In 1986, a young management graduate from Harvard who was doing very well at India’s largest mortgage lender HDFC, wrote to S S Nadkarni, chairman of IFCI, then a leading financial institution. Pradip Shah, a young man who had already been marked out for a leadership role by HDFC’s famed founder, H T Parekh, suggested to Nadkarni that IFCI should start a credit rating agency.
Those were the early days of opening up — in the form of foreign joint ventures in the auto sector, and easing of imports of white goods — and stock markets were relatively robust. But the concept of rating a company or its debt offerings, though popular in global markets, was still alien. This was also an age of administered interest rates.
Before Nadkarni could respond, he was moved to IDBI. Shah then bounced the idea off N Vaghul, the head of another top financial institution then, ICICI. Vaghul quickly bought into the idea, and threw ICICI’s weight behind the venture. Parekh was reluctant to let go of Shah — he told Shah that he was a potential boss at HDFC, and suggested that his career move was risky. But he relented by the end of 1987, and on January 1, 1988, India’s first credit rating agency, Crisil, was in business — with Shah as Managing Director and Vaghul as chairman.
Many banks came on board to diversify the shareholding base, even though top investors such as IFC, the World Bank’s investment arm, declined to take a stake. But the Asian Development Bank came along.
The concept — of rating a company or its debt offering to enable firms with good financials or business models to raise funds at lower costs, and for investors to judge the quality of firms — was completely new to the country then. Policymakers, including regulators, intermediaries and, importantly, issuers of capital such as companies, had to be educated. The new rating firm had to invest in long hours of discussions with company managements.
Shah, who discussed the ratings business with people who had worked in international firms such as Standard & Poor’s and Moody’s, reckons that the business took off after companies were persuaded — through, for example, pitches like how they could borrow cheaper than a competitor even with a rating that was not in the top rung — that value could be created for them. In those pre-liberalisation days, hardly anyone sought to engage big corporates beyond a point on financials and business models — some of these companies found the interactions useful, and agreed to get their bonds rated. It was during this period that India’s largest bank, SBI, made the first attempt to get government approval for a rating for its overseas borrowings.
Another strategy that worked was a corporate finance programme for India’s top CEOs, organised in association with Citibank. State owned firm IPCL was the first one to get its bonds rated at a time when it was restricted to just judging the creditworthiness of companies issuing bonds or offering fixed deposits — and, slowly, other companies followed. As India opened up in the first half of the 1990s, it helped that the Finance Ministry often reached out to Shah and Crisil on possible policy measures. The ratings agency had by then started offering comprehensive analysis on corporate India, getting a boost on the way through helping Malaysia and Israel to launch their own rating agencies.
By 1993, Crisil was well positioned to ride on the back of the prevalent investor euphoria. It got listed with its public offering being oversubscribed. After Shah left in 1994 to start a venture fund (with a headline-grabbing pay package of Rs 1 crore, the first professional in India to get such an offer), the ratings firm under Ravi Mohan, also from ICICI, diversified into areas such as advisory services, offering risk solutions, rating other products including IPOs, and grading real estate firms, small and medium business firms, mutual funds, etc. Its success prompted Standard & Poor’s to buy into the company with a stake under 10% in 1997, and going on ultimately to acquire majority control in 2005.
In keeping with the trend of the 1990s, other institutions were quick to follow in the business. IFCI — a financial institution that has lost its way over the last 15 years — jumped into the segment, with its chairman, D N Davar, roping in the former SBI chairman, D N Ghosh, to chair a new agency — the Investment Information and Credit Rating Agency of India, which came to be known later as ICRA. Other institutional shareholders came on board, and as the ratings firm grew, Moody’s acquired a stake, and later increased its holding. IDBI promoted another credit ratings agency, CARE — and some years later, the Indian arm of Fitch, another global ratings firm, set up shop in India, adding to the number of credit rating agencies in the growing economy. Today, there is oversight by Sebi over the ratings firms, whose coverage of Indian corporates and industry has expanded widely.