SEBI & the IL&FS Crises Fallout

As the world marked the 11th anniversary of the collapse of Lehman Brothers, which triggered the global financial crisis in September 2008, India's leading infrastructure finance company IL&FS defaulted on payments to lenders triggering panic in the markets. Following is all about IL&FS and what went wrong with it.

BY NANKIE BAWA |  5 Mins Read

IL&FS Ltd, or Infrastructure Leasing & Finance Services, is a core investment company and serves as the holding company of the IL&FS Group, with most business operations domiciled in separate companies which form an ecosystem of expertise across infrastructure, finance and social and environmental services. A brain child of the late MJ Pherwani, IL&FS was founded in 1987 with equity from Central Bank of India, Unit Trust of India and Housing Development Finance Co to fund infrastructure projects when peers IDBI and ICICI were focused more on corporate projects. 

IL&FS Financial Services, a group company, was enjoying "AAA" - the highest credit rating - until August 2018, just before one of its subsidiaries, IL&FS Transportation Network Ltd, defaulted on its payment obligations.

Non-Convertible Debenture of IFIN worth Rs 4,800 crore was first downgraded by CARE on August 16, 2018. ICRA downgraded the paper on September 8, 2018. Strangely, just a month back, ICRA has reaffirmed its "A1+" rating on commercial paper but cut the rating on downgrades long terms loans and debenture from AAA to AA positive. In its remarks, the rating agency praised the track record and prudent approach of the management.

The group defaulted in payment obligations of bank loans (including interest), term and short-term deposits and failed to meet the commercial paper redemption obligations due on September 14, and after they defaulted on a Rs 1,000-crore loan from Small Industries Development Bank of India (SIDBI), the group's bonds were sharply downgraded by these credit rating agencies.

On September 15, the company reported that it had received notices for delays and defaults in servicing some of the inter corporate deposits accepted by it. Consequent to defaults, rating agency ICRA downgraded the ratings of its short-term and long-term borrowing programmes. The defaults also jeopardised hundreds of investors, banks and mutual funds associated with IL&FS. The defaults sparked panic among equity investors even as several non-banking financial companies faced turmoil amid a default scare. 

Looking into this mess, The Securities and Exchange Board of India may pass an order against the credit rating agencies in the next two months, to send across a message to them after the occlusion of IL&FS. SFIO may also finalise action against credit rating agencies in the next two months’ time period and propose a criminal action rating agency as similar as they had taken against auditors.

Directorate may also make rating agencies a party to the case in their next chargesheet, which is expected to be filed next year.

Under the section in which action has been taken, the markets regulator can only impose a maximum monetary penalty of Rs 1 crore against ICRA, CARE and India Ratings.

SEBI has initiated action against credit rating agencies under Section 15HB but can only impose monetary penalty. SEBI had sent show-cause notices to rating agencies and started adjudication under Section 15HB. Under this section, SEBI cannot bar any credit rating agency and can only impose a monetary penalty of Rs 1 lakh to Rs 1 crore.

SEBI had rejected consent applications for all three credit rating agencies, who had rated associate companies of IL&FS. Last year, SEBI had issued show-cause notices to ICRA, CARE and India Ratings after the IL&FS mess surfaced.

Rating agencies ICRA and CARE have already sent their MDs on indefinite holidays and India Ratings has already suspended some of its officials. On the other hand, SEBI has already strengthened the rules of credit rating agencies. Most of the time rating agency does not get the proper information from lenders or from a client, which also creates problem to do the rating. However, certainly in this case rating agencies are on the wrong foot on which the department is taking action, a lawyer who deals in securities law.

SEBI has rejected consent applications of rating agencies but penalising them under Section 15HB is almost similar to consent application.

SEBI should make cases against individuals involved in wrongdoings in IL&FS case.

Taking action only against rating companies, especially when directors are foreigners, will not fulfill any objective.

In its primary investigation, SFIO found many instances of quid pro quo and roundtripping.

Amidst all this another headline read, Government formulating policy on credit ratings for MSMEs: says Gadkari. Now it remains to find out what the further course of action would be.