL) A rating is a current assessment of the relative risk of timely interest and principal payment on a debenture, structured obligation, preferred stock, fixed deposit scheme, or shot term instrument. Credit Analysis and Research Ltd. (CARE) A credit rating is an assessment of an issuer's ability and willingness to make timely payments on a specific debt or associated obligation over the instrument's existence. Australian Ratings Ratings provide lenders with a straightforward grading system that allows them to assess a company's ability to repay interest and principal on a specific form of debt on time. Standard & Poor’s A rating is a current evaluation of an obligor's credit worthiness in relation to a particular obligation. From the above definitions it is understood that: 168 CU IDOL SELF LEARNING MATERIAL (SLM)

(i) Credit rating is an assessment of the capacity of an issuer of debt security, by an independent agency, to pay interest and repay the principal as per the terms of issue of debt. A rating agency collects the qualitative as well as quantitative data from a company which has to be rated and assesses the relative strength and capacity of company to honour its obligations contained in the debt instrument throughout the duration of the instrument. The rating given is based on an objective judgement of a team of experts from the rating agency. (ii) The ratings are expressed in code number which can be easily comprehended even by the lay investors. The ratings are the quickest way of understanding a company’ financial standing without going into the complicated financial reports. Credit rating is only a guidance to the investors and not a recommendation to a particular debt instrument. The important element for investment decision making in debt security are (i) yield to maturity (ii) risk tolerance to investor and (iii) credit risk of the security. Clearly the focus of credit rating is on any one of these three elements viz., credit risk of the security and hence it cannot by itself be a basis for investment decision making. It is only a current opinion on the relative capacity of firms to repay debt in time. (iii) Credit rating, as it exists in India, is done for a specific debt security and not for a company as a whole. No rating agency tells that it is an indicator of the financial status of the company. All that a rating agency claims is that the rating symbols indicate the capacity of the company to honour the terms of contract of a debt instrument. (iv) A debt rating is not a one-time evaluation of credit risk, which can be regarded as valid for the entire life of the security. It is an on-going appraisal. Changes in dynamic world of business may imply a change in the risk characteristics of the security. Hence debt rating agencies monitor the business and financial conditions of the issuer to determine whether modification in rating is warranted. (v) A credit rating does not create a fiduciary relationship between the rating agency and the users of rating since there is no legal basis for such relationships. 14.3 FUNCTIONS OF CREDIT RATINGS The credit rating firms are supposed to do the following functions: 1. Superior Information 169 CU IDOL SELF LEARNING MATERIAL (SLM)

A ranking by an independent and professional company offers a superior and more reliable source of credit risk information for three interrelated risks: (a) It has a neutral perspective. (b) A rating firm's technical tools improve its ability to assess risks. (c) It has access to a lot of information that the general public does not. 2. Low Cost Information A rating company that gathers, analyses, interprets, and summarises nuanced information in a succinct and easily understood format for a mass audience would be a cost-effective arrangement. 3. The Foundation for an Appropriate Risk-Return Trade-Off If debt securities were professionally classified and generally recognised and trusted, a more realistic risk-return trade-off would emerge in the stock market. 4. Corporate Borrowers: A Healthy Discipline Public exposure has a positive effect on issuer management because it requires a clean image. 5. Public Policy Formulation Institutional investment guidelines Public policy on the types of securities that are available for inclusion in different types of institutional portfolios can be developed with great confidence if securities are professionally evaluated by independent organisations. 14.4 BENEFITS OF CREDIT RATING The following are the benefits of credit rating: 1. Information at a Low Cost For investors, credit ratings are a low-cost source of information. On behalf of a group of investors, a specialised organisation is in charge of collecting, processing, and analysing relevant data. 2. Make an investment decision quickly In today's fast-paced environment, ratings allow investors to make quick decisions based on relevant ratings. 3. Additional Certification Sources A credit rating agency adds to the approval of the debt/financial instrument issue. A business with a high rating would be more confident when entering the market. According to Indian experience, individual companies that use credit ratings benefit enormously from getting access to a larger amount of money from a larger audience at a lower cost. 170 CU IDOL SELF LEARNING MATERIAL (SLM)

4. Increase the number of investors A successful credit rating system offers an alternative to using a company's name as a determining factor when making an investment, and it helps to increase the number of people who invest in the company's debt obligations. 5. Risks are forewarned Credit ratings can be used as a guide by businesses with a poor credit rating. It alerts management to customer risk perceptions and allows them to take action on operational and marketing risks, resulting in a shift in business perceptions. 6. Encourages Financial Self-Control In order to increase their debt obligations' scores, corporate creditors are often urged to improve their financial structure and performance. 7. The Job of a Merchant Banker Is Simple Merchant bankers and brokers will no longer be tasked with advising investors on the risk of a given investment. Merchant bankers and brokers rely on name recognition to guide their clients in the absence of credible information. They would be able to bring the ratings of debt obligations to the attention of their clients with the introduction of credit ratings. 8. Investors' Protection The hiring of a credit agency indicates that the company's management is prepared to have its operations scrutinised by an outside party. As a consequence, even if they don't have access to classified details, investors will get a general assessment based on ratings. A dependable and unbiased rating agency will provide increased transparency, stronger accounting standards, and increased investor protection. 9. It's Easy to Collaborate with People from Other Countries Foreign collaborators also request a credit rating while negotiating with an Indian company. You can easily assess a company's financial status by looking at its credit rating. The importance of credit ratings is becoming increasingly evident in the Euro- markets. 10. It is beneficial to the entire industry Ratings are used by small and unknown businesses to gain investor interest. Companies who have higher prices get a larger amount of money at a cheaper price. 171 CU IDOL SELF LEARNING MATERIAL (SLM)

As a result, ratings would help the entire industry by allowing individuals to mobilise savings directly rather than through intermediary lending institutions. 14.5 RATING PROCESS Any rating agency can only award a rating if there is sufficient information to form a reliable opinion and only after detailed quantitative, qualitative, and legal assessments have been completed. The rating system is based on a three-tiered system: A. Information It is the issuer's responsibility to provide appropriate information to the credit rating agency when they contact them. The rating agency needs details that paints a complete image of the issuer. Chart I show the type of information needed and where it can be found. Aside from the information given by the issuer, the credit rating agency gathers additional data from its own sources. The information needed about the issuer is not only historical, but also future- oriented. Chart 14.5 Source of Information Issuer Outsider/ I 172 n d e p e n d e n t s o u r c CU IDOL SELF LEARNING MATERIAL (SLM)

Voluntarily Specific e (In Proforma During Plant s of the ratter visit, Interview) (Banker, Auditors, Past as Competitors, well as I futur ndust e ry, proje exper ction ts, Suppl iers, Deale rs and Cons umer s) 173 CU IDOL SELF LEARNING MATERIAL (SLM)

Qualitative Quantitative (Business profile) (Finance profile) B. Analysis of Information Rating agencies' rating processes are almost identical since the basic criteria to be followed in order to determine risks are the same. Rating is the process of looking at long-term fundamentals and the likelihood of those fundamentals changing. Rating fundamentals look at not just the issuer's financial profile in relation to the instrument being classified, but also its market and competitive strengths and weaknesses. Before beginning the rating process, these basics are discussed one by one: C. Financial Profile The issuer's financial profile, which is the subject of an in-depth investigation, includes liquidity, capital structure, financial stability, cash flow adequacy, profitability, leverage, and interest coverage, among other things. These criteria are heavily based on both historical evidence and future predictions. Aside from these, the rating agency scrutinises accounting policies and practises, particularly practises related to depreciation, income recognition, stock valuation, fixed asset valuation, off-balance-sheet claims and liabilities, and so on. Ratio analysis methods are used extensively. The following are the main ratios that were calculated: Coverage ratio: The coverage ratio is the most important factor in determining the debt obligation's quality level. The coverage ratio is a measurement of how many times the issuing company's earnings will cover interest changes and other debt-related costs. This ratio indicates the likelihood of interest payment default. This ratio's pattern analysis is also extremely useful. A rising trend means that better times are on the way. i) Financial leverage ratios: It is a series of ratios that are used to determine the overall mix of fund sources. If a debt fund is used as part of the overall assets, a leverage is applied. The higher the percentage of owned funds, the lower the debt and, as a result, the more stable the firm is. The debt instruments of a highly leveraged business are considered to be riskier. The debt-to-equity ratio is the prime ratio in this case. Long-term debt to total capitalization (long-term debts + short-term debts + net worth) and long-term debts to equity are two other ratios that can be used. To get a true picture of a company's solvency, rating analysts must take into account all of the company's off-balance sheet liabilities and obligations. ii) Liquidity ratios: Liquidity ratios are used to determine a company's ability to cover existing debts. Present and fast ratios are the most common ratios in 174 CU IDOL SELF LEARNING MATERIAL (SLM)

this group, also known as short term solvency ratios. Aside from these percentages, some researchers compute and consider inventory turnover ratios, receivable turnover ratios, and days to collect. This collection of ratios reflects the issuer's effective or inefficient use of liquid capital. iii) Cash flow ratios: A company's debt instrument may receive a higher rating if its cash flow is adequate in relation to its interest payment obligation and total long-term debts. Normal operating income before interest, taxes, and depreciation is referred to as cash flow. If a company's cash flow to total long-term debt ratio is less than its interest rate on debts, the company will default on payments. iv) Profitability ratios: Another important set of ratios is profitability ratios, which show a company's potential to earn money. Earnings are compared to the cost of fixed adjustments. This collection of ratios represents the company's true financial health. In the future, a business with higher ratios would undoubtedly be better off. Operating profit ratio, net profit ratio, and return on investment ratio are the ratios to be measured. The pattern of these ratios will help with future financial health projections, which is essential for debt instrument ranking. D. Business Profile As previously stated, the rating process is not limited to the assessment of financial profile. Many other factors affect the quality of debt instruments that are not included in the financial profile analysis. Let's say a rating agency presents a financial assessment of M/s ABC, which is very strong in terms of profitability and liquidity. The organisation recommends that it be awarded the highest level of safety certification. However, suppose one of the analysts says, \"Given all of these details, I disagree with awarding the highest safety symbol.\" He reveals that the commodity in which M/s ABC deals is a stronger and less expensive one that has recently been patented. M/s ABC would no longer have the same business segment as it did previously. It is a very logical argument that must be considered because it will have an effect on the firm's entire earnings. There may be a slew of other considerations that are overlooked in financial research. Many of these convenience considerations are grouped together under the heading company profile. One by one, the major considerations are discussed. Issuer’s industry: The essence of the industry in which the issues are located has an impact on the instrument's ranking. The following inquiries must be addressed: a) Does the business operate in the capital goods, consumer durable goods, or consumer non-durable goods industries? b) Is the industry in a period of growth, stability, or decline? 175 CU IDOL SELF LEARNING MATERIAL (SLM)

c) What is the essence and strength of the industry's competition? Is it on a regional, national, or global scale? Is it determined by price, product quality, or marketing strategy? d) How is the industry's labour situation? Is the business represented by a union? Is it true that labour contracts are negotiated on an industry-by-industry basis? e) What is the status and history of the main raw material supply factor? f) What has been the rate of technological advancement? What have been the most recent trends, as well as the prospects for potential developments, not just in the country but also internationally? g) Is the industry subject to price controls, as in the case of cement, sugar, and steel, for example? h) Is the organisation involved in many businesses? What are all of the important business lines' potentials? The analyst will use the answers to these questions to determine the industry risk that can be used in his rating model. While ranking, industries with stable demand, growth, and the ability to sustain margins without jeopardising future prospects are regarded favourably. Obviously, a change in market outlook would result in a change in the rating for the companies in that industry. i) Issuer’s competitors: After general evaluation of industry, detailed evaluation of issuer’s role in the industry needs be studied. The key issue for it are: a) Does the business have a large enough portion of the market share to affect industry dynamics significantly? b) Does the business have a wide range of goods or have patented products or a particular rich in the market? c) Is the business a relatively low-cost producer? d) Are the technological facilities with the business newer or more advanced than the average competitors? e) Does the company face more onerous labour situation than its competitors? f) Does the business have competitive advance by marketing and distribution strength? g) What is the financial strength of the business in context of the competitors? The answer to above listed questions offers a valuable clue to place a business in most suitable category of risk ranking. ii) Issuer’s management: The issuer company's management is responsible for a significant part of its operating performance. The track record of 176 CU IDOL SELF LEARNING MATERIAL (SLM)

management also plays a role in assessing risk tolerance. Management is put to the test on the following critical points: a) What is the issuer's context and history? b) To what extent is the Chief Executive Officer reliant, especially if he or she is nearing retirement? c) Is the management specialist to a certain extent? d) How successful is the company's control mechanism? e) What is the company's creditor report, both past and present? f) How do organisational structure and management strategy relate to each other? g) In times of tension, how is management able to sustain strategies and practises, as well as credit worthiness? h) How capable is management in dealing with short-term charges? iii) Issuer’s Instrument: The owner's rights are spelled out in the debt instrument to be rated. The numerous protective clauses found in the debt instrument's terms and conditions/prospectus also improve the instrument's quality ranking. Such safeguards may be used to create protection against the instrument, either entirely or partially. Other legal claims on the issuer's properties or profits may be subordinated. Even if the issuer defaults on its other debts, the issuer can set up a redemption reserve or sinking fund to pay off bonds. Trustees may be named to safeguard investors' interests. In the Indian sense, many of these provisions are mandatory. Any rating agency considers these to be the most important indicators. As a result, the technique used is almost identical. For rating purposes, all agencies seek nearly identical details. As a result, the ranking system covers a wide range of the company's operations and is highly thorough. As a result, an issuer is carefully examined in all of the above fields. (a) Symbol for awarding a rating: The procedure begins with a formal request for rating from the prospective issuer. In most cases, the issuer is asked to request necessary details in the form of a pre-printed proforma. This isn't a complete list. The issuer should feel free to provide additional details on any aspect that is important. In addition, the issuer company must include its financial profile for the previous 4-5 years, as well as audit reports. The problem is assigned to an analytical team by the rating agency. The analyst takes on the task of assigning additional data that they believe is important. They give the issuer the opportunity to make his presentation. Questions are posed, and solutions are found. 177 CU IDOL SELF LEARNING MATERIAL (SLM)

The team can go to the location to get first-hand information, especially on qualitative issues. They may have access to public records. They will be able to communicate with the executives and other relevant officials. The borrower's core operational and financial strategies, management policies, and credit factors can all be scrutinised in depth. The rating agency's data base on the sector in question is also widely used. The primary analyst makes a recommendation after this analysis and debate, and a meeting of the rating committee is called. The committee debates the recommendations as well as the relevant evidence that support the ranking. Finally, the recommendations are voted on by the committee. The borrower is then informed of the ranking as well as the main supporting factors. A borrower has the right to appeal a rating decision before it is released. The rating committee will take into account any new or significant additional details submitted by the borrower. Rating agencies, on the other hand, cannot guarantee that this latest information will influence the rating committee's decision. If the issuer accepts the ranking, it will be disseminated to the agency's subscriber clientele and publicly to the news media until the final rating is assigned. If a rating is not appropriate, the agency will not make it public. Otherwise, the rating agency maintains strict confidentiality of all information gathered during the rating process. When a classified business wishes to use the rating, the commission keeps track of it until the debt obligation is redeemed or repaid. The corporation is required to send revised data and communicate any significant policy changes at regular intervals. This monitoring scheme is in place for the duration of the instrument in question. A systematic analysis is performed periodically under this scheme, and emerging technologies, market trends, and financial results releases are reviewed on a regular basis. As a consequence, the ranking can be altered or revoked. Rating agencies have the legal right to make such rating changes public. While this general structure applies to all rating exercises, there are some instances where more precise knowledge is required to make rating decisions for a particular instrument. 14.6 TYPES OF RATING The above rating methodology and mechanism are specifically for debt securities such as debentures, fixed deposits, and bonds. The main business of a rating company is this form of rating. However, as time has passed, these companies have begun to include other forms of ratings, such as: A. Equity Rating 178 CU IDOL SELF LEARNING MATERIAL (SLM)

The expression \"equity ranking\" refers to the rating of equity securities issued in the stock market. Via detailed information on acquisition, consultation with corporate management, critical review, and a collective judgmental method, an opinion on earnings prospects and risk associated with such earnings can be reached. This process is also known as \"equity grading,\" and it is undertaken by the equity issuer prior to making a public offering. The degree, efficiency, growth, and substantiality of earnings over the medium term on the expanded equity base resulting from the current offer and other known potential equity expansion are all closely examined. Equity scoring, like credit rating, can be expressed as a symbolic grade as well as a detailed rationale. Such grading would be appropriate for the secondary market of the issued share if it is monitored. The prospective return on net worth is the most important factor in the whole process. Rating agencies can also measure corporate equity at the request of institutional investors with the consent of the corporate house whose stock is being evaluated. B. Mutual Fund Evaluation Mutual funds that are well-established around the world are rated by rating firms, which is known as mutual fund rating. It makes choosing the right fund from among the available funds easier. Because of the structure of mutual funds, performance analysis must depend heavily on past performance. As a result, the two metrics of risk and return are used to evaluate the project. Some of the most important metrics to consider when evaluating mutual funds are the expense ratio, turnover ratio, portfolio composition, accounting procedures, fund management qualities, and nav in the past. C. Personal Credit Score In developed countries, consumer finance is becoming more common. The success of consumer finance is determined by the consumer's creditworthiness. Such individuals can be rated by rating agencies. Individual credit rating is a self-administered objective evaluation of the risk associated with a financial transaction involving an individual at a given point in time, based on the qualification of credit risk-influencing criteria. Age, qualification, occupation, stability at work, home, marital status, properties, repaying capability, savings, and earnings potentials are all used to evaluate a credit seeker's creditworthiness. Individuals are rated on their social status, economic status, and financial status by agencies. D. Bank and Financial Company Ratings Debts are issued by banks and lending firms, just as certificates of deposit are issued by banks (cd). The internal affairs of the issuer are examined through a review of their context and history. Their relationship with the government and the central bank is investigated. The 179 CU IDOL SELF LEARNING MATERIAL (SLM)

issuer's innovative capabilities and strategic ability to attract lower-cost funds are examined. The relationship between fund source and deployment maturity is investigated. Its market share and competitive position are also investigated. A case-by-case analysis of large non- performing assets to assess the likelihood of reliability may be part of the rating process. The value of assets is assessed. Profitability is often taken into consideration. The profile of operating executives, human resource practises, and organisational structure are used to assess management efficiency. In the case of financial firms, community company support will be critical to their success. Accounting estimates are taken into account after non- standard accounting policies have been modified. E. Rating of Sovereignty It mainly involves assigning a credit rating to a country based on its credit worthiness, risk potential, and other factors. During this process, the country's economic parameters and policies are constantly monitored. Such a ranking has an effect on the availability of international assistance from organisations such as the World Bank. Due to a shortage of infrastructure and specialists, not all rating agencies may be able to take on such a project. F. Structured Obligation Rating A structured duty is a tradeable instrument or security that is backed by an asset. When analysing an asset-backed security or a structured commitment, the key function of a credit rating agency is to determine the probability of default in fulfilling contractual obligations to investors. The rating compares the default risk to other debt instruments available to the lender, much as it does for traditional debt instruments. The key goal of evaluating an asset- backed deal is to make sure that even in the worst-case scenario, the cash flows from the assets and the proposed arrangement will satisfy the committed payments to the investors. It's important to remember that when rating a formal obligation, you're measuring the risk associated with the transaction, not the issuer. A AAA rating on a structured duty issued by a single originator, for example, does not imply that the entity's other problems will also receive a AAA rating. 14.7 CREDIT RATING AGENCIES IN INDIA 180 Currently there are four credit rating agencies in India. 1. Credit Rating Information Service Ltd. (CRISIL) 2. Information and Credit Rating Agency of India (ICRA) 3. Credit Analysis and Research (CARE) CU IDOL SELF LEARNING MATERIAL (SLM)

1. Credit Rating Information Service Ltd. (CRISIL) CRISIL was established on January 1, 1988, with an equity base of Rs.4.00 crores by the Industrial Credit and Investment Corporation of India (ICICI) and the Unit Trust of India (UTI). They own 18% of the company's stock between them. The Asian Development Bank (15%), the LIC, the GIC and its branches, and the State Bank of India (each 5%), the Housing Development Finance Corporation (6.2%), nine nationalised banks (19.5%), and ten international banks (Standard Chartered Bank, Banque Indo Suez, Mitsui Bank, Bank of Tokyo, and Hongkong & Shanghai Bank) hold the remaining equity. CRISIL is a public limited company that was founded in November 1993 and is now traded on the Bombay Stock Exchange. The main aim of CRISIL has been to rate the debt obligations of Indian firms. Its rating tells investors how likely a debt instrument is to make timely interest and principal payments. Its ratings help to raise credit rating awareness among businesses, merchant bankers' brokers, and regulatory authorities, as well as aid in the development of a debt rating-friendly environment. When CRISIL first started out, the aim was for it to do credit ratings on request, then expand to include all companies on its own initiative, with the goal of providing information about creditworthiness to all companies, whether or not they approached CRISIL, so that investors were aware of the business selling securities to the public. It also intended to include all collateral in its credit rating, including common and preferred stock, debentures, secured and unsecured convertible and non-convertible securities, and fixed deposits. The CRISIL operations were created to help the Indian capital market grow in a stable and balanced manner by achieving the following objectives: I Transferring primary responsibility for established corporate credit quality from merchant bankers, brokers, underwriters, and financial advisors to CRISIL, as well as making widely accepted normal and standardised ratings available to investors; ii) Expanding transparency and improving accounting practises to improve financial knowledge for customers such as individual investors, financial institutions, stock exchanges, and corporate analysis bodies. iii) Reducing issuance costs by allowing direct funding without the use of intermediaries; and iv) Protecting the interests of investors by continuously monitoring the performance of ranked companies and adjusting the rating to reflect the true and fair state of their financial positions. CRISIL employs the standard ranking symbols that are widely used in the United States and many other nations. The table below shows the CRISIL investment wise rating symbols, as well as the value of each rating from the standpoint of investor security. 181 CU IDOL SELF LEARNING MATERIAL (SLM)

CRISIL Debenture Rating Symbol High Investment Grades : Highest Safety AAA (Triple A) : High Safety AA (Double A) : Adequate Safety Investment Grades : Moderate Safety A BBB (Triple B) : Inadequate Safety : High Risk Speculative Grades : Substantial Risk BB (Double B) : Default B C D Notes: (1) CRISIL may apply ‘+’ (plus) or ‘-‘(minus) sign for ratings from AA to C to reflect comparative standing within the category. The contents within parenthesis are a guide to the pronunciation of the rating symbols. Preference shares rating symbols are identical to debenture rating symbols except that the letters ‘pf’ are prefixed to the rating symbols, e.g. pf AAA (“pf Triple A”). CRISIL Fixed Deposit Rating Symbols Notes: (1) CRISIL may apply ‘+’ (plus) or ‘- ‘(minus) sign for ratings from FAAA to FC to indicate the relative position within the category. 182 CU IDOL SELF LEARNING MATERIAL (SLM)

Investment Grades FAAA (F-Triple A) : Highest Safety : High Safety FAA (F-Double A) : Adequate Safety FA Speculative Grades FB FB FC FD : Inadequate Safety : High Risk : Substantial Risk : Default (2) The contents within parenthesis are a guide to the pronunciation of the rating symbols. 1) CRISIL may apply ‘+’ (plus) or ‘-‘(minus) sign for ratings from FAAA to FC to indicate the relative position within the category. (2) The contents within parenthesis are a guide to the pronunciation of the rating symbols. Credit Rating for Short Term Instruments Rating Symbol Indication (Each rating indicates that the degree of safety regarding timely payment on the instrument is shown against the symbol) P-1 Very Strong P-2 Strong P-3 Adequate P-4 Minimal P-5 Expected to be in default on maturity or in default Note: CRISIL may apply “+” signs for ratings from P-1 to P-3 to reflect a comparatively higher standing within the category. CRISIL actively checks the scores it awards. New information or developments affecting the company whose debt obligation is rated could cause the ratings to be upgraded, downgraded, or removed. It has the right to make the ratings widely available through the media, its own magazines, or by other means. 183 CU IDOL SELF LEARNING MATERIAL (SLM)

2. ICRA Ltd The IFCI Ltd. has promoted the ICRA Ltd. as the key promoter in order to meet the needs of businesses in the country's northern regions. Other shareholders include the Unit Trust of India, banks, LIC, GIC, Exim Bank, HDFC Ltd., and ILFS Ltd., in addition to the main promoter, who owns 26% of the share capital. It first opened its doors in 1991. In order to bring foreign expertise and practises to the Indian capital markets, the ICRA has signed an agreement with Moody's Investors Service to provide credit education, risk management software, credit analysis, and advisory services to banks, financial/investment institutions, financial services firms, and mutual funds in India through its company Financial Programmes Inc (FPI). The ICRA's key goals, like those of CRISIL, are to: • Assist individual and institutional investors in making well-informed decisions; • Assist issuers in raising funds in significant quantities and at a lower cost for highly rated companies from a broader investor base; • To provide banks, investment bankers, and brokers with a marketing tool to help them place debt with investors. • To provide market-driven systems to regulators in order to promote the sustainable growth of capital markets in a disciplined manner while reducing the government's burden. The ICRA has broadened the scope of its services over time. There are three types of services it currently offers: (1) ranking services, (2) information services, and (3) advisory services. ICRA Rating Scale Long Term including Debentures Medium LAAA : Highest Safety M AAA : Highest Safety LAA : High Safety M AA : High Safety MA : Adequate Safety LA : Adequate Safety MB : Inadequate Safety LBBB : Moderate Safety MC : Risk Prone LBB : Inadequate Safety LB : Risk Prone MD : Default LC : Substantial Risk LD : Default, Extremely Speculative Term including Bonds and Preference Shares Deposits Fixed Short Term Including Commercial Paper 184 CU IDOL SELF LEARNING MATERIAL (SLM)

A-1 Highest Safety A-2 High Safety A-3 Adequate Safety A-4 Risk Prone A-5 Default Note: (i) The rating symbols group together similar (but not necessarily identical) concerns in terms of their relative capability of timely servicing of a debt/obligations, as per terms of contracts, i.e., the relative degree of safety/risk. (ii) The sign (+) or (-) may be used after the rating symbol to indicate the comparative position of the company within the group covered by the symbol. (iii) The letter ‘P’ in parenthesis after the rating symbol indicates that the debt instrument is being used to raise resources by a new company for financing a new project and the rating assumes successful completion of the project. (iv) The rating symbols for different instruments of the same company need not necessarily by the same. 3. CARE Ltd The Industrial Development Bank of India (IDBI) has partnered with financial institutions, public/private sector banks, and private finance companies to launch CARE Ltd., a credit rating and information services firm. It began credit rating operations in October 1993 and now provides a wide range of credit information and equity analysis products and services. Unlike the CRISIL and the ICRA, the CARE is cautious when it comes to new business ventures. At the moment, it provides the following services: (a) Credit Rating: The CARE performs credit ratings on a wide range of debt instruments, both short- and long-term. (b) Advisory Services: The CARE offers advice in the following areas: • Transactions involving securitization; • Financial instrument structuring; • Capital investment financing and • Municipal budgets 14.8 SUMMARY Financial intermediaries link savers and investors, assisting with capital mobilisation on the one hand and efficient capital allocation among competing users on the other. 185 CU IDOL SELF LEARNING MATERIAL (SLM)

This necessitates the use of reliable market data. Investors looking for investment opportunities will look for information from a variety of sources, such as issuer(s) offer articles, market intermediary research reports, media reports, and so on. They can also use credit rating agencies' ratings to assist them in making investment decisions. The method of assigning a mark that serves as a current indicator of the issuer's relative capacity to service debt obligations in a timely manner, with special regard to the instrument being listed, is known as credit rating. Credit ratings benefit investors, issuers, intermediaries, and regulators alike. The globalisation of credit rating systems has been aided by a number of factors. Multinational credit rating firms include Moody's Investor Services, S&P, Duff and Phelps Credit Rating Firm, and others. Examples include CRISIL, CARE, ICRA, and other domestic rating agencies. The rating system considers both industry and financial factors when assessing credit worthiness and assigning ratings. Rating agencies allocate grades to equity securities in addition to bond scores. Despite all of the benefits of ranking, it's important to remember that it's just for guidance, not a recommendation to buy, sell, or keep an instrument. 14.9 KEYWORDS  (ICRA) Investment Information and Credit rating Agency of India Ltd.  (CRISIL) Credit Rating Information Services of India Ltd.  (CARE) Credit Analysis and Research Ltd.  (S&P) Standard & Poor’s  (IDBI) Industrial Development Bank of India 14.10 LEARNING ACTIVITY 1. Recently, Fitch has projected that NPA in Indian banking will rise by 10% by 2010. What will be the likely impact of the same in the Indian Banking sector? ___________________________________________________________________________ ___________________________________________________________________________ 2. In 2007, India secured investment grade rating from global agency Standard and Poor's for the first time in 14 years. What did it mean for the industry? ___________________________________________________________________________ ___________________________________________________________________________ 186 CU IDOL SELF LEARNING MATERIAL (SLM)

14.11 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1.Explain the working of various credit rating agencies in India. 2.What do you think is the advantage for an economy to have multiple credit rating agencies? 3.Explain briefly about ICRA rating. 4.Discuss briefly Credit rating for Short term instruments Long Questions 1.Explain what is meant by credit rating? Discuss the functions of credit rating firms. 2.Discuss the rating process followed by credit rating firms. 3.Describe the benefits of credit rating. B. Multiple Choice Questions 1. A credit rating for an issuer takes into consideration the issuer's a. Credit worthiness b. Cash Worthiness c. Bank Worthiness d. Security worthiness 2. The period of validity of certificate of registration shall be ........................ years. a. 2 Years b. 1 Year c. 5 Years d. 3 Years 3. Every credit rating agency has to abide by the ......... contained in the Third Schedule. a. Code of Conduct 187 CU IDOL SELF LEARNING MATERIAL (SLM)

b. Regulations c. Contract d. Process 4. Every credit rating agency has to, during the lifetime of securities rated by it continuously......... the rating of such securities. a. Monitor b. Evaluate c. Approve d. Reject 5. Credit rating agencies are registered and regulated by the ............................... a. RBI b. SEBI c. IRDA d. CRISIL Answers 1 – a, 2 – d, 3 – a, 4 – a, 5 – b, 14.12 REFERENCES Text Books:  Bhole, L.M., Financial Institutions & Markets. Tata McGraw Hill, New Delhi  Khan, M.Y.Financial Services Tata McGraw Hill, New Delhi  Meir, Kohn, Financial Institutions & Markets, Tata McGraw Hill, New Delhi  Prasanna Chandra: Financial Management, Tata McGraw Hill. Reference Books:  Kothari, C.R., Investment Banking & Customer Services Arihant Publishers, Jaipur  Sharpe, William F. etc. Investment. New Delhi, PHI  Pandey, I.M., Financial Management, Vikas Publishing House ,New Delhi 188 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT 15 - SURVEILLANCE OF SEBI & RBI Structure 15.0 Learning Objective 15.1 Guideline about Financial Services 15.2 Summary 15.3 Keywords 15.4 Learning Activity 15.5 Unit End Questions 15.6 References 15.0 LEARNING OBJECTIVES After studying this unit, you will be able to:  Describe nature of Surveillance of SEBI & RBI  Identify scope of Surveillance of SEBI & RBI  Benefits of Surveillance of SEBI & RBI  Process involved in Surveillance of SEBI & RBI 15.1 CREDIT RATING AGENCIES IN INDIA Short title and commencement. (1) These guidelines may be called the Securities and Exchange Board of India (International Financial Services Centres) Guidelines, 2015. (2) They shall come into force on April 01, 2015. Definitions (1) In these guidelines, unless the context otherwise requires, the terms defined herein shall bear the meanings assigned to them below, and their cognate expressions shall be construed accordingly, – (a) \"Act\" means the Securities and Exchange Board of India Act 1992; (b) \"Board\" means the Securities and Exchange Board of India established under the provisions of section 3 of the Securities and Exchange Board of India Act, 1992 (15 of 1992); (c) \"domestic company\" means a company and includes a body corporate or corporation established under a Central or State legislation for the time being in force; (d) \"financial institution\" shall include: 189 CU IDOL SELF LEARNING MATERIAL (SLM)

(i) a company; (ii) a firm; (iii) an association of persons or a body of individuals, whether incorporated or not; or (iv) any artificial juridical person, not falling within any of the preceding categories engaged in rendering financial services in securities market or dealing in securities market in any manner. Explanation. - Stock brokers and sub-brokers, merchant banks, mutual funds, alternative investment funds, stock exchanges, clearing corporations, investment advisors, portfolio managers, and any other organisation that the Board may specify shall be considered financial institutions for the purposes of this provision, without regard to the generality of the foregoing. \"financial services\" shall mean activities a financial institution is allowed to carry out as specified in the respective Act of the Parliament or by the Government of India or by any regulatory authority empowered to regulate the concerned financial institution; (e) \"foreign jurisdiction\" means a country, other than India, whose securities market regulator is a signatory to International Organization of Securities Commission’s Multilateral Memorandum of Understanding (IOSCO's MMOU) (Appendix A signatories) or a signatory to bilateral Memorandum of Understanding with the Board, and which is not identified in the public statement of Financial Action Task Force as: i. A jurisdiction having a strategic Anti-Money Laundering or Combating the Financing of Terrorism deficiencies to which counter measures apply; or ii. a jurisdiction that has not made sufficient progress in addressing the deficiencies or has not committed to an action plan developed with the Financial Action Task Force to address the deficiencies; (f) \"intermediary\" means and includes a stock broker, a merchant banker, a banker to an issue, a trustee of trust deed, a registrars to an issue, a share transfer agent, an underwriter, an investment adviser, a portfolio manager, a depositary participant, a custodian of securities, a foreign portfolio investor, a credit rating agency, or any other intermediary or any person associated with the securities market, as may be specified by the Board from time to time; (g) \"International Financial Services Centre\" or \"IFSC\" shall have the same meaning as assigned to it in clause (q) of section 2 of the Special Economic Zones Act, 2005; (h) \"issuer\" shall mean a company incorporated in India seeking to raise capital in foreign currency other than Indian rupee which has obtained requisite approval under Foreign Exchange Management Act, 1999 (FEMA) or exchange control regulations as may be applicable, or a company incorporated in a foreign jurisdiction; (i) \"recognised entity\" means any intermediary which is registered with the Board or 190 CU IDOL SELF LEARNING MATERIAL (SLM)

registered or recognised with a regulator of a foreign jurisdiction: Provided that such entities shall comply with fit and proper norms specified by the Board; (j) \"securities laws\" means the Act, the Securities Contracts (Regulation) Act, 1956 (42 of 1956), the Depositories Act, 1996 (22 of 1996), provisions of Companies Act, 2013 administered by the Board and the rules, regulations, circulars, clarifications issued thereunder; (2) Words and expressions used and not defined in these guidelines but defined in the Act, the Securities Contracts (Regulation) Act, 1956, the Depositories Act, 1996, Companies Act, 2013, the Special Economic Zones Act, 2005 or any rules or regulations made thereunder shall have the same meanings respectively assigned to them in those Acts, rules or regulations or any statutory modification or re-enactment thereto, as the case may be. Applicability and scope. Any entity wishing to establish or assist in the establishment of a stock exchange, clearing corporation, or depository, or to provide any other financial services relating to the securities market, must be a recognised entity and obtain permission from the Board in accordance with the norms set forth herein or as the Board may specify from time to time. Any person wishing to provide financial services relevant to the stock market in an IFSC must comply with the following provisions of applicable Board regulations relating to registration or recognition, as the case may be: However, those organisations would be permitted to work in an IFSC if they followed these guidelines. Unless otherwise stated in these Guidelines or as specified by the Board from time to time, all securities laws apply to a financial institution operating in an IFSC. The Government of India's foreign investment guidelines will apply to these guidelines. Stock Exchanges, Clearing Corporations and Depositories Eligibility and shareholding. (1) Eligibility and shareholding cap for stock exchanges wishing to operate in the IFSC: Any recognised stock exchange in India, or any stock exchange in a foreign jurisdiction, can create a subsidiary to provide stock exchange services in the IFSC as long as at least 50% of the shares are owned by Indians. The exchange owns a portion of the paid-up equity share capital, with the remaining shares being sold to any other recognised stock exchange in India or abroad. (2) Eligibility and shareholding cap for clearing corporations wishing to operate in the IFSC: Any recognised stock exchange or clearing corporation in India, or any recognised stock exchange or clearing corporation in a foreign jurisdiction, may create a subsidiary to provide clearing services in the IFSC as long as at least 51 percent of the shares are owned by Indians. The bulk of the paid-up equity share capital is held by the stock exchange or clearing 191 CU IDOL SELF LEARNING MATERIAL (SLM)

company, with the remaining shares held by another recognised stock exchange or clearing corporation, whether in India or abroad. (3) Eligibility and shareholding limit for depositories wishing to operate in the IFSC: Any Indian registered depository or any foreign managed depository may create a subsidiary to provide depository services in the IFSC if at least 51 percent of the capital is invested in the subsidiary. A portion of the paid-up equity share capital is held by such a depository, and the remaining shares may be sold to any other registered depository, recognised stock exchange, or clearing company in India or abroad. Individuals must inform the Board within fifteen days of purchasing equity securities of a recognised stock exchange, recognised clearing firm, or registered depository in the IFSC. (4) A licenced stock exchange, clearing corporation, and depository must have a minimum net worth. (1) Any approved stock exchange must have a minimum net worth equivalent of twenty-five crore rupees at the outset, and it must raise its net worth to a minimum equivalent of one hundred crore rupees over the course of three years from the date of approval. (2) Any authorised clearing company must have a minimum net worth equivalent of fifty crore rupees at the outset, and it must raise its net worth to a minimum equivalent of three hundred crore rupees over the course of three years from the date of approval. (3) Within three years of approval, any approved depository must have a net worth of at least twenty-five crore rupees and must raise its net worth to a minimum equivalent of one hundred crore rupees. Certain provisions not to apply. (1) According to the Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, each recognised stock exchange shall credit twenty-five percent of its annual profits to the Fund of the recognised clearing corporation(s) that clears and settles trades executed on that stock exchange. Stock exchanges operating in the IFSC are exempt from this provision. (2) The Securities and Exchange Board of India (Depositories and Participants) Regulations, 1996, do not extend to depositories operating in the IFSC, which mandate any depository to credit 25% of income to the investor protection fund every year. (3) The Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2012 do not extend to stock exchanges and clearing corporations operating in the IFSC. (4) The Securities and Exchange Board of India (Depositories and Participants) Regulations, 1996, and Chapter V of the Securities Contracts (Regulation) (Stock Exchanges and Clearing 192 CU IDOL SELF LEARNING MATERIAL (SLM)

Corporations) Regulations 2012 do not apply to depositories, stock exchanges, or clearing corporations in the IFSC: Depositories, stock exchanges, and clearing companies operating in the IFSC must adhere to the International Organization of Securities Commissions' (IOSCO) border principles of governance, as well as the Financial Market Infrastructures (FMI) principles and other governance norms as the Board may specify from time to time. Securities that are permissible. Stock exchanges operating in the IFSC may allow dealing in the following types of securities and products in such securities in any currency other than the Indian rupee on their trading platforms, subject to prior Board approval: I Receipts from the depository; (ii) Shares of stock in a company incorporated outside of India. Debt securities issued by eligible issuers (iii). (iv) Currency and interest rate derivatives; (v) Index-dependent derivatives; (vi) All other securities as determined by the Board. Intermediaries 1. Approval. Any recognised entity or entities desiring to operate as an intermediary in the IFSC may establish a company to provide such financial services relating to the securities market as the Board permits. 2. Nature of clients. (1) Any intermediary authorised to operate under the IFSC by the Board must provide financial services to the following types of clients: (i) a person who is not a resident of India; (ii) an Indian who is not a resident of India; (iii) a financial institution based in India that is allowed to invest funds offshore under the FEMA, to the degree that outward investment is permitted; (iv) a person residing in India who qualifies under FEMA to invest funds offshore to the extent permitted by the Reserve Bank of India's Liberalized Remittance Scheme, subject to a minimum investment as determined by the Board from time to time: Given, however, that services may be provided to clients referred to in clauses (ii) to (iv), subject to Reserve Bank of India guidelines. Any intermediary approved by the Board to operate within the IFSC must appoint a senior 193 CU IDOL SELF LEARNING MATERIAL (SLM)

management person as a \"Designated Officer\" for the purpose of enforcing compliance with regulatory requirements. (2) To use the IFSC for investment advice or portfolio management services, the client must be one of the following: (i) a person residing outside India; (ii) a non-resident Indian; or (iii) a person residing in India. (iv) a financial institution based in India that is allowed to invest funds offshore under the FEMA, to the degree that outward investment is permitted; (iv) a person residing in India with a net worth of at least $1 million in the previous financial year who is entitled under FEMA to invest funds offshore to the extent permitted by the Reserve Bank of India's Liberalized Remittance Scheme: (3) Given, however, that services may be offered to clients mentioned in clauses (ii) to (iv), subject to RBI guidelines. A portfolio manager working in the IFSC is allowed to make the following investments: (a) IFSC-listed securities; (b) Securities issued by companies incorporated in IFSC; (c) Securities issued by companies based in another country. (4) In the IFSC, a portfolio manager is allowed to invest in the following: (d) Securities listed on the IFSC; (e) Securities issued by IFSC-incorporated companies; (f) Securities issued by companies based in another country. Issue of Capital 1. Raising capital. (1) Domestic companies seeking to raise capital in a currency other than the Indian Rupee via an IFSC must adhere to the requirements of the Foreign Currency Depository Receipts Scheme, 2014, as notified by the Government of India on October 21, 2014 through F. No. 9/1/2013-ECB. (2) Companies of foreign jurisdiction intending to raise capital in an IFSC in a currency other than the Indian Rupee must comply with the Companies Act, 2013 and relevant provisions of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009 as if the securities are being issued under Chapter X and XA of the said regulations, as may be applicable. 2. Listing and Trading. Companies, whether domestic or foreign-based, can list and exchange their securities in accordance with the Board's guidelines. Issue of Debt Securities 194 CU IDOL SELF LEARNING MATERIAL (SLM)

1. Eligible issuers. (1) No issuer shall be entitled to issue debt securities unless it meets the following criteria: (a) The issuer's constitution allows it to issue debt securities; (b) The issuer has not been prohibited from issuing debt securities by any regulatory authority in its home jurisdiction or any other jurisdiction where it operates or has raised capital; (c) In its home jurisdiction or any other jurisdiction where it operates or has raised funds, the issuer or its directors should not have been convicted of any economic crime; (d) Any other conditions that the Board can specify. 2. Minimum Subscription In Case Of Private Placement. In the case of a private placement, the minimum subscription amount per investor shall not be less than $100,000 or equivalent, or any other amount as the board can specify from time to time. 3. Mandatory Listing. An issuer who wishes to issue debt securities must apply to one or more stock exchanges in the IFSC for listing of such debt securities. General Requirements. The board will specify the conditions, such as the appointment of a trustee and the establishment of a debenture redemption reserve, from time to time. Advertisement for Public Issue. Any print media can be used to advertise debt issues within the IFSC. Credit Rating Requirement The credit rating for debt issues within IFSC can come from a recognised credit rating agency registered with the Board or some other credit rating agency registered in a foreign jurisdiction. Agreement with Depository or Custodian. (1) An issuer of debt securities must enter into a depository or custodian agreement with a depository or custodian entitled to function in the IFSC for the purpose of holding and safekeeping the debt securities, as well as to facilitate transfer, redemption, and other corporate activities in relation to such debt securities. (2) The information memorandum must include the following disclosures about the appointment of a depository or custodian: If the issuer has a registered office or a branch office in the IFSC, it can serve investors from that location without having to hire a depository or a custodian. Financial Statements Reporting 195 CU IDOL SELF LEARNING MATERIAL (SLM)

The issuer of debt securities in the IFSC must prepare its financial statements in compliance with the Companies Act, 2013, as it applies in the IFSC. Relaxation from Listing Agreement. The issuer must adhere to the continuous listing criteria, which include corporate governance and any other conditions set out in the listing agreement between the issuer and the stock exchange where the debt securities are to be listed: The Board may amend or relax certain conditions or criteria with regard to the listing agreement in respect of debt securities issued under these Guidelines if the issuer's securities are already listed on another stock exchange, whether international or domestic, and the issuer complies with the listing agreement for such securities. Trading of Debt Securities. Debt securities listed on stock exchanges must be exchanged on the stock exchange's website, and trades must be cleared and settled through a clearing company established in the IFSC as defined. FUNDS Conditions on Investment. (1) To invest in an IFSC-registered alternative investment fund or mutual fund, the investor must be one of the following: I am either a person residing outside of India, a non-resident Indian, or both. (iii) an Indian institutional investor entitled to invest funds offshore under the FEMA to the extent that outward investment is permitted; (iv) a person residing in India with a net worth of at least $1 million in the previous financial year who is qualified to invest funds offshore under the FEMA to the extent permitted by the Reserve Bank of India's Liberalized Remittance Scheme: Subject to Reserve Bank of India guidelines, investors in clauses (ii) to (iv) can invest in an alternative investment fund or a mutual fund that operates in the IFSC. (2) Any IFSC-registered alternative investment fund or mutual fund may only accept funds in foreign currency from qualified investors. (3) Any alternative investment fund or mutual fund that is IFSC-registered is permitted to invest in the following: a) Securities that are classified on the IFSC; b) Securities issued by companies with an IFSC number; c) Securities issued by corporations operating outside of the United States. (4) A mutual fund asset management company operating in the IFSC must have a net worth of at least USD two million, which must be increased to USD ten million within three years of commencing operations. 196 CU IDOL SELF LEARNING MATERIAL (SLM)

(5) Among other items, the Board must determine the qualifications for trustee, custodian, and manager appointments. The Board would establish requirements for raising funds in foreign currency, such as the minimum investment amount, fund corpus, disclosures, investment conditions, valuations, scheme forms, and professional qualifications, among other things. Miscellaneous Up-to-date books, records, and documents are needed. These guidelines apply to any issuer, domestic company, international company, financial institution, or agent who keeps books, records, and documents in compliance with the applicable regulations notified by the Board. Violations are punishable. Any breaches of these rules will be dealt with by the board in accordance with securities laws. Power to specify procedures and make clarifications, among other things. The board may define norms, procedures, processes, manners, or provide relaxations in guidance notes or circulars for the purposes of enforcing these guidelines and matters incidental thereto, or to promote and regulate financial services relating to securities markets in an IFSC. The Ability to Overcome Difficulties The board shall have the authority to issue clarifications in the form of guidance notes or circulars to address any issues with the interpretation or execution of these guidelines, as well as to facilitate and regulate financial services related to securities markets in an IFSC. 15.2 SUMMARY SEBI and RBI supervision are crucial in linking savers and investors, assisting in capital mobilisation on the one hand, and efficiently allocating capital to competing users on the other. This necessitates the use of reliable market data. Investors looking for investment opportunities will look for information from a variety of sources, such as issuer(s) offer articles, market intermediary research reports, media reports, and so on. They can also use credit rating agencies' ratings to assist them in making investment decisions. The method of assigning a mark that serves as a current indicator of the issuer's relative capacity to service debt obligations in a timely manner, with special regard to the instrument being listed, is known as credit rating. Credit ratings benefit investors, issuers, intermediaries, and regulators alike. 15.3 KEYWORDS  Commercial banks Those Banks that deals in debt and debt related finance 197 CU IDOL SELF LEARNING MATERIAL (SLM)

 Underwriting — A banks sign into documents that agree to provide financial payment to their clients in case of any damage or losses  Portfolio Management A kind of services to check on the liquidation of assets to track the income made by these companies and study how they can make it better  Advisory Services A type of service 15.4 LEARNING ACTIVITY 1. List down 5 Recent notifications of RBI ___________________________________________________________________________ ___________________________________________________________________________ 2. Study about the notifications issued by SEBI since Nov 2017. ___________________________________________________________________________ ___________________________________________________________________________ 15.5 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. What is Debt Security 2. What do you think is the advantage for an economy to have multiple credit rating agencies? Long Questions 1. Explain the role of RBI in Surveillance 2. Discuss in detail about the role of SEBI 3. Differentiate the role of SEBI & RBI B. Multiple Choice Questions 1. India's national stock exchange is located at a. Chennai b. Mumbai c. Navi Mumbai d. Delhi 2. SEBI was created in 198 CU IDOL SELF LEARNING MATERIAL (SLM)

a. 1992 b. 1988 c. 1990 d. 1989 3. The SEBI Act was passed in the year a. 1988 b. 1990 c. 1991 d. 1992 4. A stock exchange member is referred to as a. Stock broker b. Investor c. Issuer d. None of these 5. Securities of ‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐ companies are traded in secondary market. a. Listed b. Relisted c. Unlisted d. None of These Answers 1 – d, 2 – b, 3 – d, 4 – a, 5 – a 15.6 REFERENCES Text Books:  Bhole, L.M., Financial Institutions & Markets. Tata McGraw Hill, New Delhi  Khan, M.Y.Financial Services Tata McGraw Hill, New Delhi  Meir, Kohn, Financial Institutions & Markets, Tata McGraw Hill, New Delhi  Prasanna Chandra: Financial Management, Tata McGraw Hill. 199 CU IDOL SELF LEARNING MATERIAL (SLM)

Reference Books:  Kothari, C.R., Investment Banking & Customer Services Arihant Publishers, Jaipur  Sharpe, William F. etc. Investment. New Delhi, PHI  Pandey, I.M., Financial Management, Vikas Publishing House, New Delhi 200 CU IDOL SELF LEARNING MATERIAL (SLM)