Circles of Deceit around il&FS

The IL&FS payments default crisis is seeing a wave of collateral damage and heads continue to roll. The latest ‘victim’ is the Managing Director of credit rating agency ICRA Ltd, Naresh Takkar, who has been sent on long leave pending investigations into an anonymous complaint lodged with market regulator SEBI. The complaint concerns a lack of due diligence when assigning a high rating of ‘AAA’ to IL&FS last year. SEBI seems to have moved against two other ratings agencies too—India Ratings & Research and Credit Analysis & Research Ltd—for failing to alert investors on time about the deteriorating financial conditions in IL&FS. 

It began with IL&FS Transportation Networks defaulting on loan repayments last August. Given the size of the infrastructure lender, it triggered a massive liquidity crisis in the financial markets. What was seen as a blue chip company, was exposed with `91,000 crore in bad debts. As the story unfolded, it has emerged that many of the monitoring bodies which should have had an ear to the ground had either looked the other way or actively colluded. Among them are the company’s auditors Deloitte and a KPMG subsidiary—now being probed for failing to report fraudulent activities and diversion of funds. 

What needs to be asked is: Why has it taken a year for the ICRA board and SEBI to move against Naresh Takker? Assigning AAA ratings for a market lender that had defaulted on debt payments is a serious lapse. Why did it need an anonymous complaint to trigger action? The public and investors in particular take the scores assigned by rating agencies seriously when judging the financial health of companies and their financial instruments. If these ratings are fudged, as they seem to be in this case, what sanctity is there in these monitoring bodies? Sending the ICRA chief on long leave is not enough. The collusion that allowed IL&FS to commit criminal acts extends in concentric circles involving both auditors and rating agencies. The circle of deceit should be thoroughly investigated and the guilty brought to book.