SEBI Probing How Rating Agencies Missed Stress In IL&FS

IL&FS was rated AAA and the rating agencies failed to detect the asset-liability mismatch.

(Photo Courtesy: BloombergQuint)

The market regulator is probing how three credit rating agencies failed to spot stress in the Infrastructure Leasing & Financial Services (ILFS) Ltd. and kept giving it the highest ratings till it started defaulting on debt.

“We have begun adjudication proceedings against three credit ratings agencies in the IL&FS case,” Ajay Tyagi, chairman at Securities and Exchange Board of India (SEBI), said at a press conference after the regulator’s board meeting in Mumbai on Thursday, 13 December.

CARE Ratings, ICRA Ratings and India Ratings had rated the debt instruments of IL&FS and its subsidiaries.

BloombergQuint could not immediately reach the rating agencies for a comment.

IL&FS was rated AAA and the rating agencies failed to detect the asset-liability mismatch. After it started defaulting on debt obligations, they downgraded it several notches to junk. That spiraled into a credit market crisis and forced the government to take over the infrastructure group to contain a contagion.

The parent Infrastructure Leasing & Financial Services and direct subsidiaries like the non-bank lender IL&FS Financial Services Ltd. and road builder IL&FS Transport Networks Ltd. borrowed short-term funds from the market and banks, based on window-dressed financials and high credit ratings, Serious Fraud Investigation Office said in its interim report.

IL&FS lent these funds for the long term at high interest rates to its project subsidiaries and group companies. The subsidiaries used these funds to pay interest on loans taken in the past from the same set of IL&FS lenders.

That made the parent and key subsidiaries look financially healthy to borrow more, the SFIO said. The cycle continued till it became impossible to sustain.

The new board, led by billionaire banker Uday Kotak, is looking at asset sales and fund infusion to rescue the conglomerate, now below a debt pile of Rs 91,000 crore. So far, it has reviewed 165 of the 348 group companies and found that close to 100 will face cash crunch till March 2019.

(The article was originally published in BloombergQuint)