IL&FS case: CVC intervenes in Sebi's probe of credit rating agencies

The process followed in dealing with credit-rating agencies (CRAs) has come under the scanner of the Central Vigilance Commission (CVC), a body that probes corruption in government.

The commission has asked the Securities and Exchange Board of India (Sebi) to explain the role of CRAs and the status of its probe into the Infrastructure Leasing & Financial Services (IL&FS) fraud case.

According to sources, the vigilance office is trying to spot influential factors in the rating process and whether the regulator had any indication about a possible collusion between the rating agencies and the former management of IL&FS. 

The CVC is learnt to be examining the core issues and why the rating firms that assessed IL&FS papers failed to pick up signals of financial trouble at the lender.

Sources say the commission in its recent communique has asked Sebi to provide details of regulations governing rating firms, how they are monitored, and whether there are sufficient checks and balances in rating. 

 

Further, it has asked Sebi to share its findings that explain late detection by rating firms. Sources say the regulator has provided the information the CVC sought. 

“Statement recording is under way and, accordingly, a monetary penalty on offenders will be levied. We are awaiting audit reports and an external enquiry is being carried out by rating firms,” said a regulatory source in know.

Sebi is probing three rating firms — India Ratings & Research, ICRA, and CARE — for their alleged role in ensuring good ratings for the beleaguered infrastructure-financing company.

Sebi had launched adjudication proceedings against the three rating firms when IL&FS defaulted in payment and faced a sudden downgrade in September last year.

The three rating firms had given IL&FS the highest rating of AAA even when its subsidiary IL&FS Transport Networks defaulted in June. There was also an abrupt downgrade in the ratings of bonds sold by IL&FS and related entities after they defaulted on payment obligations in September. The agencies downgraded the bonds from the high investment grade (AA+ in some cases) to default or junk.

While Sebi is yet to conclude its adjudicating proceedings, ICRA ousted its managing director and chief executive officer (CEO), Naresh Takkar, for alleged misconduct at the rating firm under him. 

Before his termination, he was on leave since July 1 after the rating firm reviewed an anonymous complaint received by the regulator. 

CARE too sent its CEO Rajesh Mokashi on leave as long as the investigation was on.

The intervention of the CVC is not new. It earlier asked Sebi to complete its investigation in a time-bound manner. In the event of delay, the capital market regulator will have to state the reasons for it. It had issued a guideline that says the final order should be given within a year of passing an interim order, and in the case of delay the board should be informed. Following this, the regulator has started prioritising cases, clearing up the old ones before taking up new cases.

Sebi has been tightening norms regarding the methodology of rating agencies. 

It had recently mandated the disclosure of one-year forward probability of default and asking these agencies to grade the liquidity position of the issuer. Sebi has also asked for an independent audit of the processes employed and the data used in default analysis.

Currently, it is working on the framework in line with market infrastructure institutions such as stock exchanges to improve governance lapses. However, the timely flow of information from banks and concerned company are the key issues which require immediate attention, said an expert tracking the rating industry.