New Delhi: The Parliamentary Standing Committee on Finance has questioned the role of rating agencies in the IL&FS crisis and directed the regulators and the government to ensure stricter regulatory oversight over such agencies.
In a report tabled in the Lok Sabha Wednesday, the committee questioned the highest rating assigned by the agencies to debt instruments of IL&FS group even when the company was highly leveraged and at the brink of default.
The panel pointed out that this incident has questioned the credibility of the rating agencies.
“Credit rating agencies ignored the rising debt levels at IL&FS group, while assessing its creditworthiness. Rating agencies had rated it AAA, indicating the highest level of creditworthiness and these ratings were in place till June 2018,” said the committee report.
“This, despite the fact that as early as September, 2016, one of the listed IL&FS group companies, IL&FS Engineering and Construction Company, having defaulted on the redemption of optionally convertible cumulative redeemable preference shares,” said the report.
The committee sought a comprehensive inquiry on the role of the credit rating agencies as well as institutional stakeholders such as the Life Insurance Corporation of India.
The crisis at IL&FS crisis came to the fore in August 2018 after one of its group companies defaulted on debt payments, triggering a systemic liquidity crisis. With the imminent threat of a system wide impact in case of further IL&FS default, the government stepped in to remove the company’s management and appoint a new board. IL&FS was said to be overly leveraged with over Rs 57,000 crore of the Rs-90,000 crore exposure to state owned banks and financial institutions.
Care Ratings, India Ratings and ICRA were the rating agencies that rated IL&FS issuances.
ThePrint reached the three agencies for comment but there was no response until the time of publishing this report.
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‘Major failure’
The Parliamentary Standing Committee report went on to flag that only after one of the group companies — IL&FS Transportation Networks (ITNL) — defaulted on its repayment/redemption obligations under a commercial paper tranche did the credit rating agencies downgrade ITNLs long-term borrowings to sub-investment grade in July 2018.
But the agencies continued to accord good risk grades to ITNL’s short-term paper and also affirmed its excellent long-term credit rating for the parent company, the report said, adding that the agencies downgraded IL&FS by just one notch, from AAA to AA+ in August 2018.
“Only after the IL&FS defaulted on a series of loan payments in September 2018, the rating agencies downgraded IL&FS multiple notches… This was a major failure on the part of the rating agencies,” the report added.
The committee said the series of events related to IL&FS’s rating call for an introspection in the methodology followed by the rating agencies in the credit assessment.
The panel suggested a review of the existing regulations by the Reserve Bank of India and the Securities Exchange Board of India while directing the regulators to ensure strict enforcement of existing regulations.
It also sought greater disclosures by the rating agencies.
“The Committee would recommend that the disclosures being made by the CRAs should henceforth include important determinants such as extent of promoter support, linkages with subsidiaries, liquidity position for meeting near-term payment obligations etc,” the report said.
The committee also directed the government and regulators to explore the option of a mandatory rotation — disallowing the same agency for rating the debt instrument for more than a specified number of years — of the credit rating agencies.
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