In the case of IL&FS, for instance, it was amazing that rating firms which gave it a good rating for its Rs 75 crore issue as late as August 2018 failed to catch the fact that.
Though it took an anonymous whistleblower complaint, and not Sebi initiating adjudication proceedings last December, to get rating agency Icra to send its CEO Naresh Takkar on leave pending an inquiry, the good news is that some sort of action has been taken at long last. The whistleblower had alleged that senior management interfered to ensure good ratings in the case of clients like IL&FS. So, if the inquiry does show this to be true, and Sebi takes action, it won’t be a day too soon. As in the case of rating agencies in the west—Moody’s owns 52% in Icra—some Indian rating firms too have been suspected of being very liberal with rankings. In the case of IL&FS, for instance, it was amazing that rating firms which gave it a good rating for its Rs 75 crore issue as late as August 2018 failed to catch the fact that, while the holding company’s profits were Rs 584 crore in FY18, the IL&FS Group’s losses were Rs 1,887 crore; the liabilities of IL&FS at a standalone basis were Rs 17,757 crore while those of the group were Rs 116,447 crore.
But the problem is not just that of the raters, it is a larger problem of inadequate governance. While the government is trying to blacklist auditors Deloitte and KPMG affiliate BSR & Co, surely both the raters and the auditors would have believed the boards of companies—especially the independent directors—were doing their job to ensure against fraud? In the case of IL&FS, however, while the consolidated debt more than doubled between 2014 and 2018, its risk management committee met just once between 2015 and 2018, in July 2015. LIC owns more than a 25% stake in IL&FS and its managing director Hemant Bhargava chaired the committee. Other members included Maruti Suzuki chairman RC Bhargava and former shipping secretary Michael Pinto, but no action has been taken against any of them. And what kind of surveillance system does India have if neither RBI nor Sebi discovered that the audit committee hadn’t met as often as it should have? In the case of IL&FS, as this newspaper has argued, a solid bureaucratic network helped advance the group’s prospects, but this has gone unpunished so far.
So if the action against Icra or any of the auditors has to be more than the usual one-off reaction after any major scam, the government needs to act on various fronts. Certainly boards/directors need to be proceeded against, but regulators like Sebi and RBI need to be beefed up considerably, with large investments in their surveillance functions and powers. Sebi has to revive its circular making it mandatory to disclose even one day of default and RBI simply has to make all default data public; how are rating agencies going to predict default if they don’t even know when various bank defaults take place? In short, until there is a conscious effort to improve governance standards across the board, penalising one or two credit rating/audit firms won’t achieve much.