A draft forensic audit report by Grant Thornton on the engagement of credit rating agencies with IL&FS found instances of meetings with the then key employees of the company following which credit rating agencies would defer a downgrade in ratings or change it from the ones initially decided.
Mint has seen a copy of the report.
The report pointed out that when if the then key employees of IL&FS found out that ratings wouldn’t be in favour of the company, they then either delayed the process of rating surveillance or delayed the publication of the rating on the public domain.
In certain instances, it was found, that the company deliberately provided incorrect or incomplete information to credit rating agencies to avoid a rating downgrade.
“We noted instances where in case if the then key employees of IL&FS did not receive the desired rating from the credit rating agencies (CRAs) they used to potentially pressurise rating agencies to either withdraw the credit ratings or credit rating request or approach other rating agencies who would provide the desired ratings," it said.
In cases where ratings were not favorable, the then key employees of IL&FS used to keep the ratings in private domain, Grant Thornton said.
“We identified multiple emails which indicate that credit rating agencies had raised multiples issues with regards to the operation of the IL&FS group, mainly ITNL,IFIN, and IL&FS Limited. The emails identified are over the period from 2008 to 2018. Based on the above three points, it was noted that although credit rating agencies had concerns/issues with the operations of the IL&FS group (including potential stress and liquidity indicators) during the period June," it said.
It, thus, appears, the report added, that various potential strategies noted above were applied to ensure favorable ratings or to avoid a rating downgrade.
Grant Thornton conducted a review of the ratings provided by various credit rating agencies to major companies of the IL&FS group, namely ITNL, IFIN and IL&FS Limited. Based on this analysis, it said rating agencies had consistently provided and maintained good ratings over the years until in July/August 2018 when they downgraded the ratings for the first time for ITNL due to the default of repayment of Commercial papers.
“We identified multiple emails, which indicates that the IL&FS group was under stress or faced liquidity issues since 2015, mainly on account of the following reasons:Significant increase in debt in the various group companies majorly ITNL; High capital requirement for ITNL and its various SPV’s; Decreasing profitability of IL&FS group; Supporting weaker companies in the IL&FS group," the draft forensic audit report said.
After IL&FS defaulted on debt repayments last year, the National Company Law Tribunal – Mumbai (NCLT) ordered a new board of directors (BoD) to be constituted under the chairmanship of Uday Kotak. The reconstituted audit committee of IL&FS Group on behalf of the BoD appointed Grant Thornton India LLP to conduct a special audit of all high-value transactions undertaken by IL&FS Ltd and few of its group companies for the period 01 April, 2013 to 30 September, 2018.A spokesperson for India Ratings and Research said that the Grant Thornton report was produced without a request for its participation or involvement.
"We were unaware of its existence until shortly before it found its way into the public domain," the spokesperson said.
The spokesperson added that the forensic audit report is based on partial and selective source material from IL&FS and demonstrates a limited understanding of the credit rating process.
"In addition, Fitch conducted an investigation into the matter recently reported in the news relating to a senior director of the Fitch Singapore office, and found that the employee engaged in activity in violation of Fitch’s Code of Conduct. The employee is no longer employed at Fitch," the spokesperson added.