The unravelling of infrastructure financier IL&FS took place over a period of a decade during which credit rating agencies, which assigned pristine ratings to the group’s debt for most of the time, were aware of its financial troubles but chose to not highlight them willfully or under pressure.
The analysis of a forensic audit of the engagement of credit rating agencies (CRAs) with IL&FS by Grant Thornton reveals the extent of manipulation that took place in order to present a rosy picture of the group’s financials.
Moneycontrol has seen a copy of the draft report submitted by Grant Thornton to the recently-appointed board of IL&FS, which is also reproduced below.
Grant Thornton was asked by the new management to review the role of 5 rating agencies – CARE, ICRA, India Ratings, Brickwork and CRISIL -- which assigned a total of 429 ratings during the period between 2011 and 2019.
The audit firm prepared the report by interviewing key current and former IL&FS Group employees, review of the ratings assigned as well as by combing through the email and file records of former key management professionals (KMPs) for IL&FS.
The report points out that during the period between June 2012 and June 2018, all CRAs provided good ratings to paper issued by the IL&FS Group. It was only after ITNL defaulted on some commercial papers were ratings lowered.
The favourable ratings were assigned even as there were clear signs of financial stress at the group since at least 2015 – something that had also been pointed out by rating agencies internally.
The 105-page report then goes on to describe several potential strategies that were undertaken by KMPs of IL&FS to pressure CRAs into giving good ratings or avoid a downgrade.
Excerpts from the report:
- We noted that the credit rating rationale which is supposed to be drafted by the rating agencies were materially modified by or significant suggestions from the former key employees of IL&FS were incorporated, to provide and support good ratings given by the CRAs;
- We noted that in case if the then key employees of IL&FS became aware that ratings are not going to be favorable, they then either delay the process of rating surveillance or delay the publication of the rating on the public domain.
- We noted in certain instances that intentionally incorrect or incomplete information was being provided to the Credit Rating Agencies to avoid rating downgrade;
- We noted instances where in case if the then key employees of IL&FS did not receive the desired rating from the CRA they used to potentially pressurize rating agencies to either withdraw the credit ratings or credit rating request or approach other rating agencies who would provide the desired ratings;
- We noted instances where if the ratings are not favorable, the then key employees of IL&FS tend to keep the ratings in private domain;
- We noted instances where after meeting with the then key employees of IL&FS, CRA would not downgrade the ratings which it initial decided;
During the review, Grant Thornton further noted that IL&FS also provided favours/gifts to representatives of various CRAs, such as facilitating a villa purchase, arranging for football match tickets, or donating to trusts associated with an official of a CRA.
The report also documents a potential conflict of interest between IL&FS and CARE.
“For the period 2007 to 2013, IL&FS Limited and IFIN owned equity shares of approx. 5-9% of CARE. Further, during the same period, we have noted that CARE had also provided ratings to instruments of IFIN, ITNL and IL&FS Limited. Thus, it appears to be a potential conflict of interest as CARE is rating its equity shareholder which may potentially affect the independence of the rating agency,” the report says.
The report goes on to reproduce several instances of email conversations between former KMPs of IL&FS and CRAs, which demonstrate how each of the above tactics were deployed to pressure CRAs into getting favourable ratings.
IL&FS, which has an accumulated debt of about Rs 91,000 crore, was considered as one of India’s top infrastructure financiers until a default by one of its group companies laid bare by a web of financial shenanigans that its former management had deployed to hide a maze of financial troubles, corruption and incompetence.
After the default threatened to trigger a systemwide contagion among non-banking financial companies, the group superseded by the board and installed its own nominees.
Since then, several investigating agencies have opened probes into the company and its former management, many of whom have been arrested over the past one year.
The IL&FS crisis especially put the glare on the role of credit rating agencies, which issued positive ratings to the company, many of which have also now been under the lens of investigating agencies.
Of the four rating agencies, two – ICRA and CARE -- sent their MDs -- Naresh Thakkar and Rajesh Mokashi -- on forced leave, following queries by SEBI.
Grant Thornton on Credit Rating Agencies by Moneycontrol News on Scribd