Security Receipts Rating

Security Receipts (SRs) are receipts or securities issued under ‘The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act’ by Securitisation Companies (SCs)/Asset Reconstruction Companies (ARCs) (against the acquired financial assets) to qualified buyers, after acquisition of distressed assets from the lenders. RBI has issued guidelines for declaration of Net Asset Value (NAV) on these SRs issued by SCs/ARCs with the objective of enabling the qualified buyers to value their investment in SRs in accordance with the applicable guidelines. According to the guidelines issued by RBI, the SRs are required to be rated on a defined recovery rating scale (CARE’s Recovery rating scale: RR 1+ to RR 5) and this recovery rating is to be used for arriving at the NAV.

Recovery rating (RR) is based on the ‘recovery risk (probability of recovery)’ and not the ‘default risk (probability of default)’. Value of underlying security and its recoverability is of prime importance in recovery rating, whereas cash flow adequacy vis-à-vis debt obligations holds significance in credit rating, amongst various other risk parameters. The recovery rating assigned to SRs is based on the net present value (NPV) of the cash flows expected from the recovery strategy, stated as a percentage of the outstanding face value of the SRs. The recovery rating assigned to SRs is essentially based on the probability of recovery from the assigned loans within the applicable resolution period.

Recovery ratings are reviewed biannually as per RBI guidelines.

Credit Quality Rating of Mutual Funds

Debt mutual funds have gained considerable prominence in India. A large variety of debt mutual fund schemes with different investment styles and objectives are now available in the Indian market. Today, from plain vanilla bonds to more complex derivatives, fund managers have a variety of options to construct their portfolios.

In this context, CARE Ratings introduced the Fund Credit Quality Ratings aimed at enhancing the understanding of fund credit risk for the investors. CARE Ratings’ fund Credit Quality Ratings (CQR) is an opinion on the overall credit quality of specific debt mutual fund schemes. The ratings capture the fund’s overall exposure to the default risk based on the credit quality of individual securities in the portfolio. The CQR is aimed at providing an independent opinion on fund’s credit quality and act as a tool for the investors to evaluate credit risk of such fund schemes.

Capital Protection Oriented Scheme Ratings of Mutual Funds

The Securities & Exchange Board of India (SEBI), in August 2006, released the guidelines for capital protection oriented schemes, facilitating the launch of such schemes by mutual funds for the first time in India.

The SEBI guidelines defines a CPOS as a mutual fund scheme which is designated as such and which endeavors to protect the capital invested therein through ‘orientation of its portfolio structure’ and ‘not with guaranteed returns’ which means that the orientation towards protection of the capital originates from the portfolio structure of the scheme and not from any bank guarantee or insurance cover. These schemes are close-ended.

One of the SEBI regulations require that the portfolio structure of CPOS should be rated by a SEBI registered credit rating agency and the rating should be reviewed on a quarterly basis. The rating should assess the degree of certainty with which the portfolio structure can achieve the objective of capital protection. Rating of a CPOS is an important and useful tool for investors before they take the investment decision.