The Federation of Universities

Investment Information and Credit Rating Agency of India Ltd. (ICRA)

INDUSTRY OVERVIEW Credit Rating Global Industry
Evolution The origin of credit rating business in India can be traced back to mercantile credit agencies in the United States of America. The main function was to rate a merchants ability in honoring their financial obligations. Louis Tappen established the first agency in New York in 1841. Robert Dun subsequently acquired the agency in 1859 and thereafter published the first rating guide. John Bradstreet formed a similar kind of mercantile agency in 1849. The growth of rating business to securities rating began in 1909 by John Moody who started to rate US railroad bonds, and subsequently utility and industrial bonds. A publishing company called Poors issued the first rating in 1916 followed by Standard Statistic Company in 1922 and the Fitch Publishing Company in 1924. The two leaders of the global credit rating industry are Moodys Group and Standard and Poor. The international coverage of major rating agencies is different to a certain degree, although both of them have substantial coverage of the US and Europe. Other major rating agencies include Fitch, Japan Credit Rating Agency Ltd. (JCRA) and AM. These global credit rating agencies follow the strategy of globalization to cater to the needs of growing international integration of fixed income markets among the OECD countries, as also increasing their business in local markets, especially in developing countries. This method allows creating global consistency and setting local standards for credit analysis. Asian bond markets are growing rapidly leading the topmost global rating agencies to enter the fray with the help of strategic tie-ups with local credit rating agencies.

Credit Rating Indian Industry

Evolution CRISIL (Credit Rating and Information Services of India Limited), the first credit rating agency in India, was set up in 1987. ICRA (then known as, Investment Information and Credit Rating Agency of India Limited) was established in the year 1991; a third agency called CARE began its operations in 1993. Fitch India, a wholly owned subsidiary of Fitch group started its operations in 1997. Initially, Indian rating agencies faced several challenges because the corporate markets in India were in nascent state. Thereafter, the credit rating became mandatory for issuance of debt instruments with maturity/convertibility of 18 months and above. RBI guidelines made rating mandatory for issuance of commercial paper, for public deposit schemes and for NBFCs. Credit rating made rapid strides in terms of the number and value of instruments, which have been rated. SEBI, along with stock exchanges, made ratings mandatory in 2003 for debt instruments under private placement having a maturity base of one year or more, and which are to be listed. In the same way, non-government provident funds, superannuation funds, gratuity funds can also invest in bonds issued by public financial institutions, public sector companies/banks and private sector companies, which are duly rated. The above said funds can invest in shares of a company having investment grade debt rating from two credit rating agencies at least. Under this category, investments in mutual funds and insurance companies that are unrated are restricted. 1

Corporate Debt Market Development

Indian Corporate bond market is relatively small at 5.3% of GDP vis--vis other markets. The market size of debt securities as a percentage of GDP in other countries is given below. Table 1 Country China Thailand Malaysia Korea Brazil Mexico % of GDP 10.1% 17.8% 51.9% 58.4% 12.5% 3.5%

Source: Developing Markets for Long-term Finance prepared by the World Bank and CRISIL Limited for FICCIs Capital Markets Conference CAPAM 2007. Analyzing resource mobilization pattern in India over the decade from 1995-2005 reveals that debt share in resource mobilization has tremendously increased from 59% in 1995-96 to 75.4% in 2005-2006. Private placements accounted for major parts. Reasons attributed for the rise in private placements are relatively lower cost, lesser time required to conclude the transactions, comparatively easier disclosure requirements, and lesser regulatory oversights. Figure 1: Corporate Bonds with a Tenor or Put/Call Greater than One Year (Rs. in million)

Source: Prime Database.

Domestic Bond Market Rating Penetration

Market penetration levels for ratings across various industries and companies have increased to a great extent. Non-regulated debt issuances stem from demand made by the investor community comprising banks, mutual funds, and pension funds, subject to certain restrictions. During the year 2004-2005, the total debt with put/call option for one year was Rs.55,384 crore in privately placed securities. Out of this, Rs.53,749 crore was credit rated and the penetration level of credit rating was 97%.1 In 2005-2006, the privately placed debt was Rs.794, 458.25 crore with a penetration level of 96.25%.

Source: Finance Ministry Report, December 2005, Prime Database.

Figure 2: Total Vs. Rated Issues Amount

(Rs. in million)

Source: Prime Database.

Market Size
Indian credit rating industry has registered a tremendous growth in the last three years. The average outstanding Commercial Paper rates increased from Rs.77,390 million in 2004 to Rs.116,520 million in 2005 to Rs.171,700 million in FY-2006. The corporate bonds have also increased from Rs.503,484.59 million in FY-2004 to Rs.578,691.55 million in FY-2005 to Rs.764,633.25 million in FY-2006. The cumulative outstanding publishers increased from 1,199 in FY-05 to 1,237 in FY-06. As on November 30, 2006 the number of cumulative outstanding issuers list has 1,382 more cumulative outstanding publishers. Figure 3: Cumulative Number of Issues

Source: DebtonNet.

Segmentation of the Market

In rating industry, different kinds of instruments, broadly classified into four major sectors, are rated.

Corporate Sector
Rating agencies provide ratings to Indian companies for different kinds of debt instruments such as bonds, debentures, preference capital, commercial paper and other short-term debt instruments by assigning them line of credit ratings. There is huge demand for funds from the corporate sector, the latter witnessing growth due to an increase in capital investment, capacity creation and business growth leading to overall growth in working capital. 3

Corporate houses raise funds either by taking loans from banks, issuing bonds or Commercial Paper or resorting to external commercial borrowing/foreign currency convertible bonds. Corporates demand for credit rating has also been on the rise depending upon who raises funds through bonds or commercial paper. Demand for ratings is influenced by choice of sources in funding, which in turn are influenced by liquidity condition in the banking system, prevailing interest rate, and changes in currency expectations etc.

Financial Sector
In this sector, ratings are done for financial institutions, banks and NBFCs (including asset financiers, capital market related entities and housing finance companies). The instruments for banks are Tier II bonds, hybrid debt capital, and certificate of deposits and fixed deposits programs and similar long-/short-term debentures, commercial paper, and certificate of deposits. The strong economic fundamentals are the driving force for the growth in financial sector ratings. These in turn depend upon the demand for funds by banks, financial institutions and NBFCs in maintaining prescribed capital adequacy as well as financing growth disbursements. Figure 4: Rated Debt raised by Banks/FIs (Rs. in million)

Source: Prime Database.

Structured Finance Ratings

Structured finance segment comprises of Asset-Backed Securitization (ABS), Mortgage Backed Securitiztion (MBS), Collateralized Debt Obligations (CDO), Partial Guaranteed Structures (PGS), Future Flow Transactions (FFT), and Loan Sell Offs (LSO). The reasons for securitization are: Better utilization of the available capital. Alternative funding. Cheaper source of funding especially for lower rated originators. Reducing credit concentration. Risk management: interest rates and liquidity.

In the last few years, there has been an increase in domestic finance market structure, changing available capital leverage, from rapid growth in private sector banks. Investors in this sector have been investing in highly rated pools, as the market for lower rated pools is yet to develop. Seventy percent of the market accounts for asset backed securities; on the other hand, mortgage backed securities have been lower due to investors concerns on relatively longer tenure and higher complexity in structuring, requirements to mitigate interest and prepayment risk leading restricted liquidity in secondary market.

Figure 5: PTC Issues

(Rs. in million)

Source: Prime Database. According to the guidelines issued by the RBI, there has been disallowance on profit booking and reduction in originators capital to the extent of subordination. This change has adversely affected the securities market; there has been a decrease in the number of privately placed securitized instruments, although direct assignment or bilateral deals including on-tap securitization instruments increased. Securitization is used to finance retail assets, which have shown a healthy growth in recent years. Financiers can also manage capital adequacy, balance sheet exposure and liquidity and ALM related risks besides providing alternative sources of funding.

Business Overview
ICRA is one among the four major credit rating agencies in India providing wide range of services and products. ICRA was established in the year 1991 as a credit rating agency by a consortium of financial/investment institutions, commercial banks and financial services companies. The company operates as a professionally managed commercial entity with the objective of maximizing shareholders value. The main function of ICRA is to provide rating service. The company has its own subsidiaries that provide (i) consulting services, (ii) information technology-based services, (iii) information services, and (iv) outsourcing services. Moodys India, a part in Moodys group, is the promoter for ICRA. In addition to this, Moodys investors service, an international rating agency, has also entered into the Technical Services Agreement for providing technical service to the company. ICRAs business has grown consistently from 1991, its inception date and there has been expansion in the portfolio of products and services it offered. Besides the growth in rating business, the company also diversifies its products and services to increase its revenue. The total revenues of the company have also come up from Rs.333.67 million in fiscal year 2003 to Rs.559.09 million in fiscal year 2006 at CAGR of 18.77%.

ICRA Group
ICRA has three subsidiaries namely, ImaCS, ICTEAS and ICRA online. The company engages in providing rating and grading services, research based information services and outsourcing services. ImaCS provides management consulting services to clients in India and abroad while ICTEAS provides business solutions and computer aided engineering services, and ICRA online provides mutual fund based information services and outsourcing services. In recent years, ICRA online is complementing the information services business by providing technology solutions to targeted distributors of third party financial products, insurance brokers and stock broking houses. 5

Competitive Strengths of ICRA

The primary strengths of ICRA are: One of the few credit rating agencies in India ICRA is one among the four credit rating agencies in India. During Fiscal Year-2006, the volume of debt that the company rated was Rs.1389.49 million; the number of published issuers outstanding was 398 as on March 31, 2006. The volume of debt as on December 31, 2006 was Rs.988.64 million and outstanding issuers were 399. Rich database and research support ICRA products and services ICRA possesses in-depth industry knowledge in several sectors supplemented by knowledge on management systems thus enabling the company to develop a comprehensive range of products to address its requirements. The diverse portfolio of products and services enable the company in catering the additional clients along with addressing a larger base of potential clients. Innovation in products and services The success of ICRA lies in its ability to successfully introduce its new products and services. The company in the last five years have introduced various rating and grading products such as corporate governance ratings, project finance ratings, mutual fund ratings and grading of maritime training institutes, health care institutions, and real estate developer and projects. ICRA has acquired ICRA online (previously called Online India Capital.com), a dedicated portal for mutual funds in India. Good track record In order to use ratings as reliable indicators for credit risk, a rating agency has to demonstrate a strong correlation between actual performances with the information conveyed. ICRA ratings demonstrate reliable information and a higher degree of stability with greater resilience to change. Strong management team and pooling right employees ICRA management team and other professionals come from diverse backgrounds such as commercial banks and lending institutions, finance companies and other rating agencies and possess high qualifications in varied disciplines such as engineering, business management, law and accountancy. The diversified experience helps the company to adapt itself to creative and cross-functional environment. The manager and professional staff also possess domain experience in various sectors in order to cater the sector-specific needs. Association with Moodys Group Moodys India, a part of Moodys Group, is the promoter for ICRA. In addition to it Moodys Investor Service, an international rating agency, has entered into Technical Services Agreement with ICRA to provide technical service to the company in addition to the outsourcing services it provides.

ICRAs Strategy
ICRAs objective is to enhance its position as a leader in provider ratings, research, consulting and outsourcing services. The company focuses on enhancing the shareholders value by

pursuing strategies that focus on increasing profitability and return on equity. ICRAs key strategic elements are: Expanding Business by using ICRA Brand Name, Core Competencies and Strategic Relationship ICRA, in order to increase its market share, provides high quality service and plans by focusing on critical success factors. Other initiatives include improving the companys brand visibility and enhancing the services levels to franchise it among issuers and intermediaries and investors. In this process, the company employs disseminate research, rating views and explores opportunities and it also provides quality credit research in order to benefit the company from its partnership from Moodys. Expanding Service Offerings ICRA continues acquire new clients to expand its wide range of products and services to increase its business from existing clients. Expanding ICRAs Global Opportunities The company plans to supplement its basic services such as consulting services, outsourcing services and IT-based services by forming alliances and/joint ventures outside India. It also believes that these actions would allow it to develop new markets, enhance employees services and create market presence for the company. Attracting, Training and Retaining Employees The success of a company lies in its ability to maintain, grow, and pool strong and experienced professionals. ICRA has been successful in building up a team of talented professionals and it continually seeks to attract and manage highly skilled employees. It shall continue to invest in areas of career development and training of employees, with the objective of enhancing their technical skills and leadership capabilities. It also holds opinion of maintaining right balance between performance bonuses, proposed stock options and other incentives offered to its employees.

ICRAs Operations
ICRA is primarily engaged in the business of providing rating services. The company currently has subsidiaries that provide (i) consulting services, (ii) information based services, (iii) information services, and (iv) outsourcing services. Credit rating symbolizes the current opinion on the relative capability of the company to service debts and other obligations in a timely manner, with reference to the instrument ratings. The main characteristic of credit rating is to highlight the relative credit risk investors face in their investment decisions. The company rates various instruments issued by various entities such as corporates, NBFCs, financial institutions, Public Sector Undertakings (PSUs) and municipalities. The financial instruments include bonds and debentures, fixed deposit schemes, Commercial Papers, Certificates of Deposit and preference shares. ICRA rates structured financial obligations, which include Asset-Backed securities, mortgagebacked securities, partial/full guaranteed structures, future flow transactions, and loan sell offs. The structural financial ratings provide picture of the timely servicing debt obligations in accordance with the terms of the structure. The components of SFR include legal risk, credit quality of the underlying asset and the various features of structures. ICRA line of credit rating services entails evaluation of capability of an issuer in meeting the debt obligations against a specific line of credit. ICRAs credit ratings provide an opinion on the general creditworthiness of rated entities in relation to their unsecured obligations; the ratings may spread across various debt instruments. ICRA performs the function of project financing, which usually involves setting up special purpose vehicle, which raises debt and also services it from its own cash flows; in this process, it evaluates the risk associated with such infrastructure or other projects from the perspective of the lender. This helps banks, financial institutions to have information in order to form an independent opinion on the risk faced by such entities. Debt fund and credit risk rating product offered by ICRA targets on debt mutual funds. This reflects the assessment of a debt fund with its investment objective and policies, the creditworthiness of investment portfolio so that investors have simple measure to know their credit risk. 7

As in insurance companies, ability to pay claims is also rated (CPRs). It is concerned about the ability of the insurer to honor its obligations and claims made by policyholders in specified time. ICRAs CPR process involves analyzing the fundamentals of insurers business and its competitive position, and focusing on the value of insurers franchise, organizational structure/ownership, and underwriting and investment strategies. In addition, it includes analyzing the profitability of the insurer, liquidity, operational and financial leverage, capital adequacy, and asset liability management method. ICRAs corporate governance ratings provide current opinion on the level to which an organization accepts and agrees to the codes and guidelines that serve stakeholders interest in the form of shareholders, customers and creditors. The company in order to assign ratings examines various aspects such as ownership structure, financial stakeholder relations, financial transparency and information disclosure, and the composition of Board of Directors. ICRA adapts a product variant called Stakeholder Value and Governance rating, which helps in providing knowledge on value creation and value management for all stakeholders of a body corporate. The rating is done after examining the entitys actual performance and the accrual of benefits from such performance among all its stakeholders.

History and Corporate Matters

Scheme of Demerger In an arrangement between ICRA and IMACs, sanctioned by the High Court of Delhi order dated March 29, 2006, the consulting division of ICRA was demerged and transferred on a going concern basis to IMACS with retrospective effect form April 1, 2005. In the same year IMACS issued 5,164,784 equity shares of Rs.10 each to ICRA on September 11, 2006. Table 2: Key Events and Milestones Relating to ICRA Year 1991 1996 Key Events, Milestones and Achievements Incorporation of our Company. Launched credit rating service on September 1, 1991. Entered into an agreement with Financial Proformas Inc., a part of the Moodys Group, to provide, inter alia, credit education, risk management software, credit research and consulting services to commercial banks, financial and investment institutions, financial service companies and mutual funds in India. Started the consulting services business. Moodys India, an indirect subsidiary of Moodys Corporation, invested in our Company. Moodys Investors Service, a wholly owned subsidiary of Moodys Corporation, entered into the Technical Services Agreement. Entered into a technical services agreement with Credit Rating & Collection, Kuwait. Acquired minority stakes in and entered into technical services agreement with Online India Capital.Com (Subsequently, name changed to ICRA Online Limited). Entered into a technical collaboration agreement with Credit Rating Agency of Bangladesh Limited. Launched our Outsourced Services Division. Entered into an MOU with National Small Industries Corporation Limited for launching NSIC-ICRA performance and credit rating scheme for small-scale enterprises in India. Acquired Computer Exchange Private Limited (subsequently name changed to ICRA Techno Analytics Limited). Acquired a majority stake in ICRA Online. Demerged our consulting division and transferred to IMaCs, our whollyowned subsidiary, with effect from April 1, 2005.

1997 1999

2001 2003

2004 2005

2006

Source: 8

Regulations and Policies

Securities and Exchange Board of India (Credit Rating Agencies) Regulations, 1999 ICRA has to obtain registration certificate from Securities Exchange Board of India under the provisions of CRA Regulations. These regulations are valid for a period of three years and can be renewed thereafter. The regulations of CRA prescribe a code of conduct need to be complied with by credit rating agencies and their clients and mandate them to be honest, deligent for professional conduct of business in order to protect the investors interest. It also framed appropriate procedures in order to monitor trading by employees, the securities of its clients, in order to prevent insider trading, frudalent and unfair practices in securities market. CRA regulations regulate the terms of agreement between credit rating agencies and their clients. In this regard, the CRA regulations also require credit rating agencies to periodically monitor the securities during their lifetime, so that ratings can be reviewed periodically and disseminate information on any newly assigned ratings or any change in the ratings assigned earlier. According to these guidelines, every credit rating agency is required to have rating committee consisting of professionally qualified and knowledgeable members as the committee takes all the rating decisions. In accordance with CRA regulations there exists prohibition from rating securities issued by the companys associates, subsidiaries, and promoters or by a borrower, subsidiary or an associate of the company promoter. Every credit rating agency must appoint compliance officer, who would be responsible for ensuring compliances with applicable laws. If the credit rating company fails to comply with conditions of certificate of registration or contravenes any provisions of the SEBI Act, its registration is liable for suspension.

Foreign Investment Regulations

FEMA Regulations An FDI security in an Indian company is regulated by rules, regulations and notifications made under the FEMA. The RBI has notified the Foreign Exchange Management (Transfer or issue of security by a person Resident outside India) Regulations, 2000 (FEMA Regulations) in order to regulate the issue of Indian securities by or to persons resident outside India. Besides, FDI in India also governs the provisions of the Foreign Direct Investment Policy (FDI Policy), issued from time to time by the DIPP, the administering authority in respect to FIPB. FDI Policy In this policy, credit rating is done for 19 activities included under the head non-banking financial activities for which FDI has automatic route. Subject to certain capitalization norms, they are: a. b. c. If FDI is less than 51%, US $0.5 million to be brought. If FDI is more than 51% and up to 75%, US $5 million to be brought in upfront. If FDI is more than 75% and up to 100%, US $50 million, out of which 7.5 million to be brought in upfront and balance in 24 months.

If foreign investor does not fulfill the above said norms, then it requires approval of FIPB.

Regulations Mandatory to Rating/Grading Securities

Insurance Companies Governing Regulations The Insurance Regulatory and Development Authority (Investment) Regulations, 2000 dated August 14, 2000 mandates an insurance company to invest only in assets in pension business, general annuity business and group business and on securities having very strong grade from reputed and independent rating agencies. In addition to this, every general insurance company and every reinsurance company is required to invest its assets in very strong securities; this even applies to deposits and loans with NBFCs. 9

NBFCs Regulations Non-Banking Financial Companies accept public deposits (Reserve Banks). As per Directions, 1998, notified by the RBI vide notification No.DFC.118/DG (SPT)-98 dated January 2, 1998, and duly updated by notification No. DNBS (PD) CCN.75/03.02.01/2006-2007 dated July 1, 2006, this regulation says that non-banking financial company having net owned fund of Rs.20 lakh and above is unauthorized to accept public deposits, unless it obtains certain investment grades or other specified ratings by rating agencies, at least once a year and a copy of this is sent to the RBI. According to RBI circular dated March 31, 2006 all residuary non-banking companies are mandated not to invest less than 10 percent of the aggregate amount of liabilities in fixed deposits or certificate of deposit of scheduled commercial bank or in certificate of deposits by financial institutions. But if such certificates are rated AA+ or its equivalent by approved Credit rating agency then they are accepted. Regulations on residuary non-banking companies are required to invest a minimum of 75% of the aggregate amount of liabilities in securities of state or central government or in bonds or debentures rated not less than AA+ and approved by credit rating agency. Mutual Fund Regulations The Securities and Exchange Board of India (Mutual Funds) Regulations, 1996, mandates mutual fund schemes to invest 15% of their net asset value in debt instruments. However, a credit rating agency registered with SEBI rates the mortgage-backed securitized debts issued by a single issuer. There may be relaxation up to 20% of the net asset value of the scheme with prior approval of the board of trustees; these limits are only applicable to investments in government securities and money market instruments. In this unrated instruments mutual funds shall not invest more than 10% of their net asset value; and total investment in such instruments shall not exceed 25%. SEBI notification dated August 3, 2006 has introduced Capital Protection Oriented Scheme, which endeavors to protect the capital invested, by suitable orientation of portfolio structure. SEBI registered credit rating agency should compulsorily rate these units in order to view its portfolio structure and to attain protection of the capital invested. As per the additional regulations issued by SEBI dated August 14, 2006, a Mutual Fund that proposes to offer a capital protection oriented scheme has to obtain ratings from a SEBI registered credit rating agency so that an idea of proposed portfolio structure and key information memorandum is obtained. The rating is done to view the degree of certainty in achieving the objective of capital protection; as indicated in the offer document of the scheme, these are reviewed quarterly with highest investment grading given to debt components in a portfolio structure.

Regulations Pertaining to Primary Dealers in Government Securities

The RBI circular dated March 8, 2004 mandate all primary dealers in government securities to invest only in rated non-government securities, which may be in the form of Capital Gains bonds or bonds issued by central or state government sponsored institutions. However, primary dealers can invest in unlisted and unrated non-government securities at 10% in their non-government securities portfolio on an on-going basis. This ceiling is inclusive of investment in security receipts issued by securitization companies and also investment in asset backed and mortgage backed securities.

Commercial Banks Regulations

RBI in its circular dated November 12, 2003 mandates all commercial banks to make new investment only in rated non-SLR securities.

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In its further notifications dated June 11, 2004, the RBI has considered that long-term bonds for infrastructure financing issued by scheduled commercial banks through public issue or through private placement are to rated by well known credit rating agencies registered under SEBI.

Financial Institutions Regulations

An RBI circular dated February 1, 2006 has notified all banks, financial institutions and non-banking financial companies that securities issued for special purpose in securitization transaction are to be compulsorily rated by agency registered under SEBI. These ratings are to be updated for over six months.

Investment in Corporate and Debt Securities

SEBI in circular dated September 30, 2003 mandated compulsory rating for debt securities having one year or above tenure, and which listed companies issue.

IPO Grading
A SEBI circular dated April 24, 2006 has provided option for unlisted companies who are making initial public offering of equity shares, or any other securities which are to be exchanged with equity shares, has to obtain credit rating.

Mortgage Backed Securities

The RBIs master circular dated July 1, 2006 issues all commercial banks to ensure that the housing loans are securitized for the issue of mortgage backed securities and these to be in relation to the investment grade assigned at the time of issuing special purpose vehicle.

Commercial Papers
All participants in the issuance of commercial paper has to obtain a minimum specified credit rating, in accordance to the regulations issued by the RBI dated October 10, 2000. In addition to this, the RBI issued special circular dated April 30, 2003, which authorizes non-banking entities including corporates bodies to provide unconditional and irrevocable guarantee for credit enhancement in Commercial Paper, provided they have high value of credit rating compared to rating provided by a credit rating agency.

Debt Instruments Issue Regulations

SEBI Guidelines, 2000, prescribe companys making public issue or certain right issue of convertible/non-convertible debt instruments must obtain grading, from not less than two credit rating agencies, this rating must be disclosed in the offer Document.

Maritime Training Institutes

The Director General of Shipping, through its circular dates January 1, 2004 makes trading optional for all existing maritime training institutes. In this situation, institutes that are graded are given special weightage over their counter parts.

Financials
Financial statements reveal the true picture of a company. The following table summarizes the financial information restating it from the consolidated financial statement for nine-month period ended December 31, 2006 and for fiscal years 2006, 2005 and 2004. These statements are prepared in accordance with Indian GAAP and the SEBI guidelines.

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Table 3: Profit and Loss Summary

(Rs. in million) Nine Months Ended December 31, 2006 Rs. in million Revenues Rating services Consulting services Information technology based services Information services Outsourcing services Other income Total Revenues Expenditure Personnel Expenses Purchases Administrative Expenses Depreciation Interest Other Expenses Miscellaneous expenditure written-off Total Expenditure 214.08 0.25 53.29 20.38 0.02 61.83 0.56 350.41 41.77 0.05 10.40 3.98 0.00 12.06 0.11 68.37 238.19 0.60 58.64 23.12 1.35 71.89 0.43 394.22 42.60 0.11 10.49 4.14 0.24 12.86 0.08 70.52 169.42 0.00 54.25 14.25 0.00 57.58 0.14 295.64 Fiscal 2006 % age of total revenue 164.87 29.48 5.99 (10.06) 0.00 25.41 2005 % age of total revenue 87.03 22.74 6.69 (8.28) 0.00 21.15 2004 % age of total revenue 104.20 29.82 12.54 (10.72) 0.00 31.64 44.27 0.00 14.18 3.72 0.00 15.05 0.04 77.26 132.43 0.00 45.80 13.74 0.00 53.16 0.15 245.28 37.89 0.00 13.11 3.93 0.00 15.21 0.04 70.18 285.18 87.52 81.16 14.51 27.04 17.09 512.50 55.64 17.08 15.84 2.83 5.28 3.33 100.00 312.94 121.33 78.30 15.58 15.06 15.88 559.09 55.97 21.70 14.00 2.79 2.69 2.85 100.00 256.16 95.07 0.00 14.43 5.86 11.15 382.67 66.94 24.84 0.00 3.77 1.53 2.92 100.00 244.88 71.75 0.00 10.47 1.59 20.79 349.48 70.07 20.53 0.00 3.00 0.45 5.95 100.00 % age of total revenue Rs. in million Fiscal 2006 % age of total revenue Rs. in million 2005 % age of total revenue Rs. in million 2004 % age of total revenue

Nine Months Ended December 31, 2006 Rs. in million Net profit before tax and extraordinary items Extraordinary items Provision for taxation Minority interest Profit after tax 162.09 22.23 (48.45) 0.00 135.87 % age of total revenue 31.63 4.33 (9.45) 0.00 26.51

Rs. in million

Rs. in million

Rs. in million

33.49 (56.27) (0.01) 142.08

25.62 (31.70) 0.00 80.95

43.84 (37.46) 0.00 110.58

Source: Complied from Various Annual Reports of the Company. Table 4: Balance Sheet Summary
(Rs. in million) Sl. No. A. Assets Fixed Assets-gross block Less: Depreciation Net Block Capital Work-in-Progress Total B. Goodwill on Consolidation 350.73 (129.85) 220.88 4.05 224.93 51.51 51.51 51.44 0.00 0.00 329.31 (132.73) 196.58 2.33 198.91 288.26 (102.20) 186.06 0.00 186.06 228.44 (90.56) 137.88 0.00 137.88 Particulars As at December 31, 2006 As at March 31, 2006 As at March 31, 2005 As at March 31, 2004

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(Rs. in million) Sl. No. C. D. Investments Current assets, loans and advances Receivables Cash & bank balances Other current assets Loans and advances Total Current assets, loans and advances Total Assets E. Liabilities & Provisions Loan funds Secured loans Current liabilities & provisions Sundry liabilities Provisions Deferred Tax Total Current liabilities & provisions Total Liabilities & Provisions F. Net worth Represented by: Shareholders funds Share Capital Reserves & Surplus Minority Interest Less: miscellaneous expenditure not written off Total 88.05 980.25 0.00 (2.99) 1,065.31 88.05 848.20 0.07 (3.62) 932.70 88.05 749.87 0.00 (0.68) 837.24 88.05 704.06 0.00 (0.58) 791.53 93.75 69.11 6.51 169.37 169.75 1,065.31 77.36 107.11 6.47 190.94 191.56 932.70 56.81 80.70 3.86 141.37 141.37 837.24 52.03 102.36 3.60 157.99 157.99 791.53 0.38 0.62 0.00 0.00 197.86 117.35 2.17 85.93 403.31 1,235.06 129.46 63.30 2.54 89.02 284.32 1,124.26 98.05 37.96 2.32 58.07 196.40 978.61 70.51 32.50 5.32 59.41 167.74 949.52 Particulars As at December 31, 2006 555.31 As at March 31, 2006 589.59 As at March 31, 2005 596.15 As at March 31, 2004 643.90

Source: Complied from Various Annual Reports of the Company. Note: Figures as at 31st March 2002, 2003 and 2004 for ICRA limited on stand alone basis. The financial figures as at 31st March 2005 are consolidated for ICRA and ICRA Management. Consulting Services Limited (IIMaCS) as IMACS became subsidiary in 2004-2005. Consolidated figures for ICRA, ImaCS, ICRA Techno Analytics Limited and ICRA Online Limited became subsidiaries in 2005-06. Table 5: Significant Accounting Ratios
(Rs. in million) Particulars Networth (Rs. in million) (A) Adjusted Profit after Tax (Rs. in million) (B) No. of Shares outstanding at the and (C) (in Nos.) Weighted average number of shares outstanding (D) (in Nos.) Earnings per Share (EPS) (Rs.) (B/D) Return on Net worth (%) (B/A) Net Asset Value per Share (Rs.) (A/C) Cash from Operating Activities (Rs. in million) (E) Cash Earnings per Share (Rs.) (E/C) As at December 31, 2006 1,038.01 117.44 8,805,100 8,805,100 13.34 11.31% 117.89 101.01 11.47 As at March 31, 2004 923.73 126.26 8,805,100 8,805,100 14.34 13.67% 104.91 71.71 8.14 As at March 31, 2005 837.48 80.95 8,805,100 8,805,100 9.19 9.67% 95.11 30.80 3.50 As at March 31, 2004 791.53 110.58 8,805.100 8,805,100 12.56 13.97% 89.89 64.93 7.37

Source: Complied from Various Annual Reports of the Company. Note: Adjusted profit after tax and Cash from operating activities for nine months ended December 31, 2006 are not annualized. 13

Dividend Policy ICRAs Board of Directors approved by shareholders recommends declaration and payment of equity shares, which are depended on a number of factors. The table provides information of dividends declared by ICRA during the last five fiscal years. Table 6 Fiscal 2006 Fiscal 2005 Fiscal 2004 Fiscal 2003 Face value of Equity Shares (Rs. per share) Dividend (Rs. in million) Dividend Tax (Rs. in million) Dividend per Equity Share (in Rs.) Dividend Rate (in %) 10.00 35.22 4.94 4.00 40.00 10.00 30.82 4.32 3.50 35.00 10.00 44.02 5.64 5.00 50.00 10.00 26.42 3.38 3.00 30.00 Fiscal 2002 10.00 22.02 0.00 2.50 25.00

Source: Complied from Various Annual Reports of the Company.

Conclusion
For improving investor protection and to ensure transparency and disclosure by entities, and in order to tap capital market funds, SEBI has come up with independent assessment initial public offerings of equity shares. With the amendments to SEBI (Disclosure and Investor Protection) DIP Guidelines, 2000 released on April 24, 2006 SEBI has included a new clause on IPO grading. According to this clause, An unlisted company making IPO of equity shares or any securities which may be converted into or exchanged with equity shares at later date may opt to obtain grading for such an IPO from one or more credit rating agencies where an insurer obtains IPO grading, it shall disclose all grading it obtained, including unaccepted grades, in the prospectors and abridged prospectors. All this has resulted in opportunity growth for domestic rating agencies. Being new concept to the rating agencies may be insignificant at present. Though its long-term potential will depend on the acceptance level by market participants. The amount raised from IPOs has increased from Rs.82,013.05 million in FY-1996 to Rs.214,315.6 million in FY-06.

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