The role of credit rating agencies in the Infrastructure Leasing and Financial Services Ltd (IL&FS) debacle came under the markets regulator's scanner last month after a forensic audit report by Grant Thornton alleged that they continued to give top ratings to the group's entities despite being aware of their weak financials. ICRA, which was among the rating agencies named in the report, now finds its efforts towards a settlement blocked by the Securities and Exchange Board of India (SEBI).

"SEBI has rejected ICRA's consent application in the IL&FS case," a source in the know told The Economic Times. A consent order is a form of negotiated settlement of civil proceedings between the regulator and securities law offenders, which essentially helps entities to pay a penalty and settle cases without an admission of guilt. SEBI reportedly rejected ICRA's consent application, filed in May, on the grounds that IL&FS debt default crisis had market-wide impact, not only causing losses to a large number of investors but also affecting the integrity of the market.

Last October, the newly-constituted IL&FS board headed by Kotak Mahindra Bank managing director Uday Kotak mandated Grant Thornton to carry out a special audit for all high-value transactions undertaken by IL&FS and some of its group companies for the period between April 2013 and September 2018. The audit report was aimed at identifying siphoning or misuse of funds, fraudulent transactions, their modus operandi, the quantum of the financial loss, and fixing of responsibility.

During the period under review, the IL&FS group companies - IL&FS Transportation Networks Ltd (ITNL) and IL&FS Financial Services Ltd (IFIN) - were awarded credit ratings by Crisil, CARE Ratings, ICRA, India Ratings (a 100 per cent owned subsidiary of Fitch Ratings) and Brickwork. The report identified instances suggesting that the credit ratings agencies had multiple concerns on the operations of the IL&FS group for the last 6-7 years, yet the ratings assigned by them remained consistently high until they were reversed or downgraded post June-July 2018. It further flagged several cases amounting to potential favours and gifts given to senior officials of the agencies and even their family members. These favours ranged from tickets for a Real Madrid football match and hefty discounts on a luxurious villa to a Fitbit watch and shirts.

SEBI initiated legal proceedings against ICRA, CARE Ratings and India Ratings & Research since they had given IL&FS the highest rating of AAA even after ITNL defaulted in June 2018 and hence failed to warn investors about the Group's deteriorating credit profile. It was only in September, after the infrastructure financing giant defaulted on a Rs 1,000-crore loan from Small Industries Development Bank of India (SIDBI), that the Group's bonds were sharply downgraded by these three players.

According to sources, the regulator has written to them seeking responses on the issues flagged by Grant Thornton in its report and will subsequently examine the violations. In July, in the wake of the audit report, ICRA and CARE sent their managing directors on leave, while India Ratings clarified that a senior official at Fitch's Singapore office was dismissed after being found guilty of misconduct.

Meanwhile, the Enforcement Directorate (ED) filed its first chargesheet in the alleged multi-thousand crore scam involving IL&FS on Friday, in which it accused credit rating agencies for not doing due diligence on their part. "Investigation also revealed that credit rating agencies were pressurised for favourable ratings," read the chargesheet, adding that ICRA's Chief Rating Officer had accepted that they were being pressurised by top IL&FS officials for favourable ratings.

Also read: IL&FS crisis: ED files first chargesheet in the case; attaches assets worth Rs 570 crore

Also read: IL&FS may not have disclosed bad loans for 4 years: RBI report