Thread by @AnonymousInves7

ICRA Ltd. - Is the worst behind us?

ICRA was set up in 1991 by leading financial institutions of India as an independent and professional investment information and credit rating agency

Currently, Moody's holds 51.87% in ICRA making it the promoter of the company.

Role of Moody's & ICRA’s Structure

Moody's has a technical agreement wit ICRA where it is responsible to provide certain technical services to ICRA. These include providing a global research base and enrichment of ICRA's employees by training them under Moody's guidance.

Rating Services, a healthy business. What about growth?

Indian rating companies has always been a fundamentally healthy. Meaning, No debt, Consistent Cash flows, Strong Return Ratios, etc. Indian rating companies have been a little off the mark is in giving consistent growth.

Role of Rating Agencies

Simply put, they have to call out the pain points and safeguard investors with the help of their analytical expertise.

Summary of Roles..

Principal Agent Issue

Just like BODs, RAs also have to work for the shareholders/investors but are paid by the company’s management who are vested with decision power by shareholders (Principals).

What happens if PAR equation is disturbed?

This brings in reputation risk. This for rating companies is very important to safeguard.

Dent on reputation can raise a question on all the previous working of the rating agency and also puts future growth in risk.

ILFS – PAR issue live in action?

Grant Thornton, in its special audit report flagged issues related to loans disbursed by IL&FS and rated by RAs

RAs had concerns about group’s operations, RAs gave them positive ratings for 6-7 years until they were finally downgraded.

ILFS – PAR issue live in action?

Cases of potential favors and gifts given by ILFS to senior officials of RAs. SEBI initiated legal proceedings against ICRA, CARE Ratings and India Ratings & Research

9 notch downgrade from "AA+" to "BB"

ILFS didn’t seek for ratings from CRISIL

Top managements used as scapegoats?

Top managers at ICRA & CARE were removed after the Pandora's box broke open. ICRA removed MD&CEO Naresh Takkar and CARE removed MD&CEO Rajesh Mokshi. Here is Naresh Takkar's statement..

Improvements a positive?

ICRA has worked its way to improve the overall quality of companies it rates. Says its not only attributable to improvement in credit quality of existing entities but also discontinuation of lower rated entities as they were not cooperating with ICRA.

Improvements a positive?

ICRA has also managed to reduce drifts in ratings compared to last year. Also, volatility in rating has come down. All the above points are good for ICRA as they reduce reputation risk. Avoiding this risk in this business is a key.

What can drive growth?

- Companies raising money via. Indian bond markets
- M&A markets becoming better over time
- Moving from a transnational business to a more recurring business
- Refinancing, if interest rates continue to fall

Risks

- Business vulnerable to macros which devoid companies from complete control
- Sourcing of reliable data to come at conclusions
- Inadequate depth of Indian debt market
- Bulk of debt raising in the Indian bond market are done by banks
- Likelihood of interest rate hike

Is the worst actually over for Indian rating agencies and ICRA?

Only time will tell..

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