"Our financial market needs to grow more rationale in terms of making decisions based on risk return preference"

SEBON came out with Credit Rating Regulations in 2011 prescribing fit and proper entry and operational criteria.  Subsequently, ICRA Nepal obtained letter of consent from SEBON to establish and operate a credit rating agency (CRA) as a joint venture with local institutional and individual investors of Nepal. In an interview with ShareSansar.com, the company’s Chief Executive Officer Deepak  Raj Kafle shares how ICRA Nepal helps investors to select the appropriate investment opportunities from a large range of options available.   Q. What is the rationale behind a company like ICRA? A: ICRA Nepal Limited is an essential component of the capital market that has been providing Credit Rating which contributes towards the transparent and integrated financial market of the country. It has been providing Debenture Rating, Issuer Rating, Fund Management Quality Rating and IPO/Right issue grading services in its cluster. It is well prepared to provide Borrower/ Lines of Credit Rating under Basel II, if NRB issues relevant regulatory framework. The operation of ICRA Nepal has filled in the gap that persisted in the financial system by providing investors with a simple system of gradation through which future relative creditworthiness may be gauzed. Investors may optimize risk return preference, while issuers benefit from saving costs while pricing the issue and regulators may require rating outcome in the risk disclosure. Q. Please describe the circumstances that led to the creation of ICRA’s Nepal operation? A: A need to establish a credit rating agency is known for more than a decade now. Also, the same was announced in the Monetary Policy of NRB and in the Strategic Plan of SEBON. ICRA Ltd., India was looking for expansion and Nepal was being considered as one of the options. Meanwhile, SEBON came out with Credit Rating Regulations in 2011 prescribing fit and proper entry and operational criteria.  Subsequently, ICRA obtained letter of consent from SEBON to establish and operate a CRA as a joint venture with local institutional and individual investors of Nepal. Q. What are the factors on the basis of which the rating is done? A: Rating is based on key analytical factors including qualitative and quantitative. ICRA Nepal Ratings are based on an in-depth study of the industry and also an evaluation of the strengths and weaknesses of the company. The inherent protective factors, marketing strategies, competitive edge, level of technological development, operational efficiency, competence and effectiveness of management, hedging of risks, cash flow, trends and potential, liquidity, financial flexibility, government policies, past record of debt servicing, sensitivity to possible changes in business/economic circumstances are looked into. Q. Why should investors pay attention to ICRA rating? A: ICRA Nepal Credit Ratings provide an investor with critical information to enable an informed investment decision based on respective risk-return preferences. These also help investors to select the appropriate investment opportunities from a large range of options available. An investor may have limited access to information about the unlisted company, or may find it challenging to appropriately assess the available information related with business prospects and risks. An IPO Grade provides an additional input to investors by helping them to arrive at an investment decision based on independent and objective analysis. With the increased participation of new investors in the stock market, there is need for greater value-added information on companies that are tapping the capital market. In this context, IPO Grades, being the most simple and objective indicators that calculates the relative fundamental positions of the issuers concerned, could help in both widening and deepening the market. Q. Are you using the same methods and parameters used in India to grade issues in Nepal or did you bring some changes to make the grading process relevant to the investment scenario in Nepal? A: Methodology for the rating as well as grading remains broadly the same both in India and Nepal, as we are using the same brand. Furthermore, multidisciplinary and universal approaches are used for risk analysis. The universal approach in the credit rating involves a look into the future whereas judgments involve factors unique to particular industry, issuer and countries. However, some approach and parameter might be changed in future based on regulatory environment, political situation, size of business and particularly market trend; however the principle remains the same. Q. Do you get full and fair cooperation from companies whose issues you are about to grade? A: We have completed 55 Assignments till date. Cooperation from companies has to be in the form of providing information on which rating assessment is based and acceptance of the rating outcome, which, we must say, has been excellent. Indeed we cannot complete a rating without cooperation of the client. The mandates we receive are intended for value addition through transparent risk disclosure. A rating agency is there to create value through disclosure which may normally be more costly to obtain otherwise, whether to an investor, regulator, issuer or intermediaries. Rating, indeed, helps to make investment decision based on risk assessment instead of the name recognition. However, there may be some issues as some times clients don’t understand importance that we need some data to analyze risk profile of the company. Overall, we have received fair cooperation from our valued clients as a result we have been able to complete 55 rating assignment within 2 years of operation and we expect clients are also getting adequate inputs to manage their risk through rating/grading. Q. How often are your ratings challenged or disputed by the company’s whose stocks you rate? A: There is no such situation for rating which is concluded in an interactive process. Q. Can you provide some examples that illustrate the effect between ICRA rating and post-IPO trading? A. It will be immature to assess the effect when rating is still anew (2years). We just want to pin point the need of awareness factors to be in place to support the rating regime. Some structural factors needs to be reformed, the pricing of securities i.e. equity or bonds which is not based on market. Likewise risk related information is still not fully considered by investors including the institutional investors. There is need to educate about risk. Moreover there are certain, inherent limitations in the rating that does not comment on the prices of the pre or post IPO issues and neither it’s an investment recommendation. Such investment advisory services also need to come up. So that the market could move gradually to rating based decision to support the financial market. Q. 55 issues rating have been done so far. Do you think investors are following it? A: Probably, our financial market needs to grow more rationale in terms of making decisions based on risk return preference. We have received feedback that investors consider risks while making decision. It will take some time for investors to follow it as rating concept is new for Nepalese economy and all the investors are not in a position to understand all the indicators shown by the company as well as rating agency.  However, we assign a symbol of rating/grading which will definitely help the investor to judge the company even if they are not well capable to draw opinion based on financial indicator. Further, rating is a concept and many players may come in this sector in future. If all the players in the financial as well as capital market take the concept positively, it will give great inputs to the overall economy going forward. Q. Most of the IPOs have been graded 4 and right issues have been graded 3. What can be the reason behind it? A: IPO Grading factors different parameters and basically it’s grading of fundamentals. Since new company usually takes some time to establish its fundamentals and most of the trend/data are unseasoned so grading stays in the lower side. It is not that all the players of IPO grading will be awarded IPO Grade 4; we have also assigned IPO Grade 5 and IPO grade 3 for some companies. We have graded some hydropower company IPO’s with IPO grade 3 as their normal business risk will be minimum once they come into operation. Further, some company with adequate track record and promoter backup are also awarded IPO Grade 3 for the IPO. The investor and company has to understand that IPO Grading is one product for all the industry and the company under better performing industry may take advantage of the industry performance also.