Corporate governance rating services from ICRA

THE INVESTMENT Information and Credit Rating Agency (ICRA) has developed a new product - Corporate Governance Ratings (CGR). The CGR would indicate ICRA's current opinion on the relative level to which an organisation accepts and follows the codes and guidelines of corporate governance practices. Corporate governance is defined as the distribution of rights and responsibilities among different participants in the organisation, such as, the board, managers, shareholders and other stakeholders, and spells out rules and procedures for making decisions on corporate affairs.

The focus of ICRA's CGR will be on corporate's business practices and quality of disclosure standards with respect to the requirements of regulators and interests of its financial stakeholders, that is, its shareholders, lenders and creditors. The rating agency recognises that the implementation of the codes of corporate governance should be true in letter and spirit.

CGR is based on the core principles of corporate governance practices laid down by the business sector advisory group of OECD. These are: fairness, transparency, accountability and responsibility. The codes and standards, which are applicable, have been defined in detail in the various committees constituted by the Securities and Exchange Board of India and the Reserve Bank of India. The rating agency would consider these requirements and various parameters including among others (i) the ownership structure, (ii) management structure including board level issues, (iii) quality of financial reporting and other disclosures and (iv) fulfilment of interests of the financial stakeholders. Besides these broad parameters, the agency would evaluate number of sub parameters for assigning CGRs.

CGR would fall between CGR1, indicating highest level of corporate governance in the Indian context to CGR6 indicating poor level of corporate governance.

The rating agency while evaluating an organisation on the CGR scale of 1-6 would also consider whether the codes and guidelines have just been followed for statutory compliance or the organisation has implemented the concept of corporate governance in spirit as well. The agency would also benchmark the organisations against the codes and standards of Corporate Governance as spelt out by the Securities and Exchange Board of India for listed companies.

CGR will not have any direct linkage with its conventional credit ratings. A credit rating is a current opinion on the relative ability of an issuer to meet its debt obligations as per terms. Whereas, a CGR is a current assessment of various company practices and procedures relative to the codes and standards of corporate governance.

While a CGR can affect the attractiveness of a company to potential investors (debt or equity), CGR is not intended to be an opinion on specific financial obligation, credit quality, capital market valuation or operational performance. It is not an audit, a rating or a financial advice nor is it a recommendation to take any financial decision. Also CGR is not to be interpreted as an indicator of statutory compliance.

For the CGR exercise, the rating agency would have detailed interactions with the senior management of the company, its board of directors including nominee and independent directors, key shareholders, auditors and other financial stakeholders. The information which ICRA will peruse and collect copies of the same would include annual reports, intra-year financial reports, MIS reports, memorandum and articles of association of the company, documents filed with the statutory authorities, records of AGM/EGM, minutes of the board meetings, records of penalties, fines or other violations relating to abuse of shareholder rights and other relevant documents which would be case specific.

ICRA believes that this rating service would assist corporates to develop a credible opinion on its management quality and responsiveness towards the interests of all its financial stakeholders. Improved perception of investors may in turn influence its valuation and facilitate raising of funds at favourable terms. Though CGR is not an indicator of statutory compliance, a higher CGR rating may also improve the comfort level of the statutory authorities and regulators. It can also be used as a check to determine the relative standing of the company with respect to the benchmarks of best corporate practices in the industry.

ICRA will provide its CGR ratings on a formal request of corporates. A CGR rating once accepted will be subject to regular periodic reviews. During these reviews ICRA would incorporate the changes in corporate's position on various parameters in the assigned CGR. For withdrawal of the CGR rating, the corporate would have to provide a written request to ICRA giving a notice period of one year for withdrawal.

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Section  : Business
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