IL&FS' rating agencies made professional compromises, says Grant Thornton


    The role of five CRAs- CARE, Icra, India Ratings, Brickwork and CRISIL have been under review.

    ET Bureau
    IL&FS directors had tried to keep many ratings in "private", push rating officials to softens ratings, even influenced them to change the language in rating rational and occasionally inflated numbers in fishing for better ratings. The 105-page Grant Thornton (GT) report accessed by ET details out anomalies, issues of professional compromises and corporate governance surrounding the CRAs who rated IL&FS in the last ten years.

    The role of five CRAs- CARE, Icra, India Ratings , Brickwork and CRISIL have been reviewed by GT which assigned a total of 429 ratings during the period between 2011 and 2019.

    Various enforcement agencies like the Enforcement Directorate and the Serious Fraud Investigation Office (SFIO) are probing the books of IL&FS and its subsidiary.

    The development comes close to the heels of the CARE Ratings, MD & CEO, Rajesh Mokashi and Managing Director and Group CEO of ICRA Naresh Takkar sent on leave after anonymous complaint received by Sebi.

    A Grant Thornton report has observed strategies applied by IL&FS former key employees to avoid a downgrade in credit ratings. In cases if the favorable ratings were not obtained, the former employees of IL&FS were paying huge sums to keep ratings private.

    An email dated 30 January 2018 was sent by Mic Kang -representative of Moodys to Dilip Bhatia providing him with the rating letter for ITNL. This was further shared by Dilip Bhatia with the KMPs for IL&FS, where he suggested that rating from Moodys should be kept in private domain and requested Anita Ferreira to check the cost for the same. Based on the trail email, it was noted that by paying additional $68000 (Rs 47 lakhs) to Moodys ratings can be kept in private domain.

    “The draft report commissioned by the IL&FS Board on credit rating agencies is wrong with respect to Moody’s,” said Moody’s spokesperson in an email. “To be clear, Moody’s has never requested, accepted or in any way agreed to receive an additional fee in exchange for keeping a rating in the “private domain,” as the draft report inaccurately claims. The fee for any particular rating is the same regardless of whether the rating is public or private, and ongoing monitoring of the rating is subject to a separate annual fee.”

    Moody’s is in the process of alerting the company to the inaccuracies relating to Moody’s in the draft report and expect the report to be corrected accordingly.

    The report says that given the liquidity stress in ITNL, it is unusual to note that significant amount $68000 was offered to Moodys to keep the ratings of ITNL in private domain. This amount was paid over and above $91,000 upfront fees paid for rating with one year validity.

    In 2013, a mail was sent by Ajay Menon to Sujoy Das informing him that an investor of commercial papers had requested ITNL to get credit ratings from Brickworks. Further, in the trail email Sujoy Das informs Arun Saha about the proposal of Ajay Menon and states that ratings will be kept private if highest short-term rating is not given by Brickworks.

    An email communication between the erstwhile IFIN director and a senior employee at ITNL indicates that inflated projections were submitted to CRISIL in order to get good ratings. “...In an email dated December 17, 2010, it appears that Menon was informing Karunakaran Ramchand (erstwhile director of ITNL) about the projected profit after tax (PAT) for FY-2010–2011 would be approximately Rs.240 crores. However, the same was indicated as Rs. 325crs for the purpose of rating from CRISIL,”the report states. “Thus, the email appears to indicate that inflated/better projections were submitted to CRISIL in order to get good ratings,”it adds.

    The report opines that if the then key employees of IL&FS became aware that ratings were not going to be favorable, they then either delayed the process of rating surveillance or delayed the publication of the rating on the public domain. In certain cases ‘intentionally incorrect or incomplete information’ was being provided to the CRAs s to avoid rating downgrade;

    In another instance, the report states, “..We identified an email dated December 3,2014 which sent by Sujoy Das to Sushil Khandelwal in which he appears to suggest that the conclusion of the rating rationale provided by the India Ratings should be softened/less harsh. Further,he also suggests the wording for the conclusions should be “may result in a negative outlook or downgrade”. Our public domain searches indicated that the ratings had the exact same wording as suggested by SujoyDas,” the report states. Thus,it indicates that IL&FS may have been able to potentially influence the wordings/rationale of India Ratings, its concludes.

    Citing how the alleged accused IFIN directors used pressure to get favourable ratings, the GT report cites an email dated August 12, 2008 sent by Arun Saha to Ravi Parthasarathy, “...where it was noted that ICRA committee had decided to not issue “AAA” rating for the debt instruments of IFIN. This step was ICRA was not agreeable to Ramesh Bawa. Further, in the trail email Parthasarathy suggests that they can approach CARE, FITCH as well as CRISIL for the ratings instead of ICRA. Thus, the email trail suggest that key former employees of IL&FS used to approach other rating agencies if they did not get the desired ratings,” the communication reads.

    Sources says the ministry of corporate affairs (MCA) may write to the regulators to tighten the framework so as to regulate the CRAs. Credit rating agencies are jointly regulated by both Sebi and RBI as these firms rate bank loans and NBFCs, which constitute 70 per cent of their business.

    Meanwhile, India Ratings said there report was based on robust and transparent analysis of relevant information.

    "This report was produced without a request for our participation or involvement. We were unaware of its existence until shortly before it found its way into the public domain."

    "Our ratings were based on robust and transparent analysis of relevant information, including IL&FS’ audited financial statements, in line with our publicly available rating methodology. The ratings are also the collective work product of the agency and no individual, or group of individuals, is solely responsible for a rating, " it said.

    "The report is based on partial and selective source material from IL&FS and demonstrates a limited understanding of the credit rating process. The report has no legal standing whatsoever. The report largely ignores the fact that the government has charged the former management of IL&FS with engaging in widespread fraud and producing “falsified, spruced up” financial statements, which all credit rating agencies rely on to produce accurate ratings," the rating firm further said.

    "In addition, Fitch conducted an investigation into the matter recently reported in the news relating to a senior director of the Fitch Singapore office, and found that the employee engaged in activity in violation of Fitch’s Code of Conduct. The employee is no longer employed at Fitch," it added.

    Contesting the findings of the GT report, CRISIL in a statement released today said, “...In reference to the recent announcement by IL&FS Ltd on the completion of the first phase of a forensic audit by Grant Thornton on the credit ratings assigned to it and group companies in the past, CRISIL would like to clarify the following and set the record straight: lCRISIL has never rated IL&FS Ltd, IL&FS Financial Services Ltd, or any debt issued by these companies. Way back in 2011, CRISIL had assigned 'CRISIL A/Stable/CRISIL A1' rating to the bank loan facilities of IL&FS Transportation Network Ltd (ITNL). As per the rating definitions standardized by SEBI, the ‘A’ category refers to ‘Adequate Safety’. The rating was withdrawn in July 2016 and since then, CRISIL has had no outstanding rating on ITNL either. CRISIL currently has ratings on two road annuity project special purpose vehicles (SPVs) – North Karnataka Expressway Ltd, and Jharkhand Road Projects Implementation Company Ltd – that are sponsored by ITNL. The latest rating rationales in this regard are available on the website. CRISIL has no other rating outstanding on any other subsidiary – direct or step-down – of IL&FS Ltd. CRISIL follows the highest standards of governance, maintains exemplary analytical rigour, and robust processes to ensure independence of its opinions,” it read.

    “CRISIL’s ‘default and transition statistics’, the crucial metric that is followed globally by all stakeholders to evaluate the true quality of ratings assigned by credit rating agencies, continues to be the best in the Indian ratings industry,” it added.

    Further, in a statement released on Monday, ICRA defended its stand , "...We strongly urge you to refrain from drawing conclusions about the role of ICRA on the basis of unverified information contained in an interim report commissioned by the IL&FS Board, which largely ignores the alleged fraud perpetrated by former IL&FS management.As the report itself notes, the report’s authors chose not to seek the input of the rating agencies but rather rely on ‘assumptions’ and ‘limited procedures performed’ pertaining to more than 100 individuals and spanning over a decade. As a result, the report, which has no legal or official significance, demonstrates a severe lack understanding of the credit rating process," the statement states. "Credit ratings are based on information gathered from the public domain as well as confidential information provided by the rated entity. If “intentionally incorrect or incomplete information” is provided by a rated entity, as cited in the draft report, then the rated entity is deliberately misleading the credit rating agency. Credit rating agencies and the entities being rated communicate with each other throughout the credit rating process. To selectively read into this correspondence and arrive at observations would therefore be highly prone to inaccuracies and misinterpretation,"its adds.
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    36 Comments on this Story

    Vivek R Sonbhadra386 days ago
    Everything has a price. We can not become a five trillion dollar economy by such a poor corporate governance. Everyday some company is found to be defrauding a bank or defaulting payment to the bank or financial institution. Audit machinery appears to have failed in its duty.
    M J386 days ago
    I assure that learned fool is more foolish than an ignorant fool.
    Dr Mahesh386 days ago
    The Economic Times