New Delhi: A forensic audit of credit ratings obtained by crisis-hit Infrastructure Leasing and Financial Services (IL&FS) group entities under the erstwhile management has flagged widespread irregularities, including inducements to get favourable ratings despite adverse financial situation.
Citing an interim report of the special audit conducted by Grant Thornton on a mandate from the government-appointed new board, sources said the former top management personnel at IL&FS and its group firms extended favours and gifts to the top executives of rating agencies and their families and also suggested changes in the rating reports before they were made public.
While the continuing probe has already led to CEOs of two rating agencies having been sent on leave by their respective boards, fresh details have emerged about suspected attempts by the former top management personnel of IL&FS Group to influence the rating agencies and their top officers for high credit ratings and also to thwart any negative ratings.
The new board of IL&FS, which was appointed in October last year after massive defaults by the group post its debt burden ballooning to over Rs 90,000 crore and suspected wrong-doings by the former top management, had mandated Grant Thornton to carry out a a special audit for all high-value transactions undertaken by IL&FS Ltd and some of its group companies for the period between April 2013 and September 2018.
The audit is aimed at identifying siphoning or misuse of funds, fraudulent transactions, their modus operandi, 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 major companies of the IL&FS group — IL&FS Transportation Networks Ltd (ITNL), IL&FS Financial Services Ltd (IFIN) and IL&FS Ltd.
In its interim report, Grant Thornton said it appears CRAs had consistently provided and maintained good ratings over the years until in July/August 2018 when they downgraded ratings for the first time for ITNL due to a default of repayment of commercial papers.
During the review period, IL&FS Group had availed rating services from Crisil Ltd, CARE Ratings, ICRA, India Ratings (a Fitch group company) and Brickwork.
Officials at the rating agencies denied any lapses on their part and some even said the interim report seems to suggest limited knowledge of the rating process and was based on one-sided information.
India Ratings on Saturday said its investigation into the role of a senior director at parent firm Fitch’s Singapore office found him in violation of the company’s code of conduct and he is no longer an employee.
Regarding Grant Thornton’s report, a spokesperson at India Ratings and Research said in a statement, “This report was produced without a request for our participation or involvement. We were unaware of its existence until shortly before it found its way into the public domain.”
A higher rating typically helps a borrower get a lower rate of interest and is aimed at giving investors an assurance about the creditworthiness of the company. Besides, it helps create a wider borrowing landscape for the company and is also often used as a marketing tool in form of a better image in dealing with customers.
Grant Thornton said it identified multiple e-mails over the period from 2008 to 2018 which indicate that the IL&FS group was under stress or faced liquidity issues since 2015.
The main reasons for the liquidity crunch have been identified as significant increase in debt in the various group companies, majorly ITNL, high capital requirement for ITNL and its various SPVs, decreasing profitability of IL&FS group and support to weaker group companies.