Rating agencies knew of stress at India's IL&FS, but gave good ratings - audit (updated)

IL&FS Transportation Networks

20/07/2019 12:19

* IL&FS audit by Grant Thornton shows lapses by rating
agencies
    * Rating agencies knew of problems, gave good ratings-report
    * "Certain favors/gifts" possible reason for good
ratings-report
    * Favours, gifts included tickets to Real Madrid game and
gadgets
    * Report raises queries about reliability of other company
ratings

 (Adds details, quotes)
    By Abhirup Roy and Aditya Kalra
    MUMBAI/NEW DELHI, July 20 (Reuters) - Credit rating agencies
for years assigned high ratings to India's Infrastructure
Leasing & Financial Services (IL&FS) and its group companies
despite its deteriorating finances, according to a special
audit.
    Audit firm Grant Thornton was appointed by IL&FS' new board
to conduct the review following the government's decision to
take charge of the group after its defaults on debt obligations
sparked fears of financial contagion.  urn:newsml:reuters.com:*:nL4N1WA27S urn:newsml:reuters.com:*:nL3N1W804S 
    Grant Thornton reviewed the role of five credit rating
agencies -- Fitch group's India Ratings and Research, Indian
affiliate of Moody's, ICRA, Standard & Poor's local unit Crisil,
CARE Ratings and Brickwork Ratings India -- which assigned 429
ratings to various IL&FS financial instruments in recent years.
    In a 105-page report, reviewed by Reuters on Saturday, Grant
Thornton said the agencies raised multiple concerns on IL&FS
group's financial stress and liquidity position between June
2012 and June 2018, but continued to assign "consistently high"
ratings which were only downgraded or reversed last year.
    "Various strategies deployed by the then key officials of
IL&FS group and certain favours/gifts provided to rating agency
officials suggest the possible reasons for consistent good
ratings provided to IL&FS group," said Grant Thornton in its
report that detailed gifts or favours such as smartwatches and
tickets to overseas games. 
    IL&FS declined to comment. India Ratings said the Grant
Thornton report is based on "partial and selective source
material", adding "our ratings were based on robust and
transparent analysis of relevant information".
    Brickwork said it did not assign the highest ratings to
IL&FS "because it follows robust, transparent and consistent
rating methodology" and its actions were not influenced by any
commercial pressures or rating withdrawal requests.
    ICRA, Crisil and CARE did not immediately respond to a
request for comment.    
    The IL&FS crisis that started last year has sparked a series
of federal probes into the firm's operations, but Grant
Thornton's report raises questions on whether rating agencies
have misled investors about the stress levels at other companies
in India's shadow banking sector, where new fractures are
emerging.
    Dewan Housing Finance Corp  DWNH.NS , another top firm in
the sector, last week warned its financial situation was dire,
raising more worries about the sector's health and signalling
the crisis was far from over.  urn:newsml:reuters.com:*:nL8N24E0II
    "These instances show a glimpse into the incestous financial
services industry where quid pro quo has become the norm. The
rot ... is deep and needs more cleansing," said Shriram
Subramanian, a corporate governance expert at proxy advisory
firm InGovern. 
    
    FOOTBALL TICKETS, SMART WATCHES
    Grant Thornton's review of communication between former
IL&FS employees and ratings agencies found the company at times
"used to potentially pressurize" rating firms to withdraw their
assessment if the company did not receive a favourable rating.
    It also found instances where credit rating agencies would
meet with IL&FS employees and then decide not to downgrade the
ratings they had initially decided on, the report said.
    "It appears that various potential strategies noted above
were applied to ensure favorable ratings or to avoid the rating
downgrade," Grant Thornton said.
    Highlighting "potential favours/gifts", Grant Thornton said
various key officials at rating agencies received gifts such as
smartwatches, shirts and coasters.
    E-mail communication showed a former IL&FS employee had
facilitated purchase of a villa at a steep discount for the wife
of a senior Fitch executive, while another had arranged football
tickets for a Brickwork Ratings executive to a Real Madrid game,
the report added. 
    Brickwork said it had shared "a detailed response" on this
specific allegation with IL&FS' new management. Fitch in a
statement said the employee involved had violated the agency's
code of conduct and was no longer employed.
    India's market regulator has toughened regulations for
credit rating agencies over the past three years to boost
monitoring and bring clarity for investors. Following the IL&FS
crisis, the regulator last month ordered enhanced disclosure
norms for such agencies.  urn:newsml:reuters.com:*:nL4N23K3JN

 (Reporting by Abhirup Roy and Aditya Kalra; Editing by Euan
Rocha and Stephen Powell)
 ((aditya.kalra@thomsonreuters.com; +91-011-49548021; Reuters
Messaging: aditya.kalra.thomsonreuters.com@reuters.net (Twitter:
@adityakalra))