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

MUMBAI / NEW DELHI (Reuters) – Credit rating agencies have given Infrastructure & Financial Services (IL & FS) high ratings in India and its affiliates for many years, despite a deteriorating financial position. 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 examined the role of five rating agencies: India Ratings and Research of the Fitch Group, Moody's Indian subsidiary, ICRA, Crisil's Standard & Poor's Local Unit, CARE Ratings and Brickwork Ratings India, which has 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.

CIFAR indicated that it would determine the appropriate course of action and was reviewing the report, which ignored the "alleged fraud perpetrated by the former IL & FS leadership".

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 big company in the sector, warned last week that its financial situation was dire, raising more and more concerns for the health of this sector and signaling that the crisis was far from over .

"These examples provide an overview of the incestuous financial services industry where the counterpart has become the norm. The rot … is deep and requires more cleaning, "said Shriram Subramanian, an expert in corporate governance at InGovern, a proxy advisory firm.

FOOTBALL TICKETS, SMART WATCHES

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.