IL&FS Case: Rating agencies faked IFIN ratings to dupe investors  

Credit rating agencies played major villain in the IL&FS crisis as they adjudged positive and impressive ratings on a regular basis to commercial papers and non-convertible debentures (NCDs) of IL&FS Financial Services (IFIN) despite unhealthy financial condition of the company, revealed an investigation report submitted by the Serious Fraud Investigation Office (SFIO) to the Ministry of Corporate Affairs.

The document shows that several investors who subscribed to the IL&FS' financial arm's NCDs and commercial papers, attributed their decision to invest on the high ratings accorded by the rating agencies.

Anurag Jain, Chief Investment Office at Canara HSBC OBC Life Insurance Company, which invested around ₹30 crore in commercial papers and around ₹10 crore in NCDs of IFIN, said their decision to invest was primarily influenced by the credit ratings provided by CARE and ICRA.

"The investment in the IL&FS/IFIN papers was done primarily on the basis of the rating of the companies as provided by the rating agencies CARE and ICRA, which are the highest rated in their categories," the SFIO document quoted Jain as saying.

During the period between 2013 and 2018, the agencies which gave ratings to the financial instruments of IFIN were CARE Ratings, ICRA Ltd, India Ratings & Research and Brickwork Rating India, according to the document.

With an investment of around ₹115 crore in IFIN's NCDs, the Oriental Insurance Company was also apparently duped by the ratings accorded to IFIN.

"The basis of selection of debt securities are based on the financials, credit ratings and best yields available in the market. IFIN is an NBFC and based on the financial, credit ratings and better yields available, some funds have been allocated periodically based on the constant AAA ratings assigned by two rating agencies, CARE and India Ratings," said Dushyant Kumar Bagoti, DGM at Oriental Insurance Company.

Further, manager at the New Indian Assurance Company, Gyan Ranjan, recorded on oath said: "If rating is AA or above then there should not be any issue on the repayment."

New India Assurance Company had invested ₹62 crore in IFIN NCDs.

Implicating the rating agencies, the SFIO said in the document: "From the above it is clear that the investor in NCDs were induced to investment based on the heavy financials and credit rating assigned to the company.

"The investors of the NCDs of the company were induced by the management by deliberately concealing the material facts pertaining to the true and fair view of the affairs of the company and the observation of the RBI with respect to NOF, CRAR etc, which had major adverse effect on the company's capacity to continue as going concern."

SFIO also noted that largely all the four agencies had given the highest rating to the long-term and short-term instruments of IFIN on the strength of its parentage and management linkages with the Infrastructure Leasing & Financial Services Limited (IL&FS).

The probe into the role of credit rating agencies with regard to IFIN needs to be taken further in the ongoing investigation of IL&FS, it said.

With the testimonials and evidences going against the rating agencies, they might be next in the line of fire after the auditors of IL&FS, which the government wants to bar from auditing operations in the country.

The operations of rating agencies are already under close watch of the Securities and Exchange Board of India (Sebi) and the Reserve Bank of India (RBI) and both the regulatory bodies are looking into the business model of these agencies.