Credit Rating As A Determinant Of Corporate Control
- IJLLR Journal
- Jun 8
- 2 min read
Rizwi Mishra, NALSAR University of Law, Hyderabad, Telangana.
ABSTRACT
A credit rating not only provides a quantified score based on a detailed issuer analysis but also a qualitative opinion on an organization's financial health, and hence it is the primary diagnostic tool used for default prediction and signals an upcoming financial crisis. This paper discusses the development of credit ratings in the Indian financial system from a risk market signal to the issuer in the theory of credit scoring to a product with significant legal and regulatory effects. Through varying agency structures such as CRISIL, ICRA and care operating under SEBI control the following is demonstrated that a once-in- straight away rating reduction immediately leads to action from the lenders including debt acceleration and an immediate transfer of control from shareholders to lenders.
This paper also demonstrates the role that credit ratings can play in determining the volume and composition of current debt, one of the precursors to formal insolvency. The key contention is that credit ratings have become de facto regulatory triggers, in the contemporary financial environment, determining the mechanisms of debt recovery and the nature of restructurings. In this sense, the credit rating has come to be a powerful visà-vis instrumentfar beyond being just an information input relative to debt and financial stability.
Existing literature linkage among credit rating and asset price, trade off practice of regulation on financial innovations, governance and reputation incentive scheme, relation between regulator and a financial institution, geographic proximity and bank loan, bank effects on market price of bonds, triggers behind bank bankruptcy in Asian countries and Indian scenario, inception of decision of bankruptcy, the effectiveness of different regulatory tools, prediction of insolvency using quantitative approach and role of SEBI on Indian market.
Keywords: credit rating, quasi-regulatory trigger, credit risk, Indian banking sector, insolvency, SEBI.
