Funds blindly trusted rating agencies while investing in IFIN, feels SFIO
Four rating companies had been involved in rating various instruments of IFIN during the period 2013-2018.
Four rating companies had been involved in rating various instruments of IFIN during the period 2013-2018 - ICRA, CARE Rating, India Rating and Brickwork Rating.
“It was seen that largely all the four agencies had given highest ratings to the long term and short term instruments of IFIN on the strength of its parentage and management linkages with IL&FS Limited.
The highest rating enabled IFIN to make borrowings from banks, NCDs, Commercial papers etc, said SFIO in its chargesheet.
IL&FS MD and CEO Ramesh Bawa had also assisted a senior director in Fitch rating, Singapore who appears to be involved in rating of IL&FS in buying a duplex villa of Rs 4.25 crore at a discounted price of Rs 3.25 crore, the chargesheet said.
Credit ratings have a significant impact on the company’s potential to take loan and attract investment from a number of mutual funds, insurance funds, provident funds and pension funds. In case of IL&FS, over 20,000 crore was invested by provident funds, mutual funds and insurance funds based on audit reports and credit ratings assigned to different instruments of the company.
The SFIO, in its charges, has categorically stated that the financial statements prepared and filed by IFIN were not giving a true and fair view on the state of affairs of the company as the statement from FY12-FY18 were not in compliance with applicable accounting standards notified under relevant sections of the Companies act.
The report said that signatory to the IFIN financial statements had intentionally defaulted in their duty to comply with provisions of the act, knowingly avoided provisioning in the books of accounts which led to fraudulent inflation of profits and presented a rosy picture. The statutory auditors, report adds, failed to discharge their duties and knowingly signed false statements.
“These credit rating agencies factored in positively the impact of IL&FS and accordingly notched up the ratings of IFIN’, said SFIO adding that since these companies had relied heavily on the strength of IL&FS they and will need to be investigated further in the ongoing investigation of IL&FS Limited.
In the statements under oath of investing officers of various insurance companies and mutual funds had relied on ratings and audit reports for finalising their investment strategies in IFIN.
The New India Assurance had invested Rs 62 crore in NCDs and had stated that “if rating is AA or above then there should not be any issue on the repayment” as their process of investing in IFIN.
Similarly, Oriental Insurance company, invested Rs 115 crore in NCD, told SFIO that the basis of selection of debt securities are based on the financials, credit ratings and best yields available in the market. “IFIN had an overall CAR of 21.6% along with overall rating of AAA from CARE and India Rating”
Canara HSBC OBC Life Insurance, Rs 30 crore in CP, it its statement, also said that the fixed income process in Canara HSBCOBC Life Insurance is primarily dependent on the rating of the issuer provided by the rating agencies. The investments in IL&FS/IFIN were done primarily basis credit rating of the companies provided by CARE and ICRA which are the highest rated in their categories. Investment were made basis consolidated and standalone financials which seemed fine in terms balance sheet leverage and P&L profitability”
LIC MF which had over Rs 200 crore in IFIN NCDs also pointed at reliance on the ratings to make investment decisions. “With respect to investment n unlisted securities like IFIF, more reliance was placed on external ratings provided by CARE and ICRA. Lots of confidence was derived from the same. Further rating agencies have not given any qualifications. Observations with respect to the rating provided by them” said LIC in its statement
“Its a vicious and infected circle - management greed, audit failure, auditors connivance, rating agencies providing highest ratings, funds investing, the money being misused and cycle begins again with other instrument” - is a failure across levels”, said industry experts.
The crux of the rating is the dependence of agencies on the strength of IL&FS financials and audit process, something which is itself are now under question for IFIN, the charegsheet said.