Credit Rating and Information Services of India (CRISIL), the first rating company completed 25 years. Pradip Shah, the first managing director of CRISIL, N Vaghul, chairman of ICICI and Rupa Kudva who has spent most of her working career in CRISIL and has been at the helm since 2007, spoke to CNBC-TV18 about their journey with the company and the way ahead.
Below is the edited transcript of his interview to CNBC-TV18
Q: The ratings industry itself was started by you at a time when interest rates were administered, when banks were owned entirely by the government and industrialists had a cozy relationship with bankers. People didn’t even need rating. In that context how did you convince industry to become your clients? More importantly how did you convince your team members to have the spine to give an honest rating?
Shah: The latter part was very easy. I had a very bright bunch of young people working with me and they were idealists and fearless. They remained independent and true to their work that they were doing. On the first part, getting companies to come to us, we realised that without interest rate determined on the basis of ratings it was going to be a difficult challenge. So, we started convincing them that by getting a rating, if they didn’t like it, they couldn’t use it and they needn’t use it. However, they would get feedback from us as to how to improve the rating if they wanted to.
In addition if they wanted to use the rating, we said it would help them as a marketing tool in placing debt. For higher rated company they would get a larger audience and larger amounts of money and perhaps at lower cost. It was of course a conviction that we had and we were able to carry some of our clients with it. For others we said, even if you don’t get the highest rating or the rating you think you should get, you would at least put a distance between you and your competitor who may not have a rating.
So, even if you had a junk rating, it would be perhaps better than getting junkier rating. So, that was the message and we conveyed this to every constituent of ours that there was a value proposition for them. The regulators we said, you don’t have to interfere, the markets will determine what money should go where, which location, which company. To intermediaries we said, this was a marketing tool – the bankers, the brokers etc. To the issuers we said you will have higher quantum of money, lower costs etc and of course we had the investors who were craving for a rating.
Q: You were not just the first shareholder, you must have also been one of the first users of the product put out by CRISIL – the ratings that they put out. A lot of bankers today complain that they use raters for capital needs because regulation mandates it, but they cant sit back and believe that, okay it is rated so I don’t have to do due diligence. Did you have that complaint ever?
Vaghul: I don’t think that we had a link with the rating agency in the first four or five years. The first four to five years it was more related with the companies. There was a very clear understanding that what they would be rating is not the company, they would be rating an instrument. That was the basis on which the credit rating agency was started. The banks were in a different business so far as lending was concerned.
They were not investing in debentures. So, I suppose it is not correct to say whether the banks were using the credit rating agency or anything like that. Over a period of time their product changed. When their product changed the banks started using it. They could always supplement it with their own analysis because it is understandable that they would not place 100 percent reliance on the rating agencies.
Q: At what point did you see them becoming assertive?
Vaghul: Right from the beginning I don't think that CRISILs fundamental assumption. On the base of which it was started was that it would maintain the highest standard of ethics and governance. In fact you are talking about corporate governance now and that time the corporate governance was so high that - as you will see in the book that is about to be released some of the incidents that have been narrated. I think there is no question of any compromise. If something has to be downgraded it was downgraded. So, there was no fear nothing what so ever in the minds of the rating agency. Rating agency did their job.
Q: That was perhaps easier when Mr. Shah was at the helm or Mr. Vaghul was at the helm because you were the only rating agency. You were at a time when there was a lot of competition and also at a time when the nation went through a downslide so to speak. 1997 onward all the way up to 2007, was it tough? Did you lose business?
Kudva: It was tough. There was a period between 1998 and 2000 where we downgraded almost each and every one of our major clients. As a result of which we lost those clients and they went to competition. That was immediately followed by the dot com boom as well.
So, went through a period where we saw our share price go down from Rs 800 to Rs 100. However, I must say that at that point it was the board of CRISIL that gave us confidence. I remember we had a board meeting and they told us go ahead and do whatever you think is analytically right. When one is in the business of credibility, in the long run the market will realise and they will come back and that is indeed what happened.