Rating agencies knew about the stress at IL&FS, but gave good ratings: audit


MUMBAI/NEW DELHI (Reuters) – Credit rating agencies have for years given high ratings to Infrastructure Leasing & Financial Services (IL&FS) and its group companies despite deteriorating finances, a special audit has found.

People walk past an IL&FS (Infrastructure Leasing and Financial Services Ltd.) building outside its head office in Mumbai, September 25, 2018. REUTERS/Francis Mascarenhas/Files

Audit firm Grant Thornton has been appointed by IL&FS’ new board to lead the review following the government’s decision to take over the group after its debt defaults raised fears of a financial contagion.

Grant Thornton reviewed the role of five credit rating agencies — Fitch Group’s India Ratings and Research, Moody’s Indian subsidiary, ICRA, Standard & Poor’s local unit Crisil, CARE Ratings and Brickwork Ratings India – – who have assigned 429 ratings to various financial agencies IL&FS instruments in recent years.

In a 105-page report, reviewed by Reuters on Saturday, Grant Thornton said the agencies raised multiple concerns about the IL&FS group’s financial stress and liquidity situation between June 2012 and June 2018, but continued to assign ratings. “consistently high” that were only downgraded or knocked down last year.

“Various strategies deployed by key IL&FS group officials at the time and certain favors/gifts offered to rating agency officials suggest possible reasons for the consistent good ratings provided to the IL&FS group,” Grant Thornton said in his report which details gifts or favors such as connected watches. and tickets to sporting events abroad.

IL&FS declined to comment. India Ratings said Grant Thornton’s report is based on “partial and selective sources”, adding that “our ratings were based on sound and transparent analysis of relevant information”.

Brickwork said it didn’t give IL&FS the highest ratings “because it follows a robust, transparent and consistent rating methodology” and its actions weren’t influenced by any trading pressure or withdrawal requests. rating.

ICRA said it would determine an appropriate course of action and review the report, which it said ignores “alleged fraud perpetrated by former IL&FS management.”

Crisil and CARE did not immediately respond to a request for comment.

The IL&FS crisis that began last year sparked a series of federal investigations into the company’s operations, but Grant Thornton’s report raises questions about whether rating agencies misled investors about credit rating levels. stress from other companies in India’s shadow banking sector, where new fractures are emerging.

Dewan Housing Finance Corp, another major company in the sector, warned last week that its financial situation was dire, raising further concerns about the health of the sector and signaling that the crisis was far from over.

“These examples show a glimpse of the incestuous financial services industry where the quid pro quo has become the norm. The rot…runs deep and needs more cleaning,” said Shriram Subramanian, corporate governance expert at proxy advisory firm InGovern.


Grant Thornton’s review of communication between former IL&FS employees and rating agencies found that the company “at times used to pressure” rating companies to withdraw their rating if the company did not receive a favorable rating.

It also found instances where credit rating agencies met with IL&FS employees and then decided not to downgrade the ratings they originally decided on, according to the report.

“It appears that various potential strategies noted above were applied to secure favorable ratings or to avoid rating downgrade,” Grant Thornton said.

Highlighting “potential favours/gifts”, Grant Thornton said various key ratings agency officials received gifts such as smartwatches, shirts and coasters.

Email communication showed a former IL&FS employee facilitated the purchase of a heavily discounted villa for the wife of a senior Fitch executive, while another arranged tickets football for a Brickwork Ratings executive for a Real Madrid game, the report added.

Brickwork said it shared “a detailed response” to this specific allegation with new management at IL&FS. Fitch said in a statement that the employee involved violated the agency’s code of conduct and was no longer employed.

India’s market regulator has tightened regulation of credit rating agencies over the past three years to strengthen oversight and provide clarity for investors. Following the IL&FS crisis, the regulator last month ordered enhanced disclosure standards for these agencies.

Reporting by Abhirup Roy and Aditya Kalra; Editing by Euan Rocha, Stephen Powell and Kirsten Donovan


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