IL&FS senior management asked ICRA for 'desired ratings': ED probe

ICRA is also believed to have told the ED that it had no knowledge about the restrictions imposed by the RBI

The Enforcement Directorate (ED) has found that ratings of the Infrastructure Leasing & Financial Services (IL&FS) group firms were upgraded on many occasions after the intervention of senior management seeking ratings review. 

While changing the ratings of several companies, their financial stress was not taken into account by the rating agencies, the findings show, pointing to an absence of checks and balances, according to sources close to the development. ED is examining the role of credit rating agencies in connection with the IL&FS money laundering case. 

According to the enforcement sleuths, then senior management of IL&FS including Ravi Parthasarathy, Arun Saha and Hari Sankaran used to hold discussions with ICRA’s analyst team to get "desired ratings". 

“We have observed that the IL&FS brass had asked for review of the ratings on multiple occasions. It is pertinent that in the financial year 2012 and 2013, when IFIN was doing well, the rating was AA and when there was liquidity crunch in IFIN in fiscal 2019, the rating was reviewed to AA+,’’ said an ED official. 

Three prominent agencies — Moody’s subsidiary ICRA, CARE Ratings, and Fitch Ratings’ wholly-owned subsidiary India Ratings and Research — had assigned AAA to IL&FS, indicating the highest level of creditworthiness. Those ratings were in place when its subsidiary IL&FS Transportation Networks defaulted in June last year. IL&FS was downgraded in August to D, making the company’s debt junk.

Both ICRA and CARE have sent their MD and CEO on indefinite leave pending an enquiry in the matter. 

During ED questioning, ICRA claimed the agency was not aware of the funding of IL&FS Financial Services (IFIN) and IL&FS Transportation Networks (ITNL) through third party, a source in the know said. ICRA is also believed to have told the ED that it had no knowledge about the restrictions imposed by the Reserve Bank of India (RBI). While maintaining that it didn’t have any information on the dilution of collateral securities, the rating agency told the ED that the IFIN management claimed it had adequate collateral against the exposure, the source added. 

Currently, the Securities and Exchange Board of India (Sebi) rules allow rating agencies to review the rating assigned by them in case their clients (company) opt for it. However, rating agencies have to follow a well-defined process. 

According to the process, review proposals go to a committee, headed by independent members, for assignment of ratings. Changes are made after taking into consideration relevant factors. 

During the questioning, ICRA said it was not aware of the source of funding of the companies, which were under rating review. This was true for financially stressed companies too. ED is learnt to have shared this information with the respective regulators for further enquiry. 

An ICRA spokesperson refused to comment.

Investigators said there were two separate teams for rating financial sector entities and for road and transport divisions. 

ED found that ICRA had taken up the rating review with its rating committee members based on the information submitted by the infra firm and accordingly rating was changed or retained.

The enforcement agency is probing whether rating agencies knew of the crisis at IL&FS or if they were influenced by the people involved in the case. ED has so far questioned ICRA and CARE in the case.