ICRA Rating Scandal: Does the Sacking of CEO, absolve the Board, Given ICRA’s Past Record?
ICRA, the local Indian arm of global ratings firm Moody’s Investor Services, had sacked Naresh Takkar, its Managing Director (MD) and group CEO, on 29th August after investigating an anonymous complaint that alleged wrong-doing by the firm in the 90,000 crore IL&FS scam.
 
ICRA’s August 29th stock exchange notification and press release, claimed that the Board terminated Mr Takkar’s employment in the best interests of the company and its stakeholders. “The decision was made according to applicable law, contractual requirements and followed due process in line with the highest standards of corporate governance,” as per an ICRA spokesperson. 
 
Takkar has however challenged his termination terming it as “unwarranted, illegal and unfair”. According to him, ICRA had first received the anonymous complaints in last November but it was only on 24th August 2019, just five days prior to his sacking, that he was allowed to see them for the first time. Takkar has also alleged that the Board did not allow him to opt for “voluntary leave” and instead forced him to go on “administrative leave”. 
 
He has reportedly written to the shareholders to ponder over the above and question the Board before voting when the matter of his removal comes up before the 28th Annual General Meeting of ICRA scheduled for 28th September.
 
Total collapse of Governance at ICRA
 
In the absence of details, it will not be fair to comment on the merits of Takkar’s removal. However, what is coming out loud and clear is the failure of corporate governance at ICRA.
 
Is it fair to hold just one person accountable for the abject failure of ICRA to discharge its responsibilities? ICRA had continued to assign high ratings to Infrastructure Leasing & Financial Services (IL&FS) and its subsidiaries till September 2019 despite being well aware that IL&FS had defaulted on its debt payments almost a year back. 
 
Also could fiddling with the ratings be the handiwork of only the MD? Why has no action been reportedly taken against the spineless top executive team that worked on the ratings and was so subservient to the MD that he could allegedly alter the ratings dramatically. 
 
Absence of adequate controls and systems within ICRA expose its lack of competence to rate companies which normally have a significantly higher level of business complexities. The Board of ICRA owes an explanation. 
ICRA’s Board is Chaired by Mr. Arun Duggal and boasts of several representatives from Moody’s including Dr. Min Ye, Mr. Thomas John Keller Jr., Mr. Navneet Agarwal and Mr. David Brent Platt. These directors have held several senior positions with Moody’s over an extended period and it is therefore astonishing that none could detect the poor systems and controls at ICRA.
 
Yet, in its above referred communication to the stock exchanges, ICRA has claimed that its decision to sack Takkar was in keeping with the highest standards of corporate governance! 
 
Deep Ramifications 
 
It is difficult to have one standard definition of governance. It, amongst others, stands for the value and ethics which collectively drive any organization, at all levels, to conduct its business in the best interest of all the stakeholders but strictly within the confines of law. Governance can certainly not be person or transaction based. 
 
IL&FS was not the only major failure at ICRA. As highlighted in my earlier article of 9th August 2019, ICRA had miserably failed in its duties when rating Pricewaterhousecoopers Pvt Ltd., and two of its network audit firms, Price Waterhouse and Lovelock and Lewes. 
 
Subsequent events have vindicated what I had highlighted. Last week, the Enforcement Directorate Enforcement Directorate (ED) has slapped a  penalty  of Rs230 crores  on  Pricewaterhousecoopers Pvt. Ltd. (Pwcpl),  its Chairman, Shyamal Mukherjee, two past Chairmen: Deepak Kapoor and Ramesh Ranjan, director, Satyavati Berera, and ex-director, Ambarish Dasgupta, for receiving foreign investments  from Pwc Service BV, Netherlands disguised as “grants” in blatant  violations of FEMA 1999.  
 
ED’s Investigations had started on directions of the Hon’ble Supreme Court pursuant to a Public interest litigation filed before it. Even ED found it fit to issue notices to not just one person but even two past Chairmen!
 
Healthy financial system
 
The basic aim of credit ratings is to facilitate a healthy financial system for the society at large. Had ICRA used basic professional skepticism in its ratings of Pwc, it could have highlighted the systemic defects in the banking system to the Reserve Bank of India for taking corrective action. 
 
Large amounts of “terror money” has allegedly flown in though banking channels. ICRA’s inputs could have helped tremendously in fortifying the country’s banking system. 
 
ICRA could have also helped in saving precious time of the Hon’ble Supreme court as also the needless  waste of public money that has  been expended in the ED’s investigations. 
 
ICRA needs to introspect 
 
IL&FS and Pwc are unlikely to be the only two cases where ICRA has goofed up. So far it has made only Takkar the scapegoat. ICRA must therefore immediately investigate its style of functioning, address the yawning gap in its systems and controls, objectively fix accountability: identify and punish  the others who colluded with Takkar and, amongst others, make its risk mitigation processes more robust  to ensure that it delivers what it is paid to do. 
 
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    COMMENTS

    Shailesh Lal

    2 weeks ago

    I wish the authors proofread before posting the article. Thanks

    Hudaf Shaikh

    3 weeks ago

    The sacking of Talwar is a clear admission by ICRA of it's cupability in selling ratings. One expects the ICRA board now to come forward with an offer to make good the losses suffered by investors in those IL&FS securities it had rated.

    Sriram Veeraraghavan

    3 weeks ago

    It is very clear that author neither understands the Credit Rating process nor corporate governance.

    ADB cuts India's FY20 GDP growth forecast to 6.5%
    The Asian Development Bank (ADB) has revised its outlook for India's GDP growth for the financial year 2019-20 to 6.5 per cent from the previous projection of 7 per cent due to domestic reasons such as the pre-election decline in investment and tighter credit conditions.
     
    However, the Manila-based bank in its supplement to the Asian Development Outlook (ADO) released on Wednesday said that the growth may improve in FY 2020-21 to 7.2 per cent.
     
    "India's growth forecast for fiscal year 2019-20 is lowered to 6.5 per cent after growth slowed markedly to 5 per cent in the first quarter, April-June," the ADB said.
     
    "India is expected to rebound to 7.2 per cent growth in fiscal 2020-21 and join
    most other subregional countries in performing at or near their ADO 2019 growth
    forecasts for the next year," it said.
     
    Besides, the Manila-based bank said the contribution of investment in India's growth fell substantially because of subdued bank lending and uncertainty ahead of elections in April-May. 
     
    The revised forecast comes a month after official data showed that severe slowdown in manufacturing activity in the country pulled India's GDP growth rate in the first quarter (Q1) ended June 30 down to 5 per cent, marking the fourth successive quarter of decline in growth.
     
    From 8 per cent in Q1 of 2018-19 to 5 per cent in this quarter, the GDP has fallen by 3 per cent in barely a year's time.
     
    On a sequential basis, the growth rate came lower than the 5.8 per cent in Q4 of 2018-19.
     
    Currently, a culmination of factors such as high GST rates, natural calamities, subdued farm produce prices, stagnant income levels and low job generation have led to the slowdown.
     
    Various sectors are facing a sales downturn. Industries such as fast-moving consumer goods (FMCG) and automobiles have been the hardest hit.
     
    Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.
  • User

    Fiscal expansion and monetary 'teasing'
    The unexpected corporate tax cuts alongside previous measures announced over the last few days by the government amount to a total fiscal expansion of around 0.8 per cent of GDP at face value. That said, private estimates in this regard are between 0.2 - 0.4 per cent shy of the governments estimate.
     
    Here are the growth, monetary policy, and bond market aspects of the move:
     
    Growth
    With this the government has shown a clear commitment to shore up growth even with its back against the wall, fiscally speaking. Further, it has resisted an easy consumption stimulus which may have had very little multiplier effects and possibly may have eventually contributed to some macro-economic imbalances. Rather, the tax cuts will help improve corporate profits and hopefully improve our global competitiveness. Further, incentives for new units announced may also help with attracting some of the global supply chains reallocations that are underway given escalating trade tensions.
     
    This may, however, not necessarily be a substantial shot in the arm for near-term growth prospects. The tax cuts may be used in a variety of ways, including stepping up investments, reducing debt, cutting product prices, increasing salaries, buyback and dividends, among others. 
     
    All told, the immediate pass-through and growth impulses created may be not as strong and thus the tax buoyancy hoped for on the back of stronger growth may have to wait for a while. This is especially true as general competitiveness in an increasingly challenging world requires other aspects of factor input efficiencies to fall in place as well.
     
    Monetary policy
    Prima facie, if, unlike earlier expectation of limited further space, fiscal policy has indeed chosen to step up to the plate, then monetary policy need not be as aggressive, all else being equal. That said, the global and local context is weak enough to argue for yet some (though not substantial) incremental role for monetary easing. This is especially true because RBI Governor Das doesn't appear to be as large a fiscal hawk, currently (indeed welcoming the bold step from the government, after observing one day prior that fiscal space seemed limited). 
     
    We would hence look for monetary "teasing" incrementally, as opposed to "easing" that we were expecting before and would expect the repo rate to bottom out in the 5 to 5.25 per cent area. The one caveat to this view is of further global growth deterioration which would then open up room for further easing, whereas liquidity policy is expected to remain one of substantial surplus.
     
    Bonds
    As noted, before term spreads have been quite wide for this part of the cycle, largely reflecting the inadequate availability of risk capital versus the supply of bonds (the same inadequacy is being reflected as higher credit spreads in the loan and credit market). 
     
    Despite more than adequate liquidity now, risk capital has been cautious possibly due to lack of confidence on market risk, given the fiscal and bond supply overhang. Since a large term premium has already existed, we wouldn't expect a significant further expansion just because the risk has now materialized. 
     
    Further we don't expect the entire expansion to manifest in the Centre's fiscal deficit. After sharing this with states and accounting for other levers built in, we are looking for a final fiscal deficit of 3.7 nper cent versus the 3.3 per cent budgeted. This will entail some additional bond supply eventually, but with the cushion that the Centre's net bond supply was slated to fall substantially in the second half of the year versus the first.
     
    Portfolio Strategy
    With the prospects of monetary easing somewhat diminishing in incremental intensity, and accounting for the somewhat higher bond supply, we may expect some amount of curve steepening going forward. This may likely happen as market participants anchor themselves to 3 thoughts: One, liquidity will remain abundantly surplus. Two, repo rate is here or modestly lower. Three, prospects of a very large bond rally are somewhat diminished (although this view will evolve going forward depending also on how much net additional supply actually manifests for local absorption) . This will likely increase appeal for the front end of the curve versus the longer duration, hence creating steepening pressure. 
     
    Reflecting the above thought, we have cut our recent duration elongation into the 10-14 year segment and are now refocussing on being overweight 5-7 year for government bonds in our active duration funds. For AAA corporate bonds, the relative value continues in up to 5 years. These segments could better align to what remains an environment of abundant surplus liquidity, a very attractive term spread, still general lack of credit growth, and continued global monetary easing.
     
    Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.
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    COMMENTS

    Ramesh Poapt

    3 weeks ago

    inflation coming soon........... good for growth??

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