Credit rating agencies, auditors on ED radar in IL&FS charge sheet

Representative Image
The Enforcement Directorate’s (ED’s) first charge sheet in the Infrastructure Leasing & Financial Services (IL&FS) case has elaborated the role of India’s top credit rating agencies and auditors, indicating irregularities, concealment, and possible collusion with the beleaguered entity’s former management.

The enforcement agency had filed its prosecution complaint on Friday, containing the statements of Deloitte’s former Chief Executive Officer Udayan Sen (statutory auditor of IL&FS), N Sampath Ganesh, partner, BSR and Associates, S S Kohli, chairman of IL&FS Financial Services (IFIN) audit committee; Anjan Deb Ghosh, chief ratings officer, ICRA, and TN Arun Kumar, chief ratings officer, CARE Ratings among others.

Along with their statement, the ED charge sheet enclosed several emails exchanged between rating agencies and IL&FS top executives. “These emails and statements indicate that rating agencies have changed their actions on many occasions after intervention of senior management of IL&FS, seeking rating review,” said an ED official. Auditors too did not raise objections over IFIN funding to group firms, which were in acute financial stress, he added.

The charge sheet incorporated Udayan Sen’s response on end use of funding done by IFIN and whether it was within the ambit of auditing, which he found satisfactory. The loans given during 2017-18 were usually for giving loans and advances, working capital, general corporate purposes. Sen said on the basis of the management’s observation, Deloitte had not raised any objection on funding the stressed group firms.

Another auditor Sampath Ganesh, partner of BSR and Associates, a KPMG-network firm said he was not aware about any third party financing to the IL&FS Transportation Networks (ITNL) from IFIN and the same was not stated in any of the documents produced to the audit firm, though the management should have been aware of it.

IFIN audit committee chairman Kohli said the issue of evergreening of loans was never presented before the board. He stated loans were sanctioned by the committee of directors according to the policy, and no independent director was a member. While any deviation from the credit policy should have been reported to the board, “not a single case indicating deviation was put up”, he said.

Further, the ED prosecution complaint covered the chief ratings officers’ statements. ICRA’s Ghosh stated that IL&FS executive directors and even chairman Ravi Parthasarthy would attend meetings with rating companies’ analysts on key issues, which would have a bearing on the ratings. “There are instances when IL&FS officials, including Parthasarthy, Saha and Sankaran would talk to ICRA for ‘desired ratings’,” the charge sheet noted.

CARE Ratings’ Arun Kumar confirmed to the ED that they were aware about IFIN’s top exposures being stressed but the issue of evergreening and dilution of collateral securities were not disclosed. They were informed that the company’s non-performing assets (NPAs) position was not alarming. He further stated: “CARE was not provided actual picture of IL&FS and IFIN with regard to their internal transactions, evergreening, build-up of stress in liquidity, diversion of fund and so on. So, the rating of IFIN was done on a consolidated basis with percentage of IL&FS, otherwise the rating would have been different.”

Three prominent agencies — ICRA, CARE Ratings, and India Ratings — had assigned AAA to IL&FS, indicating the highest level of creditworthiness. Those ratings were in place when its subsidiary IL&FS Transportation Networks defaulted in June last year. IL&FS was downgraded in August to D, making the company’s debt junk.

While changing the ratings of several companies, their financial stress was not taken into account by the rating agencies, the investigation findings show, pointing to an absence of checks and balances. “It is pertinent to note that in financial years 2012 and 2013, when IFIN was doing well, the rating was AA and when there was liquidity crunch in the 2019 fiscal year, the rating was reviewed to AA+,’’ said an ED official.

ED has so far arrested two senior executives in the matter and is likely to file supplementary prosecution complaint soon in the case.

ED action follows the Ministry of Corporate Affairs (MCA) and Serious Fraud Investigation Office (SFIO) prosecution against senior executives of IL&FS, Deloitte Haskins and Sells as well as BSR and Associates and their former employees for alleged role in perpetuating the fraud at IFIN. MCA had also moved application in court to bar these audit firms.

Key Submissions

  • Statements of Deloitte’s former Chief Executive Officer Udayan Sen (statutory auditor of IL&FS); N Sampath Ganesh, partner, BSR and Associates;  S S Kohli, chairman of IL&FS Financial Services (IFIN) audit committee; Anjan Deb Ghosh, chief ratings officer, ICRA; and TN Arun Kumar, chief ratings officer, CARE Ratings
  • Several emails exchanged between rating agencies and IL&FS top executives
  • Sen’s response on end use of funding by IFIN and whether it was within the ambit of auditing, which he found satisfactory 
  • Chief ratings officers’ statements