Background

ICRA has been providing investors with independent, professional and reliable rating opinions on debt instruments since 1991. Recognizing the increasing importance of corporate governance, ICRA has recently launched a new product – Corporate Governance Ratings (CGR)- for the Indian market. Corporate Governance is defined as the distribution of rights and responsibilities among different participants in the organization, such as, the Board, managers, shareholders and other stakeholders, and spells out rules and procedures for making decisions on corporate affairs.
A CGR is a symbolic representation of ICRA’s current opinion on the relative level to which the rated company accepts and follows the codes and guidelines of governance practices both in letter and spirit.

The Benefits
ICRA’s Corporate Governance Rating is designed to enable rated companies:
 
 

The Rating Process

ICRA assigns CGRs to corporate entities on receiving a formal request from them. For the CGR exercise, ICRA has detailed interactions with the senior management of the companies concerned, their Board of Directors (including Nominee and Independent Directors), key shareholders, statutory and internal auditors, and other financial stakeholders. The information that ICRA analyses includes: Annual Reports; intra-year financial reports; Management Information System reports; documents filed with the statutory authorities; records of annual and extraordinary general meetings, agenda papers and minutes of Board meetings; records of penalties, fines or other violations relating to abuse of shareholder rights; and other relevant documents.
ICRA ensures complete confidentiality of the information provided by a company seeking a CGR and makes the rating public only when it is accepted by the company concerned.
A CGR rating once accepted is subject to regular periodic reviews. For withdrawal of the CGR rating, the rated company has to provide a written request to ICRA giving a notice period of one year for withdrawal.

Overview of the Rating Methodology

The focus of ICRA’s CGR is on a corporate’s business practices and quality of disclosure standards determining equitable treatment of, and fairness to, the interests of its financial stakeholders, viz., its shareholders, lenders and creditors. Compliance with regulatory requirements is only one of the factors in ICRA’s CGR analysis, since the CGR exercise covers much further ground.
ICRA’s CGR is based on the core principles of corporate governance practices as laid down by the business sector advisory group of the Organization of Economic Co- operation and Development (OECD). These principles are: Fairness, Transparency, Accountability, and Responsibility. The codes and standards that are applicable for Indian listed companies have been defined in detail by the committee constituted for the purpose by the Securities and Exchange Board of India (SEBI).
The key variables that ICRA analyses while arriving at the CGR for a corporate entity include:
 

CGR 1

Implies that in ICRA’s current opinion, the rated company has adopted and follows such practices, conventions and codes as would provide its financial stakeholders the highest assurance on the quality of corporate governance. ICRA’s opinion, however, is not a certificate of statutory compliance or a comment on the rated company’s future financial performance, credit rating or stock price.

CGR 2

Implies that in ICRA’s current opinion, the rated company has adopted and follows such practices, conventions and codes as would provide its financial stakeholders a high level of assurance on the quality of corporate governance.  ICRA’s opinion, however, is not a certificate of statutory compliance or a comment on the rated company’s future financial performance, credit rating or stock price.

CGR 3

Implies that in ICRA’s current opinion, the rated company has adopted and follows such practices, conventions and codes as would provide its financial stakeholders adequate level of assurance on the quality of corporate governance.  ICRA’s opinion, however, is not a certificate of statutory compliance or a comment on the rated company’s future financial performance, credit rating or stock price.

CGR 4

Implies that in ICRA’s current opinion, the rated company has adopted and follows such practices, conventions and codes as would provide its financial stakeholders moderate level of assurance on the quality of corporate governance.  ICRA’s opinion, however, is not a certificate of statutory compliance or a comment on the rated company’s future financial performance, credit rating or stock price.

CGR 5

Implies that in ICRA’s current opinion, the rated company has adopted and follows such practices, conventions and codes as would provide its financial stakeholders inadequate level of assurance on the quality of corporate governance.  ICRA’s opinion, however, is not a certificate of statutory compliance or a comment on the rated company’s future financial performance, credit rating or stock price.

CGR 6
Implies that in ICRA’s current opinion, the rated company has adopted and follows such practices, conventions and codes as would provide its financial stakeholders low level of assurance on the quality of corporate governance.  ICRA’s opinion, however, is not a certificate of statutory compliance or a comment on the rated company’s future financial performance, credit rating or stock price.

Notes:

A sign of ‘+’ may be suffixed to any of the rating symbols other than CGRI to indicate a relatively higher standing within the category represented by the particular symbol.

The author is Managing Director 
ICRA Limited, New Delhi