IL&FS Ratings Regrettable Failure, but I Can't Be Solely Held Responsible for Collective Failure at ICRA: Naresh Takkar
Calling the ratings given to debt-ridden Infrastructure Leasing & Financial Services (IL&FS) group as 'a highly regrettable failure', Naresh Takkar, who was sacked as group chief executive (CEO) and managing director (MD) of ratings agency ICRA Ltd, has said that he cannot be singled out and held responsible for the collective failure in assigning ratings to the IL&FS group.
Mr Takkar was responding to a notice
issued by Moody’s Singapore Pte Ltd, which holds 51.87% stake in the Indian rating agency, to remove him as director of ICRA.
He says, "Our ratings team never expected and did not foresee such malfeasance by the (IL&FS) group, which was owned by such large and respectable institutional shareholders, overseen by highly experienced and reputed board members and the financial statements audited by auditors with such high repute and international standing. Given all these factors, management plans, policies and representations were relied upon with greater confidence. ICRA, and for that matter no rating agency is either expected or equipped to carry out investigations or forensic audits."
"ICRA followed all its regular process and practices, but could not be expected to anticipate and prevent what happened at IL&FS. ICRA since its inception, institutionalised checks and balance where all its rating decision are assigned by the rating committees, and each rating committee member has an equal vote, with a right to record dissent, and no individual has a veto right. There are strict guidelines for dealing with conflict of interest for all the analytical and rating committee members,” he said adding that since November 2016, as per requirement from Securities and Exchange Board of India (SEBI), review of each rating committee’s decisions are required to be presented to the board.
According to Mr Takkar, Moody’s exercises a close oversight over all aspects of ICRA’s business and operations with the key functions including credit policy, compliance, internal audit, legal, human resources, business planning and finance, having “a dotted line reporting to Moody’s senior managers with complete access of detailed information relating to ICRA’s business and operations.”
On 1st July this year, ratings agency ICRA sent Mr Takkar, the then MD & CEO, on administrative leave following concerns raised in an anonymous representation shared by the market regulator. Later, on 29 August 2019, Mr Takkar was terminated from ICRA as MD & CEO of ICRA and group CEO of ICRA group.
Moody's, the majority stakeholder in ICRA, has given a notice to remove Mr Takkar as director of its Indian unit. As a director being sought to be removed, Mr Takkar has the right to make a representation to the shareholders under Section 169 (4) of the Companies Act.
In his representation, Mr Takkar admitted that ICRA received an anonymous representations sometime in November 2018 and he had fully supported independent investigations. However, he says, "...during the last few months, I had serious concerns about the lack of transparency, fairness and independence of the investigations, and also the board's reluctance to deal with the same."
"After repeated requests, I was allowed to inspect the representations on 24 August 2019 for the first time. I found the allegations completely baseless and vague. Since my access to all of ICRA's documents, and emails was barred way prior to the representations being shown to me, I was constrained to request the board to provide me with back-up data and information to enable me to respond to the allegations in my best capacity. This request as well as my various concerns about the board's conduct and its investigations have not been responded to till date," Mr Takkar claims.
Mr Takkar, however, had not commented on whether he had access to all data and documents in ICRA prior to being sent on leave by the board and what he did then with all this information.
Almost all rating agencies had given high ratings to IL&FS, when the ground reality of the company was different. The rating agencies have been accused of not reporting the deteriorating financials of IL&FS. This prompted the Securities and Exchange Board of India (SEBI), in December last year, to initiate adjudication against credit rating agencies.
Market regulator SEBI had received an anonymous complaints alleging meddling by IL&FS's executives and top management of ratings agencies to obtain high or favourable ratings for the group.
The complainant had alleged that ICRA’s top brass had meddled in assigning high ratings to IL&FS and its subsidiaries. As is well known, since last September, IL&FS has defaulted on its debt payments, triggering a liquidity crisis in the financial services market.
As per the interim report of the serious fraud investigation office (SFIO), the modus operandi of IL&FS group, from 2015 to 2018, was to keep the holding company and its immediate subsidiaries financially viable and healthy, through an unsustainable, pyramidal funding, routing short-term funds borrowed at the holding company or the subsidiary company level to its various step-down or project subsidiaries, as the holding companies' contribution or to avoid default on these companies' borrowing.
The report says, "Defaults in the group companies were avoided for the period by routing funds borrowed by key companies, which projected a financially healthy picture, thus creating an unsustainable bubble in the absence of sufficient revenue generation internally by the IL&FS group."
According to SFIO, this was done to project key subsidiaries of IL&FS as financially sound through the interest charges, dividend and fee-based returns as well as through ever-greening of loan. This allowed IL&FS and its key subsidiaries to enjoy regular dividends, interest payments and high credit ratings.
During September 2018, rating agencies ICRA, CARE and India Ratings downgraded the bonds, long-term loans and short-term commercial papers of IL&FS and its subsidiaries. It is interesting to note that IL&FS did not seek ratings from CRISIL.
The credit ratings of IL&FS’s bond papers went down by nine notches to ‘BB’ grade, which is considered non-investment grade, from ‘AA+’ which indicates a strong financial profile.
The ratings of commercial papers, which are debt papers that mature within a year, went down by six notches to A4 from A1+, another instance of sharp change in the financial profile from strong to very weak.
Several mutual fund (MF) schemes hold the debt papers of IL&FS, and its subsidiaries, in large numbers. The total amount of currently outstanding debt papers held by MF schemes was valued at around Rs2,400 crore as at end-August, before the downgrade.