PNB scam: Banks relied on Ind-Ra's rating of Nirav Modi firm to lend money

In March 2017, Ind-Ra said it had rated the company's debt instruments at 'IND A-' with a stable outlook

The Fitch-owned India Ratings (Ind-Ra) gave a Ind A- outlook to Nirav Modi's flagship company, Firestar International Private Limited (FIPL), even though the firm was suffering from a high-leverage, off-balance-sheet exposure. Indian banks, including Punjab National Bank (PNB), relied on this rating to lend huge sums to the company.

Ind-Ra's officials said they were in discussions with the company till December 2017, for they needed more information, and placed FIPL and other group companies on rating watch with negative implications on Thursday, a day after PNB informed the stock exchanges about its loss. An Ind-Ra official said, as a policy, the company does not comment on issuer-specific ratings.

Interestingly, a year ago in February 2016, CARE Ratings had red-flagged FIPL's deteriorating financial health. CARE then downgraded the company's debt instruments worth Rs 24.6 billion. The rating agency also warned about Firestar Diamonds, a subsidiary based in Hong Kong, saying the company may not be able to repay its loans unless its parent company steps in as a guarantor.

But, on June 7, 2016, CARE said it had withdrawn the ratings assigned "with immediate effect" to the bank facilities of FIPL, following receipt of a no objection certificate from the lenders. This was mainly because FIPL decided to rely on Ind-Ra's better ratings.

While CARE raised the red flag in February 2016, Ind-Ra in March 2017 said it had rated the company's debt instruments at 'IND A-' with a stable outlook. This puts FIPL's financial performance in line with Ind-Ra's expectation, indicated by a stable consolidated Ebitda (earnings before interest, tax, depreciation and amortisation) margin of 5.8 per cent in 2015-16 compared to the 5.7 per cent in 2014-15. 

Ind-Ra said in the first half of 2016-17, the company reported a consolidated revenue of Rs 68.95 billion and lower profitability margin of 4.4 per cent. Consequently, gross interest coverage was low at 2.8 times. "Ind-Ra expects the company's consolidated financial profile to remain moderate over FY17-FY18, with fixed charge coverage of around three times," Ind-Ra said in March 2017. 

Elaborating, it said FIPL enjoys operational synergies between its B2B businesses - cut and polished diamond trading, jewellery manufacturing and retail - which provide ease of sourcing, distribution and economies of scale. "Moreover, the company's operations are strategically located to facilitate higher profitability in tax-free regions of the UAE, along with low-cost manufacturing in India, access to global participants and consumers in Hong Kong and the UAE markets, and quality diamond procurement from Belgium. A majority of the company's sales and procurements are global; hence, unhedged receivables comfortably cover its payable position, thus, maintaining a natural hedge on a stand-alone level," it said. This rating was not revised until the scam hit the headlines.