In April 1991, about three months before then finance minister Manmohan Singh dismantled the licence raj, devalued the rupee to make exports competitive and ushered in a gradual lowering of tariffs even as India was forced to embrace economic liberalization, a deputy general manager of IFCI Ltd (then Industrial Finance Corp. of India Ltd)—the first development finance institution in independent India—was sent on deputation to set up its newly promoted rating agency Icra Ltd. The rating agency’s non-executive chairman D.N. Ghosh was appointed a few weeks ahead of the IFCI executive, its first employee. With an initial capital of Rs.3.47 crore, Icra started its operation in a small room on the second floor in Scope Complex on Delhi’s Lodhi Road with the lone employee, on loan from IFCI. The gentleman used to type board agenda papers, make photocopies, rush to the nearby post office in a three-wheeler and stand in queue to send them to directors through Speed Post. His secretary Asha Balani, also on deputation from IFCI, joined a few months later.
Icra started its rating service in September 1991 and in its first year of operation, Icra posted a net profit—mostly from the interest earned from its capital kept as a fixed deposit with a bank. In the very next year, it paid a modest dividend of 5% to its promoters. Icra chairman Ghosh’s motto was “never be in loss” and to ensure that, the company’s first employee often slept in office after working 14 hours a day and survived on Maggi noodles. In 1993, after working as CEO for two years, he quit IFCI when he was made managing director of Icra, but there was hardly any change in his salary.
By October 1991, the first batch of analysts had joined Icra—Sanjoy Bhattacharya, K.L. Dhingra, Amul Gogna, Sandeep Nanda, Ambareesh Srivastava, Deepak Rohra, Damayanti Varma, R. Raghuttama Rao and Naresh Takkar. The strategy was to hire the best talent, pay the best possible compensation and create an ideal environment for a private sector entity. Rao is now managing director of unit Icra Management Consulting Services Ltd and Takkar is managing director and chief executive of Icra.
Today, Icra is a full-service credit rating company; Moody’s Investors Service Inc. is its largest shareholder. The relationship with Moody’s started in 1996 when Financial Proformas Inc., an affiliate of Moody’s Investors Service, signed an agreement with Icra for providing certain services. Moody’s entered into a technical services agreement with Icra and took 10% equity stake in 1999—the second instance of the global rating company picking up a minority stake in a credit rating agency after it did so in South Korea. Over a period of time, Icra has entered into agreements for providing technical services to credit rating agencies in Kuwait, Bangladesh and Bulgaria and floated management consulting, software development and knowledge process outsourcing businesses. It has also set up subsidiaries in Indonesia, Sri Lanka and Nepal and acquired a business consulting and software technology services firm in San Francisco.
India’s first credit rating agency, Crisil Ltd, was incorporated four years before Icra came into being—on 29 January 1987. Promoted by ICICI Ltd, the old avatar of ICICI Bank Ltd, and a few other financial institutions, Crisil started operations in January 1988 when banks’ loan rates were fixed and there was no corporate bond market. Crisil was perhaps ahead of time but its first chairman N. Vaghul and managing director Pradip Shah knew their job well. Now, it does not call itself a rating agency—it’s a global analytical company which offers ratings, research, risks and policy advisory services as rating accounts for about one-third of its revenue and the contribution of its overseas and domestic operations is roughly of equal share. The rationale of diversifying beyond ratings is possibly to make sure that it does not become overly dependent on its rating clients for business and can maintain analytical independence and derisk itself.
In contrast, Icra is a little late in spreading its wings across Asia. It was invited in Indonesia, Sri Lanka and Nepal when there was no rating agency in those countries, but Icra was hesitant to explore the business potential in those markets. Now, it is in Indonesia, Sri Lanka and Nepal, but the entry was a little late; it should consider entering Malaysia, Thailand, the Philippines and Vietnam soon as it has the ability and resources to become an Asian credit rating agency. Icra also has to grow much faster in its business other than rating, particularly in information technology and information technology enabled services segment, both organically and through the acquisition route—something Crisil has done rather well.
The IFCI executive on deputation, P.K. Choudhury, fondly called PKC by the industry, 67, chairman and group CEO of Icra, will retire this week. Indeed he has been risk-averse, but none can deny him the credit for building a fine rating institution. Many of his colleagues acknowledge that the soft spoken and low-profile Choudhury is an uncompromising professional who has always been ready to fight for the independence of Icra. They remember instances of Icra fighting with its promoter—once, IFCI was very upset because Icra refused to give investment grade to a debenture issue of one of its corporate clients. The lack of investment grade made it clear that IFCI should not have had exposure to that particular company. There was pressure from the promoter but Icra stood its ground and that spoilt its relationship with IFCI.
Rating is a unique business where the buyers of the product are not the consumers. This makes the job enormously difficult. If a rating company wants to keep the buyer happy, it ends up cheating the consumer. With six rating agencies operating in India, the competitive pressure is severe and dilution of due diligence and rating shopping are a reality. A rating company’s biggest challenge is to maintain its independence. Choudhury has done that well.