Exclusive: From buying villas to football match tickets, here's how IL&FS got favourable ratings from credit rating agencies

From buying homes and football match tickets in Madrid to donating money to charities linked to top management of credit rating agencies, infrastructure firm IL&FS did a host of questionable activities to secure good credit ratings and mask its dismal financial situation, revealed a confidential report prepared by Grant Thornton and accessed exclusively by CNBC-TV18.

The newly constituted board of the company under banker Uday Kotak appointed Grant Thornton to conduct a special audit of all high-value transactions undertaken by IL&FS Limited and a few of its group companies for the period commencing from April 1, 2013 to September 30, 2018.

This exercise was code-named Project Icarus.

IL&FS has a debt of over Rs 91,000 crore and is currently facing severe liquidity crisis. Between July 2018 and September 2018, two subsidiaries of IL&FS group failed to pay back loans and inter-corporate deposits to lenders. In July 2018, the road arm of IL&FS  faced difficulty in making repayments due on its bonds. In September 2018, one of the subsidiaries of the IL&FS group was unable to repay a short-term loan of Rs 1,000 crore taken from Small Industries Development Bank of India (Sidbi). Apart from this, certain group companies defaulted in repayments of various short- and long-term deposits, inter-corporate deposits, and commercial papers.

This led to the National Company Law Tribunal (NCLT) in Mumbai reconstituting the new board on October 1, 2018.

CNBC-TV18 on Friday reported that the Ministry of Corporate Affairs had called for a serious probe into the role of rating agencies in various fraud cases including IL&FS.

In its confidential report, Thornton said, "It was noted that although Credit Rating Agencies had concerns/issues with the operations of the IL&FS group (including potential stress and liquidity indicators) during the period June 2012 to June 2018, the ratings assigned by them were consistently high and the same were reversed/downgraded only post June/July 2018."

The report further alleged key employees of IL&FS tried to delay the process of rating surveillance or delay the publication of rating in public domain in case they became aware that ratings were not going to be favourable to the company.

It said, "We noted in certain instances that intentionally incorrect or incomplete information was being provided to the Credit Rating Agencies (CRA) to avoid rating downgrade."

Thornton's report noted instances when credit rating agencies did not downgrade the ratings even after they initially decided to do so. It said, "We noted instances wherein case if the then key employees of IL&FS did not receive the desired rating from the CRA they used to potentially pressurise rating agencies to either withdraw the credit ratings or credit rating request or approach other rating agencies who would provide the desired ratings."

"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.

Since it was a draft report, Grant Thornton has not taken any clarifications from the key representatives of IL&FS group and have prepared it based on its own understanding and assumptions. GT relied on the information and explanations provided to it by the key representatives of the IL&FS Group and has not independently verified the same. The scope of the forensic audit report by Grant Thornton is limited to findings provided by the rating agencies.

Replying to allegations, Moody’s said, "The fee for any particular rating is the same regardless of whether the rating is public or private, and ongoing 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."

Also, India Ratings and Research spokesperson said, "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," the spokesperson added.

CARE Ratings said, "ILFS & IFIN 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 CRA could rate the debt instruments of a shareholder till the time its shareholding in the CRA did not exceed 10%."

How did IL&FS manage to achieve this? Through a web of grafts, bribes and favours. 

The report highlights three instances where IL&FS bought a villa, football match tickets for a key personnel of a rating agency and donated Rs 25 lakh to a charity where head of a rating agency was a managing trustee.

Thornton said IL&FS arranged a football match ticket where Spanish club Real Madrid played a game in 2015. The top official of this rating agency is thanking IL&FS in the email reviewed by Grant Thornton stating, "It was a great feeling to watch Real Madrid match live from one of the best stadiums in the world. IL&FS corporate box has a superb view and hospitality was fantastic."

The report identified an email as dated as February 2008 sent by a manager at IL&FS to former chairman Ravi Parthasarthy indicating donation of Rs 25 lakh to be given to a trust where chairman of a rating agency was a managing trustee. Thus, it appears monetary benefits were given to the other entities of the key officials of the rating agency, Thornton's report said.

Apart from this IL&FS also helped a top official at Fitch Ratings buy a villa costing over Rs 3 crore for a discount of Rs 43 lakh. "It brings into question his

independence in the rating obtain from Fitch as well as India Ratings," Thornton's report said.

In an email dated September 2013, two officials at IL&FS were discussing the fitness watch they saw at a key personnel of Care Rating. The report said, "It appears that Arun Saha and Sujoy Das were planning to provide Fitbit Watch as a gift. Further, it also indicates that IL&FS key personnel were aware of the likes of the key officials of CRA."

Grant Thornton reviewed emails of employees of IL&FS to come to these conclusions. It said, "Based on the review of the emails, it appears that the rating agencies were potentially aware of the issues in the IL&FS group. However, various strategies deployed by the then key officials of IL&FS group and certain favours/gifts provided to rating agency officials suggest the possible reasons for consistent good ratings provided to IL&FS group during the period June 2012 to June 2018."

In one such case, Grant Thornton reviewed an email chain between December 2016 to February 2017 where Care Ratings, first downgraded ratings of IL&FS' ITNL to 'BB+ outlook stable' to a reaffirmed 'BBB-'. It said, "Based on the above chain of events in the email, it appears that CARE had earlier planned to assigned ‘BB+ with outlook stable’ ratings to IECCL which was

changed to ‘BBB- with outlook stable’ post meetings between the representatives of CARE and IL&FS group."

Care Ratings on Wednesday said the company's board of directors has decided to send Rajesh Mokashi, Managing Director & CEO of CARE, on leave, with immediate effect, until further notice.

Similarly, Grant Thornton found emails between IL&FS and ICRA officials.

On September 10, 2013, rating agency ICRA assigned 'A-' rating for Rs 100 crore non-funded based facility availed by IL&FS Rail Ltd. A meeting was set up on September 18, 2013 between ICRA and IL&FS. In December 2013,  ICRA rated this Rs 100 facility an 'A'.

Thornton report said, "Based on the above chain of events in the email, it appears that ICRA had earlier planned to assign ‘A- with outlook stable’ ratings to IL&FS Rail Limited which was changed to ‘A with outlook stable’ post meetings between the representatives of ICRA and IL&FS group."

Grant Thornton, in its report, has listed many such incidents involving CRAs including Fitch Ratings, ICRA and Care Ratings.

On July 1, ICRA decided to send its managing director and chief executive Naresh Takkar on forced leave, pending an inquiry into the "concerns" raised by the capital markets watchdog the Securities and Exchange Board of India (Sebi) regarding the agency's role in IL&FS ratings.

The IL&FS debacle has spooked the credit markets triggering a liquidity crisis for the non-banking financial companies (NBFCs). The system is yet to come out of the stress despite investors losing thousands of crores.

Rating Agency Moody's in December 2018 said the current NBFC crisis will weigh on India's growth prospects and expects the country's economic growth to slow to just above 7 percent in fiscal 2019 and 2020.

Moody's explained that India's NBFCs are an important provider of credit

to the country's economy and, in the fiscal year ended March 31,

accounted for nearly 17 percent of total loans and one third of total retail

loans.

India's GDP growth slowed to 6.6 per cent in the October-December quarter of 2018-19, the lowest rate in five quarters, primarily due to the stress among NBFCs.

A direct correlation could be seen as many NBFCs are facing liquidity challenges resulting in slower loan disbursements and eventual fall in demand and consumption.

In an interview to PTI, corporate affairs secretary Injeti Srinivas said, "There is an imminent crisis in the NBFC sector. There is a credit squeeze, over-leveraging, excessive concentration, massive mismatch between assets and liabilities, coupled with some misadventures by some very large entities, which is a perfect recipe for disaster."