Rating of Debt Instruments - a Model for Evaluation

Abstract

The Indian capital market has witnessed a tremendous growth in the past few years. Companies are relying on capital markets, rather than on institutions, for financing existing operations as well as for new projects. In this process, the average size of securities issued, the number of companies issuing such securities and the number of investors have grown substantially. As the number of companies tapping capital market increases, investors find that the company's size or name is no longer a sufficient assurance of the timely payment of interest and principal. They felt the need for an independent and credible agency, which can judge the quality of debt obligations of different companies and assist individual and institutional investors in making investment decisions. Credit-rating agencies describe their rating as a symbolic indicator of the current options on the relative capability of the issuer to serve its debt obligation in a timely fashion, with specific reference to the instrument being rated. Rating is focused on communicating to the investors, the relative ranking, usually expressed in alphabetical or alphanumeric symbols, and are a simple and easily comprehensible aid for investors.