Small penalties resulted in their shares rising; equally perplexing is lack of action on IL&FS’s board/directors.
When the Grant Thornton audit report on IL&FS’s rating agencies had given so many lurid details of how the rating agency was being told what to do by the client, and hefty bribes were paid to senior managers of these raters, you would have thought markets regulator Sebi would have thrown the book at them. Instead, it slapped the equivalent of a traffic fine—Rs 25 lakh each on India Ratings, Care, and Icra—for their lack of ‘due diligence’, and for basing their reports on primarily the inputs given by the IL&FS management. But, surely, as Grant Thornton revealed, the offer by an India Ratings to keep the rating private was illegal; a senior Fitch/India Ratings manager got a Rs 44 lakh discount on a flat, and Rs 25 lakh was donated to a trust run by the Icra’s chairman.
Email records showed that Care was downgrading an IL&FS group firm to BB+ with a stable outlook, but after a discussion with the IL&FS management, this got bumped up to BBB- with a stable outlook; in another case, Fitch’s AAA with a negative outlook for IL&FS became an AAA with a stable outlook. It is hardly surprising, then, that after the Sebi penalty, the shares of the rating agencies rose. And, this is despite the Grant Thornton report saying that the agencies were concerned about the group’s exposure even way back in 2011; in one case, an IL&FS staffer even edited the rating rationale given by Icra.
While credit rating agencies were the eyes and ears of those who invested in IL&FS or lent money to it, none of them drew attention to the fact that, between 2014 and 2018, its consolidated debt ballooned to Rs 91,091 crore from Rs 48,671 crore. And, while IL&FS earned a profit of Rs 584 crore in 2018, this was on a standalone basis; at a group level, it made a loss of Rs 1,869 crore in that year. In the case of group firm ITNL, the liabilities are Rs 16,318 crore on a standalone basis and Rs 42,371 crore for the consolidated entity.
While this changes everything, and that is why the IL&FS meltdown has nearly crippled the entire NBFC sector, what is surprising is the lack of action against the group’s independent and shareholder directors. Its risk management committee, headed by LIC’s managing director—LIC owns over 25% of IL&FS—met just once in the four years when the IL&FS group leverage rose to a frightening 13 from a reasonable 2.6 on a standalone basis.
Other high-profile IL&FS directors on the risk committee were Maruti Suzuki chairman RC Bhargava, and former shipping secretary MP Pinto. Another LIC staffer, ex-chairman SB Mathur, headed IL&FS’s remuneration committee and had no hesitation in clearing a Rs 20 crore annual salary for IL&FS chief Ravi Parthasarathy despite the company being run to the ground and having fishy accounts.
Given this, it is truly shocking that no serious action of any type—debarring directors from being on the board of any company for a certain number of years, for instance—has been taken by the government or any regulator. Indeed, despite RBI designating IL&FS as a systemically important NBFC, it failed to detect what was going on. While two audit firms are facing a ban for their role in the IL&FS scam, a lot more action needs to be taken against IL&FS’s promoters and directors.