New Delhi: The Serious Fraud Investigation Office (SFIO) is looking into methods used by credit rating agencies as part of its probe into a series of defaults by Infrastructure Leasing and Financial Services Ltd (IL&FS). “SFIO is looking into the issue from the specific angle of how comprehensive they (rating methods) are," Injeti Srinivas, secretary, ministry of corporate affairs, said on the sidelines of an event on Monday. The idea is to figure out if their methods gave investors a false sense of security.
The move to examine the robustness of methods used by credit ratings agencies and the reasons they could not detect the stress building up in IL&FS would help the government identify vulnerabilities in the financial system that could jeopardize its stability, said ministry officials.
ALSO READ |
The corporate affairs ministry, in its petition to the National Company Law Tribunal in October, said that it was after IL&FS defaulted on payments that CARE and Icra downgraded credit ratings of IL&FS and some of its subsidiaries to “default" or “junk" grade.
In June, IL&FS group’s transport arm, IL&FS Transportation Networks Ltd (ITNL), delayed repayment of ₹ 450 crore of inter-corporate deposits from the Small Industries Development Bank of India (Sidbi), triggering a ratings downgrade from Icra and CARE on ITNL’s debt papers. IL&FS group and units subsequently defaulted on several other payment obligations.
In response to an emailed query, Icra said it would not be in a position to share details of its discussion with any regulatory authorities as the contents of the dialogue are confidential. “Being a responsible organisation, we are providing full support to all government agencies in this matter," the Icra statement said. An email sent to CARE Ratings remained unanswered at the time of publishing.
An executive from a rating agency, who spoke on condition of anonymity, said the mandate of rating firms was limited and that they could not go beyond it to perform the roles of auditors or detectives.
Srinivas said a section of non-banking financial companies (NBFCs) engaged in housing finance are facing liquidity concerns in the aftermath of IL&FS defaults. NBFCs are lending institutions that, unlike banks, do not accept deposits in most cases and are a vital source of funds for many businesses. Srinivas said the situation warranted short-term and medium-term responses.
ALSO READ | What can be done about the credit rating problem
“It requires an overall easing (of liquidity) at the macro level, for which adequate steps are being taken by the government and the RBI (Reserve Bank of India)," he said. “I do not see any crisis. It should be duly addressed in the short term. In the medium and long term, we need to look into how entities (NBFCs) expand and finance (projects). All entities have to follow a sustainable business development model. One should not expand at a pace that is not sustainable."
The secretary said would take into account the best interests of all stakeholders. On the planned sale of its assets to raise funds for a revival scheme, Srinivas said: “In the best-case scenario, it could be a sale of IL&FS group enterprise as a going concern. But there are serious issues and the likelihood of such an outcome is limited. There are alternative approaches of disposing of separate verticals. The last approach is an asset-level sale. What seems more probable is a combination of some of these options."
Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!
ABOUT THE AUTHOR
Gireesh Chandra Prasad
Gireesh has over 22 years of experience in business journalism covering diverse aspects of the economy, including finance, taxation, energy, aviation, corporate and bankruptcy laws, accounting and auditing.
Read more from this author
Related Premium Stories
‘Large rocket capacity being doubled, small rocket privatization by June’
The silent rise of the public sector banker in private bank boards
Indian telecom firms too want fair share of revenues from internet companies
Mint Explainer: Why Opec+ is extending production cuts till June
Power farming: The onerous task of making agrivoltaics work
Mint Primer: India's solar capacity addition slowed in 2023. Why?
International airlines vie for the Indian globetrotter
Why a warm December has clothing retailers waiting for a summer comeback
For content studios, there’s no such thing as over-the-top loyalty
RIL plans foray into pumped storage projects amid energy transition push
Explore Premium
Catch all the Industry News, Banking News and Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
MoreLess
Published: 05 Nov 2018, 12:33 PM IST