At least four credit rating agencies are being probed by the Serious Fraud Investigation Office (SFIO) for their role in rating the debt instruments of IL&FS Financial Services Ltd (IFIN) that were used to raise about Rs 12,000 crore from the market.
Officials of these four credit rating agencies — Care Ratings Ltd, ICRA Ltd, India Ratings and Research Pvt Ltd and Brickwork Ratings India Pvt Ltd — have been summoned and questioned by the SFIO in the last one month on their role in rating the debt papers of IFIN between 2014 and 2018, sources familiar with the development said.
Sources said the SFIO claimed that these credit rating agencies did not downgrade the ratings of the debt papers of IFIN even though they were aware of its weak financials. In one case, the SFIO allegedly found evidence which shows that top officials of a rating agency did not downgrade the high ratings to IFIN despite being alerted by their subordinates. The SFIO is likely to file its chargesheet in the case by the end of this month.
Meanwhile, in a separate development, ICRA has filed a consent application before the Securities and Exchange Board of India (Sebi), which is also investigating three rating agencies including ICRA, for their role in the IL&FS crisis.
Under Sebi’s consent mechanism, an entity is allowed to settle charges by paying a penalty without admission or denial of guilt. An entity can apply to settle the case under consent mechanism only after Sebi concludes its adjudication proceedings in the case.
Reached for comments, the official spokesperson of ICRA, in an email, said: “Being a responsible organisation, ICRA follows and adheres to the guidelines and rules set by the regulators and will continue the same in the future. We are fully cooperating with all the government agencies in this matter. However, we will not be able to make any comments at this stage.”
An email sent to Sebi did not elicit a response.
The Sebi probe began after the rating agencies failed to warn investors in time about the deteriorating credit profile of IL&FS. At least two rating agencies had given IL&FS the highest rating of AAA, even when its subsidiary, IL&FS Transport Networks, defaulted in June 2018. Subsequently, the rating agencies downgraded its debt papers/credit facilities citing weak financials.
A spokesperson for Care Ratings said: “CARE Ratings has been cooperating with all the concerned agencies involved with the IL&FS case and have provided whatever information has been sought. We would also continue doing so when asked for any further data/information.”
Brickwork Ratings said that in December 2017 it assigned ratings to only a Rs 200-crore perpetual debt programme of IFIN, out of the firm’s total outstanding debt of approximately Rs 15,000 crore in financial year 2018. “Brickwork Ratings is cooperating with the investigative agency. Brickwork Ratings is unable to share any further information at this stage,” said its spokesperson in an email.
A spokesperson for India Ratings said: “Interactions between India Ratings & Research and regulators are confidential. Hence, we would not like to comment on probes conducted by the authorities in relation to IL&FS.”
Sources said IFIN has total borrowings of around Rs 17,500 crore through debt instruments and bank loans.
Last month, the SFIO arrested IFIN’s former MD and CEO Ramesh C Bawa for alleged fraud in granting loans. The fraud office claimed that Bawa was involved in mismanagement at IFIN, fudging of accounts and non-disclosure of NPAs. Bawa is currently in judicial custody.
An interim report of the SFIO said it found multiple instances of evergreening of loans at IFIN which helped it “deflate” its provisioning of NPAs, project a “strong balance sheet” and “inflate its financial performance”.
The alleged financial irregularities at IL&FS came to light last September after some group entities started defaulting on debt repayments. The entire group has been defaulting on repayments since then. The government subsequently superseded the company’s board, and appointed a new management to work on a resolution plan.The IL&FS Group has total liabilities of Rs 91,000 crore.