IL&FS Controversy: SEBI Asks CARE Ratings to Act Against Top Management, says Report

Within two months of penalising three rating agencies found to be guilty in their conduct while rating debt instruments of the crisis-hit Infrastructure Leasing and Financial Services (IL&FS), market regulator Securities Exchange Board of India (SEBI) has reportedly asked the board of CARE Ratings to take action against its top management for misconduct in the case.

Citing official sources, The Economic Times reported that SEBI has asked the board of CARE Ratings to sack its chairman S.B. Mainak and take action against former Managing Director and Chief Executive Officer Rajesh Mokashi and other staff involved in rating IL&FS debt instruments.

According to the report, SEBI received a forensic audit report prepared by accounting firm Ernst and Young (EY) on February 11 which was commissioned after a whistle-blower complaint last year. The forensic report has reportedly scrutinised calls, WhatsApp messages and emails, and recorded statements of staff members that revealed the misconduct of Mainak and Mokashi in IL&FS case.

Mainak, who was previously the Managing Director of the Life Insurance Corporation of India (LIC), joined the CARE Ratings board as Chairman and Independent Director in August 2015. CARE ratings forced Mokashi, who later stepped down as the CEO, to go on leave from July 2019.

In December last year, SEBI found that three rating agencies -- ICRA Ltd., India Ratings & Research and Care Ratings Ltd. -- had not fulfilled their duties while rating IL&FS and its subsidiaries till mid-2018, levying a penalty of Rs 25 lakh for each. Finding rating agencies guilty of improper conduct, SEBI noted that the firms “continued to assign the highest possible rating (AAA) to the Non-Convertible Debentures (NCDs) issued by IL&FS, based mainly on institutional parentage of IL&FS and the assurances given by IL&FS management.”

At the time of the collapse of IL&FS group in September 2018, it had close to Rs 1 lakh crore as outstanding debt across 348 subsidiaries. Financial institutions and banks rely on ratings by accounting firms on debt instruments while granting loans.

IL&FS Resolution

The resolution of IL&FS has been dragging on for close to fifteen months and is likely to stagger further under the leadership of the Government appointed board chaired by Uday Kotak.

In its latest affidavit filed with National Company Law Appellate Tribunal (NCLAT), the Ministry of Corporate Affairs (MCA) has requested for an additional moratorium of 270 days for completing the resolution of 105 subsidiaries of IL&FS. It has also asked the tribunal to release the remaining 55 entities, which are now able to discharge debt obligations, from moratorium.

On October 15, 2018, the NCLAT granted moratorium to all IL&FS group companies on the request of the new board. Last year, Uday Kotak claimed that the new management will be able to recover only 50% of the outstanding dues of the IL&FS.