Audit panel uncovers secret behind IL&FS’ ‘favourable’ ratings

Venkatesh Ganesh K. Ram Kumar Mumbai | Updated on July 19, 2019 Published on July 19, 2019

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Besides offering various inducements, group also misled CRAs: Grant Thornton

Although credit rating agencies (CRAs) had concerns regarding the operations of the debt-ridden IL&FS group during the period June 2012 to June 2018, the ratings assigned by them were consistently high and the same were reversed only after June/July 2018, as per the observations of Grant Thornton India LLP, which was appointed by IL&FS’ audit committee to conduct a special audit.

The advisory firm, which carried out a digital forensic audit of the electronic communication of 11 former key employees/key managerial personnel (KMP) of the IL&FS group, alleged that the credit rating rationale, which is supposed to be drafted by the rating agencies, was materially modified or significant suggestions from the former key employees of IL&FS were incorporated to provide and support good ratings given by the CRAs.

Grant Thornton, in its draft update pertaining to observations relating to CRAs, claimed that in case the then key employees of IL&FS became aware that the ratings are not going to be favourable, they either delayed the process of rating surveillance or delayed the publication of the rating on the public domain.

The firm noted that in certain instances intentionally incorrect or incomplete information was being provided to the CRAs to avoid rating downgrade.

The audit alleged instances where if the then key employees of IL&FS did not receive the desired rating from the CRA, they potentially pressurised rating agencies to either withdraw the credit ratings or approached other rating agencies who would provide the desired ratings.

The firm noted instances where if the ratings were not favourable, the then key employees of IL&FS tended to keep the ratings in the private domain. Further, it noted instances where after meeting with the then key employees of IL&FS, a CRA would not downgrade the ratings which it had initially decided.

The special audit identified instances which suggested that the CRAs had multiple concerns for the last 6-7 years on the operations of the IL&FS Group.

The firm reviewed emails to try and identify the rationale for providing high ratings or for not downgrading the ratings in spite of multiple concerns on the operations of the IL&FS Group.


Grant Thornton came across multiple e-mails indicating that the IL&FS group was under stress or faced liquidity issues since 2015, mainly on account of — significant increase in debt in the various group companies (majorly IL&FS Transportation Networks Ltd); high capital requirement for ITNL and its various special purpose vehicles (SPVs); decreasing profitability of the IL&FS group; and supporting weaker companies in the IL&FS group. During the email review, the audit identified instances where benefits in the form of favours — facilitating a villa purchase; arranging tickets relating to Real Madrid football matches; donating ₹25 lakh to a trust where a CRA’s chairman was the managing trustee — were provided to CRA representatives.

Based on the review of the e-mails, the firm said it appears that the rating agencies were potentially aware of the issues in the IL&FS group.

However, it alleged that various strategies deployed by the then key officials of the IL&FS Group and certain favours/gifts provided to rating agency officials suggested the possible reasons for the consistent good ratings provided to the IL&FS Group during June 2012 to June 2018.

Published on July 19, 2019
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