A quarter century on, India’s first rater is coasting

In 1987, credit raters across the world were already evolved to provide an independent assessment of a company’s creditworthiness.

But in India, it was a binary business. There were only two types of credit: good and bad.

Good, for companies from well-known families such as the Tatas and the Birlas, and bad, or risky credit, was everything else.

“Yield differentials didn’t exist. People operated on the basis of interest rates that were administered,” recalls Pradip Shah, the founding managing director of Crisil.

Shah’s own case is telling. At thirty-something, he was a rising star in the Indian financial sector, having helped in the founding of Housing Development Finance Corporation (HDFC), which introduced home loans in India.

So, when he decided to join a new organisation that was to bring credit rating to India, people thought he was committing harakiri.

Even the International Finance Corporation (IFC), which had helped fund HDFC, found the idea of an Indian rating agency difficult to swallow.

“IFC said this won’t work in India because you don’t know the concept, you don’t know how to operate, or the methodology, and you will never have credibility and you will be brow-beaten by the issuers,” says Shah.

The industrial houses were not enthused by the need for credit ratings either: “We know the banks and they know us,” was their refrain.

The founding team of Crisil also got no encouragement from the leading credit rating agencies they approached for a tie-up. Moody’s sent a team to survey the market and decided it won’t work. Standard & Poor’s met them at the reception and took them no further.

They, therefore, decided to go ahead without foreign expertise.

For credibility, they had the backing of ICICI and its head N Vaghul, as well as the Unit Trust of India. HDFC, too, agreed to participate. They roped in good shareholders in 10 Indian and foreign banks as well as the Asian Development Bank.

Finally, they opened the doors of their Nirlon House office on January 1, 1988.

“I had hired only two people in the few months before that and we had started working on rating methodology, making the brochures… We had nothing except some brochures of Moody’s and Standard & Poor’s,” says Shah about his first days with Crisil.

The rating agencies didn’t share their system for charging fees so Crisil decided that effectively, it should be very low-cost for an issuer to come and get an opinion. Also, they should be able to decide whether to use it or not. If they used it, they would be charged a fee.

One of the first things they did was tie up with a prominent foreign bank to connect to customers through a seminar.

On January 31, they launched the Crisil-Citibank seminar on corporate financial management, to be addressed by a professor from Harvard Business School and one from Rochester.

It was an expensive course, but it was used to introduce themselves to the chairmen of 500 companies in India and their financial directors. They needed 33 participants to break even on the event; they got 37.

“It was a way to create awareness. We had no money to advertise,” says Shah.
Capital was tight in those days.

Crisil’s first cheque came from ICICI. They had to put Rs30 lakh into deposit for the office and a few lakh as deposit for working capital.

“I had no money. My last cheque for my equity came 15 months after we started operations. Can you believe it?”asks Shah.

That was partly because people were still a little sceptical even after they had made their commitments.

With tightly controlled costs, Shah took a pay cut.

“I was the lowest paid Harvard MBA in the world. I was described as such… I was drawing a higher salary in HDFC and in Crisil I got a seven-and-a-half thousand salary… That was the limit, it was not anybody’s fault,” remembers the man, who had to work as a night-watchman to meet expenses while he studied in America for his coveted degree.

But the quest for clients bore fruit soon.
The chairman of Crisil’s rating committee at that time was D N Ghosh, who was also the chairman of the State Bank of India. He spoke to Indian Petrochemicals Corporation for a rating assignment.

“It was part of the strategy. We do it for a company which was apparently the strongest. And if they come out the strongest, then great for us. Then they will use it… We thought the Tatas would come first. But they didn’t. It was a public sector giant which came first,” says Shah.

IPCL got the highest rating, a fact they promptly publicised, indirectly helping Crisil’s cause.

The assignment and cost controls helped the company break even from the first quarter, but the going remained tough since Crisil allowed companies to decide if they wanted to use the rating.

“It’s not that we didn’t get assignments. We got assignments. But they wouldn’t use the rating… they would be upset with us… “You have given me a low rating. See, my bank has given me the best credit rating on loan. They can give me any amount,’” recalls Shah.

But the brand-building was having an impact and within seven years, they had rated 800 companies and over 1,200 debt instruments.

Some of Crisil’s public appeal may also have reflected in the success of its initial public offering (IPO) in 1993. The issue of 20 lakh shares, sold at a premium of Rs40 per share, was oversubscribed 2.47 times.

Shah left Crisil shortly after the float. And though the share price collapsed from `165 to around Rs90 when he exited, eventually, people realised that the organisation was very strong, says Shah.

R Ravimohan took the reins from Shah, made sure that the critics were proved wrong. He guided the company through the turbulent nineties when Crisil downgraded many clients – more than a dozen NBFCs one day -- and there was an immediate furore.

Crisil lost some clients and the companies downgraded jumped to rival raters who had by then set up shop.

The events culled Crisil’s market share of the ratings business from 70% to less than 50% and its share price, which had climbed to Rs400, fell 75% to Rs100.

“We realised that to be truly independent, we could not be overly dependent on the ratings business or on just one type of clientele,” said Roopa Kudva, the current managing director and CEO. “It was essentially Ravimohan’s idea.”

Today, the company runs a massively successful analytics business where clients include 12 of the top 15 investment banks in the world. 

“Absolutely the marquee names. We can’t say more because of confidentiality agreements,” she said.

The derisking has helped a lot, and keeps Crisil away from corporate and political pressures, Kudva said.

So today the core business of rating, Crisil’s raison d’etre, brings in only a third of revenues, while business outside India, which is the knowledge process business, half of revenues.

Under this, Crisil, through businesses it acquired such as Irevna, and the recently bought UK firm Coalition, gives analysts at investment banks the first cuts and data support on companies, facilitating the stock call process.

The business is so successful, Crisil covers 2,400 international stocks today, representing 88% of the global market capitalisation, said Kudva.

To avoid conflict of interest, Crisil won’t rate any of these foreign clients.

Kudva believes the future of its core business in India will in no small measure be driven by the small and medium enterprises, who are understanding the immense benefits of getting themselves rated.