Homes, Football Tickets, Pressure Tactics: The Ways In Which IL&FS May Have Influenced Ratings

How an entire system missed the weakness in one of India’s largest infrastructure conglomerate.

Road construction takes place near the IL&FS building, one of India’s leading infrastructure-development and finance companies, in Mumbai, India. (Photographer: Abhijit Bhatlekar/Bloomberg News)
Road construction takes place near the IL&FS building, one of India’s leading infrastructure-development and finance companies, in Mumbai, India. (Photographer: Abhijit Bhatlekar/Bloomberg News)

The collapse of Infrastructure Leasing & Financial Services Ltd. in September 2018, which roiled the Indian credit markets, left behind many questions on how an entire system missed the weakness in India’s largest infrastructure conglomerate.

Specifically, questions were raised on why credit rating agencies failed to flag-off the build up of risk to investors.

The government-appointed board of IL&FS had brought in Grant Thornton to undertake a forensic audit on the role of credit rating agencies. The agency has submitted its findings in an interim report to IL&FS, the board said in a statement on Thursday. “The report has been shared with relevant stakeholders, sector experts, and legal teams for information, consultation and opinion.”

BloombergQuint has reviewed a copy of the interim report, which speaks of the manner in which senior officials of IL&FS manipulated credit rating agencies and their officials. This allowed IL&FS and its group companies to retain their high ratings and hide a build up of stress.

In response to queries a spokesperson for ICRA Ratings said, “We’re aware of the interim report commissioned by IL&FS board. We are reviewing the content of the report, However, we can’t comment on the accuracy of the information at present.”

A spokesperson for India Ratings and Research said the report has been produced without request for participation and has no legal standing. “The report is based on partial and selective source material from IL&FS and demonstrates a limited understanding of the credit rating process.... The report largely ignores the fact that the government has charged the former management of IL&FS with engaging in widespread fraud and producing “falsified, spruced up” financial statements, which all credit rating agencies rely on to produce accurate ratings.”

Fitch Ratings said it “conducted an investigation into the matter recently reported in the news relating to a senior director of the Fitch Singapore office, and found that the employee engaged in activity in violation of Fitch’s Code of Conduct”. The employee is no longer employed at Fitch, it said.

A spokesperson for Brickwork Ratings said on Friday evening that the agency did not assign the highest grade to IL&FS because it follows robust, transparent and consistent rating methodology. “Rating actions on the subsidiaries of IL&FS Ltd. followed the due process and was not influenced by any commercial pressures or rating withdrawal requests as indicated in the email conversation.”

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,” the rating agency said while adding that final rating decisions are the prerogative of the rating agency.

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

‘Managing’ Ratings

Grant Thornton, in its report, said a review of communications between rating agencies and IL&FS group officials showed that although credit rating agencies had concerns as early as 2012, the ratings assigned to IL&FS firms remained high until middle of 2018.

The concerns, including around potential stress and liquidity indicators, were related to three IL&FS companies — IL&FS Transportation Networks Ltd., IL&FS Financial Services Ltd. and IL&FS Ltd. The ratings of these firms, however, were not downgraded.

Grant Thornton’s interim report showed that IL&FS officials used a number of means to ensure favourable credit opinions.

We noted that the credit rating rationale which is supposed to be drafted by the rating agencies were materially modified by or significant suggestions from the former key employees of IL&FS were incorporated, to provide and support favourable ratings given by the CRA.
Grant Thornton Interim Report

Grant Thornton found and highlighted several such instances. A few of these are highlighted below.

While naming the rating agencies and their top executives due to their institutional responsibility, BloombergQuint is not naming individual rating analysts as we have not been able to speak to them to get their side of the story.

  • In November 2011, Fitch Ratings shared a draft rating action commentary with IL&FS with an intention to downgrade the outlook on IL&FS’ rating from ‘stable’ to ‘negative’. Ravi Parthasarathy, head of IL&FS, suggested that the team speak with a certain senior financial sector ratings official at Fitch. Followings phone calls and meetings, Fitch retained the outlook at ‘stable’.
  • In December 2015, ICRA indicated that it wants to downgrade the ratings of ITNL. Arun Saha, the head of ITNL, asked Parthasarathy to meet with Naresh Takkar, chief executive officer of ICRA. Email trails indicate that Ravi Parthasarathy, Ramesh Bawa, head of IL&FS Financial Services, and Naresh Thakker met on May 19, 2016. It was agreed in the discussion that ICRA would hold the ratings of ITNL till end of June 2016, Grant Thornton said while citing emails.
  • In April 2016, CARE Ratings communicated provisional ratings at ‘AA+’ for a proposed Rs 300-crore debenture issue raised by Gujarat Road and Implementation Co. Ltd. IL&FS group officials were unhappy with this and email communications suggest that Saha spoke to Rajesh Mokashi, managing director at CARE. The eventual rating assigned was AAA.

On July 1, ICRA asked Takkar to go on leave pending investigations. On July 17, CARE Ratings asked Mokashi to go on leave pending investigations.

Material Changes To Rating Rationale

Grant Thornton points to instances where email communications between IL&FS group officials and rating executives suggests that IL&FS managed to alter wordings in the rating rationale published.

Some of these are detailed below:

  • Grant Thornton identified a Dec. 3, 2014 email exchange between IL&FS officials and India Ratings officials in which the former suggested that the rationale provided by the India Ratings should be “softened/less harsh.” The wording suggested by the IL&FS officials was eventually used in the ratings release, Grant Thornton said.
  • Email exchanges dated April 18, 2016 showed an ICRA official writing to a senior IL&FS official asking for the wording of the rating rationale to be verified. The final published rating rationale suggests the rating agency incorporated the wording suggested by IL&FS officials.
  • In March 2017, there was an email exchange pertaining to the rating rationale for ITNL with ICRA. The exchange suggested that the rationales had been modified a few times, pertaining to the the leverage.

Delayed Ratings, Incorrect Information

There were instances where IL&FS managed to delay the release of rating, which may have worked in favour of the infrastructure group, the forensic audit showed.

  • Grant Thornton identified an email dated Sept. 20, 2010 sent by Saha and Bawa, stating that a suggestion has been made to CARE Ratings not to send out communication of a AA- rating assigned to the financial services subsidiary of the IL&FS Group. The rating was finally released only on Dec. 31, 2010.
  • An email on Jan. 8, 2018 between Saha, Bawa and a few other officials suggested that an impending downgrade of ITNL by India Ratings should be delayed in order to complete certain transactions. Hari Sankaran, former vice chairman of the group, suggested in his email responses that the downgrades had been deferred for three months following meetings with India Ratings officials.

In addition, Grant Thorton also cites examples of IL&FS group officials providing partial and misleading information to credit rating agencies. There are also cases where rating withdrawals and threat of such withdrawals may have been used to influence ratings, the report shows.

Gifts And Benefits

Grant Thornton found instances of rating agency officials and analysts getting gifts and benefits such as smartwatches and football tickets from IL&FS companies and officials.

  • Once such instance was where Bawa helped the wife of a senior rating official at India Ratings purchase a villa at a discount of Rs 43 lakh. Bawa also helped the couple defer interest charges on delayed payments by speaking to the head of a real estate firm. Multiple emails between September 2012 and August 2016 were cited by Grant Thornton.
  • In April 2015, Saha provided D. Ravishankar, founder of Brickwork Ratings, tickets for a football match at Madrid in the IL&FS corporate box. The email exchange, Grant Thornton said, suggested potential favours were arranged for key rating agency officials.
  • Communications between IL&FS officials also suggested that they helped purchase a Fitbit or smartwatch for the managing director of CARE Ratings.
  • Grant Thornton’s review also threw up a Rs 25 lakh donation by IL&FS to the Sameeksha Trust, whose managing trustee was the chairman of ICRA.

The trustee named in the report did not reply to an email from BloombergQuint sent on Thursday. Mokashi, when contacted, said that he was neither offered any gift nor did he accept any gift.

Regarding the allegation against Ravishankar, the spokesperson for Brickwork said a detailed response has been shared with the new management at IL&FS.

(Updates an earlier version to incorporate responses by India Ratings and Research, Brickwork Ratings, Fitch Ratings, CARE Ratings and Rajesh Mokashi.)