IL&FS Mess: Grant Thornton Forensic Audit Exposes Manipulative Nexus Between Key Employees and Credit Rating Agencies
Updated on 22 July 2019 to incorporate comment from CARE Ratings...
Grant Thornton India LLP, which was appointed to conduct forensic audit on credit rating agencies (CRAs) by Infrastructure Leasing & Financial Services (IL&FS) reveals nexus between key employees of the scam-hit group and top executives of rating agencies. The interim report from Grant Thornton highlights how IL&FS and its key employees managed to obtain good ratings or avoid a downgrade in ratings over the years by manipulation and granting favours or providing gifts to top executives of the ratings agencies over the years.
It says, "...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 and 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."
IL&FS and its key employees provided favours or gifts to representatives of the credit rating agencies says Grant Thornton, adding, "During our e-mail review, we identified various instances where benefits in the form of favours such as, a. Ramesh Bawa facilitated villa purchased for Ambreesh Srivastava (India Ratings), b. Arun Saha arranged football tickets for D Ravishankar (Brickwork Ratings India Pvt Ltd) relating to the matches in Real Madrid, and c. IL&FS group donated to the Sameeksha Trust Rs25 lakh where the managing trustee of the Trust, DN Ghosh is also the chairman of ICRA. Further, our email review indicates that the various key officials of rating agency were provided gifts such as smartwatches, shirts, and coasters."
Mr Srivastava is head of financial institutions for South and Southeast Asia at Fitch Ratings, while Mr Ravishankar is founder and director of Brickwork Ratings.
Mr Bawa is former managing director (MD) and chief executive officer (CEO) of IFIN, while Mr Saha was joint managing director and CEO of IL&FS. Mr Saha, a key member of the operating cabal was arrested by the Enforcement Directorate (ED) in mid-June. Earlier, in April, the Serious Fraud Investigation Office (SFIO) had arrested Mr Bawa and Hari Sankaran, former vice chairman of IL&FS in connection with financial irregularities in the company. At present, both Mr Bawa and Mr Sankaran are in judicial custody. 
Earlier this week, CARE Ratings placed its CEO Rajesh Mokashi on leave until further notice, making it the second rating agency to do so amid regulatory concerns. Earlier this month, ICRA Ltd, the Indian unit of Moody's Investors Service, placed its CEO Naresh Takkar on leave after market regulator SEBI forwarded concerns raised anonymously to the company. 
CARE Ratings, ICRA, India Ratings and Brickwork have been the main rating agencies for IL&FS Transportation Networks Ltd (ITNL), IL&FS Financial Services Ltd (IFIN) and IL&FS during the period reviewed by Grant Thornton. Brickwork was introduced in IFIN and ITNL from 2016, replacing CRISIL (in ITNL), during this period under review, the statement from IL&FS says.  
Here are the strategies, as found by Grant Thornton, and which were undertaken by former key employees or KMPs of IL&FS group to obtain good ratings...
  • We noted that the credit rating rationale which is supposed to be drafted by the rating agencies were materially modified by or significant suggestions from the former key employees of IL&FS were incorporated, to provide and support good ratings given by the CRAs;
  • We noted that in case if the then key employees of IL&FS became aware that ratings are not going to be favourable, they then either delay the process of rating surveillance or delay the publication of the rating on the public domain.
  • We noted in certain instances that intentionally incorrect or incomplete information was being provided to the Credit Rating Agencies to avoid rating downgrade;
  • We noted instances where in case if the then key employees of IL&FS did not receive the desired rating from the CRA they used to potentially pressurize rating agencies to either withdraw the credit ratings or credit rating request or approach other rating agencies who would provide the desired ratings;
  • We noted instances where if the ratings are not favourable, the then key employees of IL&FS tend to keep the ratings in private domain;
  • We noted instances where after meeting with the then key employees of IL&FS, CRA would not downgrade the ratings which it initial decided.
"Thus, it appears that various potential strategies noted above were applied to ensure favourable ratings or to avoid the rating downgrade," the forensic audit report says.
Grant Thornton also reveals potential conflict of interest between IL&FS and CARE Ratings. It says, "Our review of the financials of CARE indicates that for the period 2007 to 2013, IL&FS Limited and IFIN owned equity shares of approx. 5-9% of CARE. Further, during the same period, we have noted that CARE had also provided ratings to instruments of IFIN, ITNL and IL&FS. Thus, it appears to be a potential conflict of interest as CARE is rating its equity shareholder which may potentially affect the independence of the rating agency."
The forensic audit also highlights instances where these rating agencies had initially decided to downgrade the ratings, however, a combination of tactics employed by then key employees of IL&FS and favours and gifts extended to key officials of CRAs resulted in either consistent or good ratings or avoidance of rating downgrade.
"...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," Grant Thornton says.
Emails reviewed by Grant Thornton appear to suggest meetings and discussion were conducted with officials from CARE Ratings post which ratings were not downgraded by ratings agency.
"Based on the above chain of events, it appears that after conducting meetings and discussions between the representatives of CARE and key management persons (KMPs) of IL&FS group, the ratings were finally assigned at ‘AAA’ even though Fitch had earlier planned to assigned ratings at ‘AA+’," Grant Thornton says.
Post meeting with IL&FS key former employees, there were potential change in ratings by ICRA as well. Email trails appear to suggest that meetings were held between key former employees of IL&FS and ICRA officials in order to mitigate the potential downgrade of ratings.  The below table provides sequence of events:
Grant Thornton says, "...based on the above chain of events in the email, it appears that ICRA had earlier planned to assigned ‘A- with outlook stable’ ratings to IL&FS Rail Ltd, which was changed to ‘A with outlook stable’ post meetings between the representatives of ICRA and IL&FS group."
Additionally post meeting between Ravi Parthasarathy and Naresh Thakker the ratings of ITNL were kept on hold instead of downgrade ratings immediately, the forensic audit report reveals. 
After conducting private meetings and discussions between the representatives of ICRA and KMPs of IL&FS group, the ratings on Rapid Metrorail Gurgaon Ltd were finally assigned at ‘BBB with outlook negative’ even though ICRA had earlier planned to assigned ratings at ‘BBB- with outlook negative’, Grant Thornton says while sharing another incident of change in ratings.
The forensic audit also reveals change (downgrade) in ratings of IL&FS by Fitch Ratings post meeting with key former employees. 
Grant Thornton says, "...based on the email trail, it appears that post private meetings between the representatives of Fitch and KMPs of IL&FS Group, the ratings were finally assigned at ‘AAA with outlook stable’ even though Fitch had earlier planned to assigned ratings at ‘AAA with outlook negative’."
Responding to the interim forensic audit report, CARE Rating says, Grant Thornton should have understood the details of the rating mechanism before putting out such a report, which presents the ratings agency in unfavourable light. It also says that Grant Thornton had never approached CARE Ratings for any clarification in this regard.
"As a matter of courtesy, CARE Ratings provides the client a reasonable opportunity to seek a review on the rating action taken by it at the time of review or surveillance, after providing material facts which have not been considered in the rating. Further, prior to publishing the rating rationales, CARE Ratings, as a standard practice, sends the same to the client for their comments, if any. This is done as a matter of courtesy to clients and with a view to ensuring that no factual inaccuracies have inadvertently crept in. If the client reverts with any changes or comments within a certain timeframe, it is CARE Ratings’ prerogative whether to incorporate the same in the rationale or not," the ratings agency says in a statement.
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