The rating agencies knew that there was stress at IL & FS in India, but gave good ratings – audit

By Abhirup Roy and Aditya Kalra

MUMBAI/NEW DELHI (Reuters) – Credit rating agencies have awarded Infrastructure Leasing & Financial Services (IT & FS) and affiliates in India a high rating for many years, despite a deteriorating financial situation, according to a special audit.

The audit firm Grant Thornton has been tasked by the new board of directors of IL & FS to conduct this review as a result of the government's decision to take over the group after its defaults on debt securities sparked fears of financial contagion.

Grant Thornton reviewed the role of five rating agencies, namely India Ratings and Research of the Fitch Group, Moody's Indian subsidiary, ICRA, Standard & Poor's Crisil Local Unit, CARE Ratings and Brickwork Ratings India – which have awarded 429 ratings to various financial instruments IL & FS in recent years.

In a 105-page report, reviewed by Reuters on Saturday, Grant Thornton said the agencies had raised concerns over the financial strains and liquidity situation of the IL & FS Group between June 2012 and June 2018, while continuing to Assign "constantly high" ratings reversed last year.

"Various strategies deployed by the key managers of the IL & FS Group and some favors / gifts provided to rating agency managers suggest possible reasons for the satisfactory quality of the ratings provided to the IL & FS group," Grant Thornton said in his report. report, according to which detailed gifts or favors such as smartwatches and tickets for sporting events abroad.

IL & FS declined to comment. India Ratings said the Grant Thornton report was based on "partial and selective sources," adding that "our ratings were based on a robust and transparent badysis of relevant information."

Brickwork stated that it did not award the highest scores to IL & FS "because it follows a robust, transparent and consistent rating methodology" and that its actions were not influenced by any commercial pressure or demand for withdrawal of rating.

ICRA stated that it would determine an appropriate course of action and was currently reviewing the report which, in its view, does not take into account the "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 polls on the company's activities. However, Grant Thornton's report raises the question of whether rating agencies have misled investors about the stress levels of other shadow banking companies in India, where new fractures are emerging.

Dewan Housing Finance Corp <DWNH.NS>, another large company in the sector, warned last week that its financial situation was catastrophic, raising more and more concerns for the health of this sector and signaling that the crisis was far from over. to be finished.

"These examples provide an overview of the incestuous financial services industry where the counterpart has become the norm. The rot … is deep and still needs to be cleaned up, "said Shriram Subramanian, corporate governance expert at InGovern, Voting Consulting Firm.

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Grant Thornton's study of communication between former IL & FS employees and rating agencies revealed that the company "sometimes used to force" rating companies to withdraw their valuation if it did not receive a rating. favorable note.

He also uncovered cases where credit rating agencies met with employees of IL & FS and then decided not to downgrade the ratings initially decided upon, the report said.

"It seems that various potential strategies mentioned above have been applied to ensure favorable ratings or avoid rating downgrades," Grant Thornton said.

Grant Thornton, highlighting the "potential favors / gifts," said various key officials of the rating agencies had received gifts such as smartwatches, shirts and coasters.

The email communication showed that a former IL & FS employee had facilitated the purchase of a villa at a significant discount for the wife of a senior executive. Fitch senior, while another had organized football tickets for a Brickwork Ratings executive at a Real Madrid match, the report added.

Brickwork stated that it shared "a detailed answer" regarding this allegation with the new management of IL & FS. In a statement, Fitch said the employee involved broke the agency's code of conduct and was no longer employed.

The Indian market regulator has tightened the regulation imposed on credit rating agencies over the last three years to strengthen supervision and clarify the situation of investors. In the aftermath of the VA crisis, regulators ordered last month to tighten disclosure standards for these agencies.

(Report by Abhirup Roy and Aditya Kalra, edited by Euan Rocha, Stephen Powell and Kirsten Donovan)