And this is not the first time that Crisil has downgraded the ratings of secured instruments like debentures and bonds, while retaining or according a higher rating to unsecured instruments like FDs of a corporate. In the recent past, Crisil had meted out a similar treatment to Tata Chemicals and Sundaram Finance to name just a few.

The rating differentiation between debentures and bonds on the one hand, and FDs on the other, is perhaps justifiable because normally the two categories have different timeframes of maturity. Debentures and bonds have a maturity term of five years or more and, hence, areclassified as long-term instruments. FDs, on the other hand, are redeemable between one and three years and hence become short- to medium-term instruments.

Credit rating, in essence, judges a company's servicing/repaying ability based on projected cash flow. In any such forecast, the longer the duration, greater is the level of uncertainty, and hence the risk. Since credit rating does factor in this risk, it is natural to assume that a longer term instrument would be rated more conservatively.

All the same, factors balancing the risk, like the secured or unsecured nature of the instruments, cannot be missed. Such a comprehensive logic of risk audit apparently seems to have been not been applied in the cases of Tisco, Tata Chemicals and Sundaram Finance.

That the downgraded debentures/bonds are all secured instruments while the rating reaffirmed FD programmes are entirely unsecured, exposes the jinx in the armour of the raters. Secondly, at the time of the rating review the downgraded instrumentsincluded certain debentures/bonds which were due for redemption over the short to medium term. The raters have missed that fact too.

Take, for example, Tisco. As on March 31, 1998, Tisco had outstanding debentures of Rs 620 crore, bonds of Rs 540 crore, secured premium notes (SPNs) of Rs 170 crore and FDs of Rs 150 crore covered by Crisil's rating. The outstanding debentures included 17.5 per cent and 15 per cent NCDs of Rs 290 crore, redeemable in two equal installments in 1999 and 2000, and 16 per cent NCDs of Rs 20 crore, redeemable during the current fiscal. This means Tisco faces a redemption liability of Rs 165 crore within 12 months.

Similarly, the SPNs of Rs 170 crore are presently outstanding only to the extent of the final redemption due in June 1999, another Rs 170 crore having already been redeemed. Therefore, as of today, the SPNs and the above debentures are only short- or medium-term instruments, even though they were originally issued for a longer term.

As on March 31, 1998, the companyhad outstanding FDs of Rs 150 crore. Summed up over two fiscals commencing from the current fiscal, Tisco has a cumulative repayment commitment of Rs 800 crore on account of debentures and FDs. (Here we are assuming that the existing debentures/FDs are not rolled over). As against this, Tisco generated net cash of about Rs 500 crore from its operating activities in fiscal 1998. The company's current investments stood at Rs 110 crore as on March 31, 1998.

Assuming that its operations generate the same amount of cash that it generated in fiscal 1998, it should be comfortably possible for Tisco to meet all its debt obligations. Clearly, the point here is that the FD programme does not merit a higher pedestal; it is as safe, or as risky, as the debentures.

In the case of Tata Chemicals, the company had outstanding debentures/bonds of Rs 480 crore as on March 31, 1998, while the FDs were negligible. Out of this, debentures worth Rs 260 crore have a repayment horizon of less than two years. Tata Chemicals'tangible net worth amounts to Rs 1,600 crore as against long-term borrowings of Rs 1,000 crore.

The company generated a cash flow of Rs 400 crore from its operating activities in fiscal 1998. Assuming the company generates even 80 per cent of the cash generated in fiscal 1998, it would be able to meet its debenture repayment obligations over the medium term. When this is the case, how does the safety of even the medium-term debentures climb down one rung when comparable FDs are perched up to `FAAA' rating?

The case of Sundaram Finance, though slightly different, is equally interesting. At the end of fiscal 1997 its FD base amounted to Rs 730 crore and its debenture kitty stood at a mere Rs 40 crore. After factoring in debentures worth Rs 126 crore raised by the company, its debenture portfolio stood at less than one-fifth of its outstanding FDs. Its secured bank borrowings amounted to Rs 450 crore.

At the end of fiscal 1997, Sundaram Finance's net worth stood at Rs 290 crore as against its asset baseof Rs 1,650 crore which has been supported by its FD programme and not its debentures. However, the company has demonstrated over time its impeccable ability to service its FDs. So, while the FD programme has been accorded top billing, the debenture portfolio has lost by a few notches, even after being much smaller in terms of quantum.

In all the above three cases, going by the available figures, the short- to medium-term debentures do not seem to be carrying any more risk than the comparable FD programmes. Nor are they less preferable to the investing public.

In fact, should the yield on a debenture -- post stamp duty and transaction cost -- be equal to the return on a FD, any normal investor would prefer the secured debenture to the unsecured FD. In this sense, Crisil's grading appears to send wrong signals to the investing community. Therefore, an exercise to understand the rationale behind the rating review became due. We spoke to both Crisil and CARE, two of the leading rating agencies of thecountry.

Our interaction with the raters did give us an insight into their handicaps. Also, it provided us some startling eye-openers. First, the investing public needs to understand that the rating agencies are not at all concerned with the underlying security of the rated instrument. To them, unsecured and secured instruments come alike. According to them, they are concerned with the regularity of "timely" service and redemption of the rated instrument, and not with any accidental "eventuality" that may affect service and redemption.

It is their logic that as long as the corporate is servicing its obligations, it does not matter if the instruments are secured or unsecured. True, but corporate failures can occur so swiftly and devastatingly that security does count. Unfortunately, not for the raters though.

Secondly, the credit rating agencies aver that they only rate credit programmes and not the issuers. But a huge cross-section of the investing community, which tends to go by the credit rating,might not be aware of this fact. The general assumption is that the rating is a commentary on the working of the issuer company.

Thirdly, the rating agencies have only class-specific ratings, which are not term-specific. For example, all debentures and bonds are bunched into one class (of long-term instruments), fixed deposits into another and commercial paper into yet another. This sort of classification is slightly rigid and does not provide for the metamorphosis, or change, of a long-term instrument into a medium-term one and later, into a short-term one over time. The anomalies noticed in the ratings of Tisco and Tata Chemicals have arisen largely due to this rigidity.

It is also the assertion of Crisil that the rating scales for long-term instruments (like debentures) and medium-term instruments (like FDs) cannot correspond. According to them, there are 10 notches, or rankings, in the long-term investment grade, beginning with `AAA+' and ending with `BBB', classified into four risk levels such ashighest safety, high safety, adequate safety and moderate safety.

However, there are only seven notches in the medium-term investment grade, beginning with `FAAA' and ending with `FA-', classified into three risk levels of highest safety, high safety and adequate safety. Hence, according to Crisil, they are not exactly comparable. But clearly, the first three risk levels appear to be comparable, at least to the lay investor.

An ordinary investor often tends to compare a `AAA' rating for a long-term instrument with a `FAAA' rating for a FD programme. More so, because there does not seem to be any disclaimer clause in Crisil's publications discouraging such a comparison. The raters, when queried, tend to explain credit rating as an opinion, or a point of view. Nevertheless, it is an expert opinion which the investing public is inclined to `believe' to be correct.

Therefore, credit raters have to be more than casual and businesslike. They have a social accountability and moral responsibility to theinvestors, in particular, and to the market in general.

It must, however, be said in defence of the raters that in our country they are forced to depend on the issuers for their revenue. Internationally, the bulk investors like the pension funds are often prepared to access credit rating by paying high fees for the purpose. International credit raters are, therefore, not dependent on the issuers for their revenue.

Consequently, abroad the issuers cannot bring to bear pressures on raters. Another major factor of relevance is that there are no uniform accounting standards in India. Indian raters are often placed in a thankless position of going by the accounts and the information provided to them by the issuers. Quite often, they do not form a reliable basis to do justice to the ratings.

In their defence, the rating agencies say that they follow international practices employed by reputed organisations like Standard & Poor's and Moody's. Notwithstanding their reputation, these international ratingagencies have been found wanting in the recent south-east Asian crisis.

Besides, their rating experience relates to well developed business climates with regulatory checks and balances all in place. Therefore, it might not be a bright idea to simply import the international usage, without tailoring it to our needs and vagaries.

On balance, while the importance of rating cannot be ignored, the service cannot kept at a distance from the understanding of the retail investor, the common man of the capital market.

The present situation as unfolded above calls upon the raters, who need to be complimented for their open door approach to the media, to come out with an educative series for the benefit of small investors highlighting the lesser known facts about credit rating. Only then will they be able to minimise the victims of financial disasters, which seem to be burgeoning by the day.