IL&FS impact: Govt considers rating reforms to separate review, approval

With the role of rating agencies in the Infrastructure Leasing & Financial Services (IL&FS) scam under the scanner, the government is considering a slew of reforms to separate their review and rating approval functions to ensure there is no conflict of interest.

A senior government official told Business Standard, “IL&FS is perhaps the turning point. There will be a lot of regulatory changes by the learnings of this case.”

Rating agencies that had rated the debt instruments of IL&FS, which went bust, are facing government heat.

“We need to recognise the rating agency. There has to be something about its independence, transparency and disclosures,” the 

official said.

Secondly, on the lines of a public interest director in the stock exchanges, a post could be created for rating agencies. Besides, the government wants to ensure that all debt instruments are rated.

Rating agencies are currently governed by the Securities and Exchange Board of India’s (Sebi’s) Credit Rating Agencies Regulations, 1999. According to rules, credit rating agencies (CRAs) have to specify the rating process, and have professional committees to take rating decisions.

Rating agencies had given IL&FS debentures the ‘AAA’ rating, the highest level of creditworthiness, until its subsidiary IL&FS Transportation Networks defaulted in June 2018. 

Drawing confidence from these ratings, many companies invested in the provident funds of IL&FS and its subsidiaries to the tune of over Rs 10,000 crore.

A rating agency executive, who did not wish to be named, said the agencies gave only an opinion and not an advice, and that banks should do their due diligence to establish creditworthiness. However, he said that recent events had put more onus on rating agencies to do their job with greater transparency.

As far as global practices go, following the 2008 global financial crisis, the US was one of the first jurisdictions to impose civil liability on CRAs through the enactment of the Dodd-Frank Act.

In the European Union, a civil liability could be imposed in the event of intentional commission or gross negligence by the rating agency or in the case of damage to investors.

Last year, Sebi tightened the disclosure and review requirements for rating agencies after they failed to raise timely alerts ahead of debt defaults by IL&FS, one of India’s top shadow lenders. The market regulator had taken note of the lapses on part of the rating agencies, namely India Ratings & Research, ICRA, and Credit Analysis and Research, in the case.

The Serious Fraud Investigation Office in its charge sheet noted that the top management members of IL&FS “deliberately presented falsified, spruced-up, deceptive and misleading” financial statements to the rating agencies, which continued to give them the highest ratings till the latter part of 2018.

“All governance concerns are getting more pronounced. You have to look at compliances in form and substance,” the official quoted above said.