The Rating Agencies that Lied

After the government disbanded the ILFS board of directors and appointed a new one under the chairmanship of Uday Kotak, one of the first decisions it took was to appoint Grant Thornton (GT) to conduct a forensic audit on the group. The recent GT forensic report on the dubious and collusive role of the rating agencies, in the entire over Rs. 1 lac crore ILFS scam is shocking, to say the least. GT reviewed the suspicious role of the five rating agencies, CRISIL, CARE, ICRA, Brick work and India Ratings, during the period 2008 to 2018 and its findings are incriminating and deserve a criminal punishment for these raters. It was right upto July/August 2018, that these agencies gave a AAA credit rating to the ILFS group, (which helped it to hoodwink and entyce lenders and investors), despite being aware of the rotten financial position and eroded liquidity of the group in 2011 itself. The GT findings are outrageous and clearly show how the top brass of ILFS and the credit rating agencies together manipulated the ratings for years, in a well planned and deceitful manner and good ratings were given for a quid pro quo, despite the weak financials of the group.

The GT findings are numerous and appalling.

1. It was in November 2011 that the rating agencies were aware of the weak financial position and eroded liquidity of the ILFS group and its rating downgrade was imminent. But the top officials of ILFS met and tackled the top brass of the rating agencies and surprisingly a possible downgrade actually became an upgrade. This happened regularly since 2011 and it was the ILFS managers who thereafter drafted the favourable rating rationale. And in the process of tackling the rating agencies year after year in this manner, various other inducements were thrown in by ILFS, including expensive gifts, a large donation to a trust owned by the ICRA chairman, football tickets for matches in Europe and a huge discount on a flat purchased by the top manager of a rating co., which must have been funded by ILFS.
2. The fact is that ILFS was a lucrative client for the rating agencies and none of them wanted to lose the business. In fact the rich ESOP benefits of the top executives of the rating agencies depended on the business they got and none of them would want to lose the ILFS portfolio. This is apparent from the fact that between 2011 to 2018, the ILFS group got 429 ratings done, which gave rich business to these rating agencies.
3. There was a clear conflict of interest which neither CARE nor ILFS disclosed. ILFS was a major shareholder of CARE and was certainly in a position to manipulate credit ratings given to it.
4. In certain cases when the credit rating given to an ILFS group company was not good and its public disclosure would have exposed the rot in ILFS, it paid additional fees to the rating agency to keep quiet and not make the adverse rating private. The raters thus kept quiet for a price.
5. The top executives of the rating agencies were thus pressurised and influenced by the ILFS group, whenever they desired to give a rating downgrade and the same was not surprisingly either kept untouched or was upgraded.

The unfortunate part is that despite such incriminating findings of GT against the rating agencies, they are in a mode of denial and indifference. CARE and ICRA say that the GT report has no legal and official significance and that it shows severe lack of understanding of the credit rating process itself. They say that GT also ignores the fraud perpetrated by the ILFS management. These rating agencies may deny the report’s validity, and challenge its procedures, but the incriminating findings and evidence cannot be ignored.

SEBI, which is the regulator of these agencies has got into motion and has summoned their top dogs. The CEOs of CARE and ICRA who were involved in the ILFS shady ratings and are under suspicion have been already sent on indefinite leave and new regulations to discipline and supervise the rating agencies are on the cards. These include stricter procedures, peer review, no ESOPS and compulsory rotation of rating agencies. But that will not be enough. The ILFS scam has involved collusion between the top management, auditors and rating agencies and just as the directors and auditors of ILFS are facing criminal prosecution, so must be the case with the top bosses of the rating agencies. After all, if the directors and auditors signed bogus financial statements of ILFS, it is the rating agencies who marketed them by giving a top notch AAA rating.