Grant Thornton Report Points To Conflict Between CARE Ratings, IL&FS

The collapse of the Infrastructure Leasing and Financial Services Ltd. in September 2018 revealed weaknesses in the process of assigning credit ratings to the complex infrastructure conglomerate. Credit rating agencies failed to downgrade IL&FS and group companies in time, leaving investors unprepared for the final default which roiled India's credit markets.

Grant Thornton, which was appointed to review the role of credit rating agencies by the new board of IL&FS, found several alleged irregularities in their functioning. On Friday, BloombergQuint reported that key IL&FS officials used several pressure tactics to get rating agencies to publish favourable ratings. The Grant Thornton report also pointed to instances where gifts and undue benefits may have been used to try and influence rating agencies.

In the case of CARE Ratings specifically, Grant Thornton also flagged-off a potential conflict of interest.

The report states that IL&FS Financial Services held an equity stake in CARE Ratings between 2007 and 2013. Despite that, the rating agency continued to rate IL&FS' financial services arm and other group companies including IL&FS and IL&FS Transportation Networks Ltd. “Thus, it appears to be a potential conflict of interest as CARE is rating its equity shareholder which may potentially affect the independence of the rating agency,” the report said.

In response to a BloombergQuint query, CARE Ratings said that IL&FS and IL&FS Financial Services were only passive shareholders of CARE and did not have any representation on Board or Rating Committee. “As such, IL&FS or IFIN did not have any influence or control on Board or Rating Committee or any officer of CARE and there was hence no conflict of interest. Further, as per regulatory guidelines, a credit rating agency could rate the debt instruments of a shareholder till the time its shareholding in the credit rating agency did not exceed 10 percent,” the rating agency said.

The other major shareholders of CARE Ratings, as of March 31, 2019, include Life Insurance Corporation of India (9.85 percent), Franklin Templeton Investment Funds (5.94 percent), and Crisil Limited (8.9 percent), among others.

Between 2011 and 2019, CARE Ratings assigned 79 credit ratings for ITNL, 65 ratings for IL&FS Financial Services and 61 credit ratings for IL&FS Ltd, the report stated.

On July 17, Rajesh Mokashi, chief executive officer and managing director of the rating agency, was sent on leave till further notice after an anonymous complaint received by the Securities and Exchange Board of India, according to a company filing on the Bombay Stock on Exchange. TN Arun Kumar has been named as an interim CEO, the filing said.

The forensic audit flagged a host of instances across rating agencies to suggest that rating decisions, rating rationales and the timing of ratings was influenced by IL&FS officials.

As part of those instances, several examples involving CARE Ratings were cited, along with similar instances seen across other rating agencies.

• In September 2010, Arun Kumar Saha, the former head of ITNL, wrote to Ramesh Bawa, the former head of IFIN, stating that the latter had received a ‘AA' rating from CARE Ratings. Saha responded by saying that he told the rating agency not to send any communication regarding the rating. Grant Thornton says that the rating for IFIN was eventually published in December 2010.
• In April 2016, a CARE Ratings official assigned a provisional rating of ‘AA+' for a proposed non-convertible debenture issue by Gujarat Road and Implementation Company Ltd., a special purpose vehicle of the IL&FS Group. Email communications reviewed by Grant Thornton show that IL&FS officials spoke to Mokashi and a month later CARE issued a ‘AAA' rating for GRICL's Rs 300-crore NCD issue.
• In December 2016, CARE Ratings suggested that it intended to downgraded the bank lines of IL&FS Engineering and Construction Company Ltd to ‘BB+'. However after meeting with Mokashi, the ratings rationale published reaffirmed the company's bank facilities at ‘BBB-'.

BloombergQuint is not publishing the names of CARE Ratings' executives named in the report as we couldn't reach them individually.

CARE Ratings, in its response, said that the agency's employees/analysts are not in any way in conflict of extant regulations and in violation of codes of conduct. “Prior to publishing the rating rationales, CARE, as a standard practice, sends the same to the client for their comments, if any. This is done as a matter of courtesy to clients and with a view to ensuring that no factual inaccuracies have inadvertently crept in. If the client reverts with any changes/comments within a certain timeframe, it is CARE's prerogative whether to incorporate the same in the rationale or not,” the rating agency said.

The report has been modified to include a response from CARE Ratings received on July 22.