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’."
 
UPDATE:
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.
  • Like this story? Get our top stories by email.

    User

    ED attaches properties worth Rs200 crore of Basil International, others in ponzi case
    The Enforcement Directorate on Thursday said it has attached properties totalling Rs 200 crore of different companies of the Basil International Ltd in several states in its probe into a ponzi scheme case.
     
    In a statement, the agency said: "The ED has attached assets to the tune of Rs 200 crore under the provisions of Prevention of Money Laundering Act in a ponzi scheme case."
     
    The agency said the attached assets include lands, flats, factories, hotels, amusement park, tea estate, office spaces, shops, registered in the name of 16 companies of BIL in Assam, West Bengal, Odisha, Jharkhand, Uttar Pradesh, Tripura and Maharashtra along with balances lying in the company's bank accounts. 
     
    The ED has registered a case of money laundering on the basis of a chargesheet filed by the CBI against BIL and others for cheating common public by propagating and selling illegal schemes and by promising huge and unsustainable returns. 
     
    The agency said it was found that the funds were fraudulently collected by selling illegal schemes through chain of agents in Assam, West Bengal, Tripura, Odisha, Jharkhand and several other states.
     
    These schemes were sold not only in the name of BIL but also in the name of other companies like Vamshi Chemicals Ltd, Nixcil Pharmaceuticals and Specialties Ltd. and Basil Express Ltd. 
     
    The agency aid that funds collected through the schemes were illegally diverted by creating a web of shell companies. It said that more than 60 private and public limited shell companies had been identified so far.
     
    A scrutiny of the accounts maintained by these companies lead to a trail in the proceeds of the crime.
     
    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

    COMMENTS

    Veeresh

    1 month ago

    Interestingly enough, this case along with others will now face the "multiple FIRs" route, with sentences applied consecutively and not concurrently or for just a single case.



    https://timesofindia.indiatimes.com/india/builders-to-face-separate-trials-on-victims-complaints-hc/articleshow/70165845.cms

    Jailed Arun Saha centrifugal force in fixing rating agencies at IL&FS
    The rating agencies fiasco viz IL&FS is now common knowledge. Triple A rated IL&FS Group entities enjoyed best of credit worthiness in the market place and a whole catalogue of high profile MNCs, trusts and corporate entities subscribed to its bonds.
     
    On Wednesday, it accounted for another victim. CARE Ratings placed Chief Executive Officer (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 Sebi forwarded concerns raised anonymously to the company. 
     
    CARE said Mokashi would be on leave until the company had examined an anonymous complaint against him sent to the Sebi. The same Mokashi connect emerges in the questioning of joint Managing Director (MD) at IL&FS, Arun Saha.
     
    Saha, a key member of the operating cabal who was arrested by the Enforcement Directorate (ED) in mid-June, has during the course of his interrogation dropped quite a few clangers and implicated himself and the clique which ran the Group headed by Ravi Parthasarthy on the jiggery pokery that was going on. 
     
    The malfeasance stems from the role played by this closed user group. The narrative that emerges from Saha's questioning on this issue is a telling tale of how the collusion between managements and ratings agencies functions to the detriment of corporate India. 
     
    Take a gander at the questioning of Saha by the Serious Fraud Investigation Office (SFIO), which reveals the world of complicity. On a question posed to him by the SFIO during the course of the interrogation, Saha is asked about a mail dated December 30, 2015 from Ravi Parthasarthy to him. His response is that he intimated Ravi that IL&FS had not given CRISIL any business and only once the negative rating in ITNL was removed by them would business be given to them again for new ratings. 
     
    On being asked about how extreme pressure was brought to bear in the context of forwarding of the Rating letter with the mail subject, IEECL-CARE RATING BBB- OUTLOOK STABLE, Saha's retort was that it was done in the context of achieving the result for FY 2017 with only two months left in the financial year. 
     
    Extreme pressure being in the context of the Rating Agency agreeing to the company's Plan. So brazen and naked was the threat of removing or giving business by Saha and Parthasarthy that it was used as a lever for power play. 
     
    Here is a sample of the line of questioning:
     
    Q4. Please state the issues which you were handling in rating agencies in absence of Ravi in light with the answer to question no.30 in your statement dated 9.4.2019.
     
    Ans. The matters handled were with regard to update on fund raising plan, Operational issues raised by the Rating agencies. Post Mr Parthasarathy's illness attending meeting with Rating Agencies along with Mr Hari Sankaran on matters relating to capital raising plan in IL&FS that was contemplated and the shareholder support and divestment initiatives of ITNL and other assets.
     
    Q5. What are the operational issues which were handled by you with the rating agencies?
     
    Ans. Issues, if any that the agency wanted to have discussions on any operational matters. Like various discussions were held with regard to adoption of IND AS account standard, compliance of norms, observations of auditors etc.
     
    Q8. You have been shown email dated 24.11.2016 from Hari to you regarding appointment of an Independent director, why have you stated that in the reply of the same that the person has to be non-intrusive and obedient?
     
    Ans. That was inappropriate communication. What I wanted to communicate was that the person should be a nice gentleman.
     
    Q9. Are you suffering from any mental illness?
     
    Ans. No, I am not suffering from any mental illness.
     
    Q10. Then in that situation how can the words non-intrusive and obedient mean nice? Which in fact are the very reasons why an independent director is mandated in Companies Act?
     
    Ans. It was a judgmental error to use those terms.
     
    Q11. Are you saying today on 17.04.2019 that the words used by you in 2016 were inappropriate for the appointment of an independent director?
     
    Ans. Yes I am saying this today.
     
    Q13. Please see the email dated 4.5.2018 from you to Ravi wherein you have stated that I have told ICRA to keep in abeyance the downgrade in rating to A- (negative) for ITNL. Can you do so?
     
    Ans. I had requested ICRA on intimation from ITNL, that to keep the rating decision in abeyance for discussions and I wanted the CFO of ITNL to meet them asap.
     
    Q14. Were you not interfering in the independent process of rating agencies to the advantage of your company?
     
    Ans. No. As soon as a rating mandate is given to the rating agency, the agency has the unfettered right to go ahead with their rating decisions. As a customary practice, rating agencies keep a communication with the Company till it's formally published and provide draft of their communication for review and comments.
     
    Q20. Were such communications with Mr Anjan Ghosh done previously also by you for ratings given by ICRA for instruments raised by your companies?
     
    Ans. I do''t think so, it has been done by me previously for ratings given by ICRA for instruments raised by our companies. This would be a one off case, where such telephonic communication has been made with Mr Anjan Ghosh and email to that effect (dated 04.05.2018) had been sent to me which is mentioned above.
     
    Q21. So you mean to say that you were influencing the rating agencies after the customary practice of communication sent to your company?
     
    Ans. No, in this case no formal communication was sent to me.
     
    Q23. Having written -- "I have already spoken to CARE and India Rating"", please explain what does this mean? Were you speaking directly and if so to whom?
     
    Ans. I do‘'t recollect to whom I have spoken in the rating agency.
     
    Q24. Do you know anyone in CARE and India Ratings?
     
    Ans. Mr Rajesh Mokashi, MD of CARE and Mr Anando Bhowmik, head of financial services ratings of India Ratings were known to me.
     
    Q16. In case the interactions were done by the officials of the companies with the rating agencies then in what capacity were these rating agencies informing you?
     
    Ans. The communications take place at the credit department and accounts department and the credit department handling these rating agencies communications were headed by Sujoy Das and in case of ITNL it was handled by Mr Dilip Bhatia, CFO.
     
    Q17. So you mean to say in the context of the mail above that Dilip Bhatia informed you about the downgraded rating of ITNL by ICRA?
     
    Ans. The name of the person who intimated me over the phone about this downgrade is not recollected today but he was reporting to Dilip Bhatia, CFO in ITNL.
     
    Q18. So after this telephonic communication by this person in ITNL you mailed Ravi immediately about this downgrade.
     
    Ans. Yes.
     
    Q25. Is''t it coincidental that you are knowing all the heads of the rating agencies in spite of not having any mandate for taking up the task of rating of the IL&FS entities?
     
    Ans. I have been dealing for IL&FS rating for over two decades and in this process have made various officials of rating agencies from time to time and on few occasions interacted with rating agency officials for group rating if needed by the group entity.
     
    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.
  • Like this story? Get our top stories by email.

    User

    We are listening!

    Solve the equation and enter in the Captcha field.
      Loading...
    Close

    To continue


    Please
    Sign Up or Sign In
    with

    Email
    Close

    To continue


    Please
    Sign Up or Sign In
    with

    Email

    BUY NOW

    online financial advisory
    Pathbreakers
    Pathbreakers 1 & Pathbreakers 2 contain deep insights, unknown facts and captivating events in the life of 51 top achievers, in their own words.
    online financia advisory
    The Scam
    24 Year Of The Scam: The Perennial Bestseller, reads like a Thriller!
    Moneylife Online Magazine
    Fiercely independent and pro-consumer information on personal finance
    financial magazines online
    Stockletters in 3 Flavours
    Outstanding research that beats mutual funds year after year
    financial magazines in india
    MAS: Complete Online Financial Advisory
    (Includes Moneylife Online Magazine)