How credit rating agencies played ball with IL&FS senior management

Emails cited by Grant Thornton show huge manipulation

“Attached is the edited rating rationale. Please let us know if there are any other changes required from your end.” This email from a credit-rating agency (CRA) to an employee of Infrastructure Leasing & Financial Services (IL&FS) sums up the huge manipulation done by both the parties to hide the financial trouble at the group.   

A draft report by Grant Thornton (GT), which was submitted to IL&FS on Thursday, shows that ratings were upgraded after former IL&FS executives met officials of rating agencies. The report has reviewed the role of five rating agencies — CARE, ICRA, India Ratings, Brickwork, and CRISIL — during 2011-2019. And it reveals that at least three CRAs did not downgrade the companies despite being  aware that the group was under pressure and had multiple issues in November 2011. Again, concerns were raised in IL&FS, IL&FS Financial Service (IFIN), and IL&FS Transportation Networks (ITNL) in February 2017. GT’s report, which has been reviewed by Business Standard, says their review indicates no downgrades in the rating.  

The email trail of the top management of IL&FS shows several instances where meetings were suggested with the senior management of CRAs to seek upgrades of ratings. In one such mail that the GT report has put out, Arun Saha, former joint director of IFIN, informed Ramesh Bawa, former MD and CEO of IFIN, that he had told CARE to not send any official communication after IFIN was given the AA rating. Both have been arrested by the Serious Fraud Investigation Office (SFIO). Currently, the Enforcement Directorate and the SFIO are investigating the case.

In an email dated January 8, 2018, Saha had written to Dilip Bhatia, former CEO of ITNL, highlighting that there would be an immediate downgrade by India Ratings for ITNL, but not by several points.  After this, former IL&FS vice-chairman Hari Sankaran informed the group that he and Saha met Ind-Ra’s key officials and they appeared to have delayed the rating downgrade actions by three months, notes GT.

Another email, dated January 30, 2018, was sent by Mic Kang – representative of Moody’s – to Bhatia, providing him with the rating letter for ITNL. This was further shared by Bhatia with the key management for IL&FS, where he suggested that rating from Moody's should be kept in private domain and requested another employee to check the cost for the same. Based on the trail email, it was noted that by paying an additional $68,000 to Moody's, the ratings can be kept in private domain.

However, in an emailed response, a Moody’s spokesperson said: “The draft report commissioned by the IL&FS board on credit rating agencies is wrong with respect to Moody’s. To be clear, Moody’s has never requested, accepted or in any way agreed to receive an additional fee in exchange for keeping a rating in the ‘private domain’, as the draft report inaccurately claims. The fee for any particular rating is the same regardless of whether the rating is public or private, and monitoring of the rating is subject to a separate annual fee. We are in the process of alerting the company to the inaccuracies relating to Moody’s in the draft report and expect the report to be corrected accordingly.”

The former management of the group regularly withheld information as well as fudged data for better ratings. As another email in the GT report shows the projected profit after tax for FY11 was approximately Rs 240 crore. However, the same was indicated as Rs 325 crore for the purpose of rating from CRISIL. 

The draft report also goes on to say the ratings were done even without critical data like the projection of profits.

The report also noted that the credit rating rationale supposed to be drafted by the rating agencies was materially modified by or significant suggestions from the former key employees of IL&FS were incorporated, to provide and support good ratings given by the CRAs. 

Further, when key employees became aware that ratings won’t be favourable, they tried to delay the process and publication. In addition, when the company did not get desired rating from the CRA, they would pressurise them to either withdraw the credit ratings or approach other rating agencies for better ratings. GT further noted that IL&FS also provided favours/gifts to representatives of various CRAs, such as facilitating a villa purchase, arranging for football match tickets, or donating to trusts associated with an official of a CRA.

India Ratings and Research's response:

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.

Our ratings were based on robust and transparent analysis of relevant information, including IL&FS' audited financial statements, in line with our publicly available rating methodology. The ratings are also the collective work product of the agency and no individual, or group of individuals, is solely responsible for a rating. 

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 has no legal standing whatsoever. 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.

In addition, Fitch 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.”