IL&FS fallout puts rating agencies on SFIO’s radar

The Serious Fraud Investigation Office (SFIO) is looking into methods used by credit rating agencies as part of its probe into a series of defaults by Infrastructure Leasing and Financial Services Ltd (IL&FS), a government official said.

“SFIO is looking into the issue from the specific angle of how comprehensive they (rating methods) are,” Injeti Srinivas, secretary, ministry of corporate affairs, told reporters on the sidelines of an event on Monday. The idea is to figure out if their methods gave investors a false sense of security. The move to examine the robustness of methods used by credit ratings agencies and the reasons they could not detect the stress building up in IL&FS would help the government identify vulnerabilities in the financial system that could jeopardize its stability, said ministry officials. The corporate affairs ministry, in its petition to the National Company Law Tribunal in October, said that it was after IL&FS defaulted on payments that Care and Icra downgraded credit ratings of IL&FS and some of its subsidiaries to “default” or “junk” grade.

In June, IL&FS group’s transport arm, IL&FS Transportation Networks Ltd (ITNL), delayed repayment of ₹450 crore of intercorporate deposits from the Small Industries Development Bank of India, triggering a ratings downgrade from Icra and Care on ITNL’s debt papers. IL&FS group and units subsequently defaulted on several other payment obligations. In response to an emailed query, Icra said it would not be in a position to share details of its discussion with any regulatory authorities as the contents of the

dialogue are confidential. “Being a responsible organisation, we are providing full support to all government agencies in this matter,” the Icra statement said. An email sent to Care Ratings remained unanswered at the time of publishing. An executive from a rating agency, who spoke on condition of anonymity, said the mandate of rating firms was limited and that they could not go beyond it to perform the roles of auditors or detectives. Srinivas said a section of non-banking financial companies engaged in housing finance are facing liquidity concerns in the aftermath of IL&FS defaults. NBFCs are lending institutions that, unlike banks, do not accept deposits and are a vital source of funds for many businesses.He said the situation warranted short-term and medium-term responses.

“It requires an overall easing (of liquidity) at the macro level, for which adequate steps are

being taken by the government and the RBI,” he said. “I do not see any crisis. It should be duly addressed in the short term. In the medium and long term, we need to look into how entities (NBFCs) expand and finance (projects). All entities have to follow a sustainable business development model. One should not expand at a pace that is not sustainable.” He said the resolution plan for IL&FS would take into account the best interests of all stake holders. On the planned sale of its assets to raise funds for a revival scheme, he said: “In the best-case scenario, it could be a sale of IL&FS group enterprise as a going concern. But there are serious issues and the likelihood of such an outcome is limited. There are alternative approaches of disposing of separate verticals. The last approach is an assetlevel sale. What seems more probable is a combination of some of these options.”