IL&FS Bankruptcy Crisis: SEBI Expands Probe in Role of Credit Rating Agencies
Securities and Exchange Board of India (SEBI) has reportedly expanded its probe into the role of credit rating agencies (CRAs) after a forensic audit flagged cases of misconduct by them in rating the IL&FS group companies. The move from the market regulator came after a forensic audit by Grant Thornton pointed out that credit rating agencies gave top ratings to IL&FS group entities despite being aware of the weak financials of the group. The Enforcement Directorate (ED) also discovered that the now-bankrupt company’s senior management interfered in the ratings review of its group firms, seeking their upgradation on many occasions.
The board of Infrastructure Leasing & Financial Services (IL&FS) was overhauled in October last year after massive defaults by the group and suspected wrongdoings by the former top management. In light of this, the new board mandated Grant Thornton to carry out a special audit for all high-value transactions undertaken by IL&FS and some of its group companies for the period between April 2013 and September 2018. The Grant Thornton audit report was aimed at identifying siphoning or misuse of funds, fraudulent transactions, their modus operandi, the quantum of the financial loss, and fixing of responsibility.
Grant Thornton was also asked to review the ratings provided by various credit rating agencies (CRAs) to IL&FS Transportation Networks Ltd (ITNL), IL&FS Financial Services Ltd (IFIN) and IL&FS Ltd. During the period under review, the IL&FS group companies were awarded credit ratings by Crisil, CARE, ICRA, India Ratings (a 100 per cent owned subsidiary of Fitch Ratings) and Brickwork.
Grant Thornton found that in certain instances, intentionally incorrect or incomplete information was being provided to the CRAs to avoid rating downgrade. In cases of desired ratings not being received, the IL&FS management used to exert pressure on rating agencies to either withdraw the ratings or approach other rating agencies that would provide the desired ratings.
After the disclosure of direct interference, conflicts of interests, circumvention of impartiality, ICRA and CARE have sent their chief executives on leave, whereas India Ratings has clarified that a senior official at Fitch’s Singapore office has been dismissed after being found guilty of misconduct.
Source: Business Today