ICRA Rating Scandal: Does the Sacking of CEO, absolve the Board, Given ICRA’s Past Record?
ICRA, the local Indian arm of global ratings firm Moody’s Investor Services, had sacked Naresh Takkar, its Managing Director (MD) and group CEO, on 29th August after investigating an anonymous complaint that alleged wrong-doing by the firm in the 90,000 crore IL&FS scam.
 
ICRA’s August 29th stock exchange notification and press release, claimed that the Board terminated Mr Takkar’s employment in the best interests of the company and its stakeholders. “The decision was made according to applicable law, contractual requirements and followed due process in line with the highest standards of corporate governance,” as per an ICRA spokesperson. 
 
Takkar has however challenged his termination terming it as “unwarranted, illegal and unfair”. According to him, ICRA had first received the anonymous complaints in last November but it was only on 24th August 2019, just five days prior to his sacking, that he was allowed to see them for the first time. Takkar has also alleged that the Board did not allow him to opt for “voluntary leave” and instead forced him to go on “administrative leave”. 
 
He has reportedly written to the shareholders to ponder over the above and question the Board before voting when the matter of his removal comes up before the 28th Annual General Meeting of ICRA scheduled for 28th September.
 
Total collapse of Governance at ICRA
 
In the absence of details, it will not be fair to comment on the merits of Takkar’s removal. However, what is coming out loud and clear is the failure of corporate governance at ICRA.
 
Is it fair to hold just one person accountable for the abject failure of ICRA to discharge its responsibilities? ICRA had continued to assign high ratings to Infrastructure Leasing & Financial Services (IL&FS) and its subsidiaries till September 2019 despite being well aware that IL&FS had defaulted on its debt payments almost a year back. 
 
Also could fiddling with the ratings be the handiwork of only the MD? Why has no action been reportedly taken against the spineless top executive team that worked on the ratings and was so subservient to the MD that he could allegedly alter the ratings dramatically. 
 
Absence of adequate controls and systems within ICRA expose its lack of competence to rate companies which normally have a significantly higher level of business complexities. The Board of ICRA owes an explanation. 
ICRA’s Board is Chaired by Mr. Arun Duggal and boasts of several representatives from Moody’s including Dr. Min Ye, Mr. Thomas John Keller Jr., Mr. Navneet Agarwal and Mr. David Brent Platt. These directors have held several senior positions with Moody’s over an extended period and it is therefore astonishing that none could detect the poor systems and controls at ICRA.
 
Yet, in its above referred communication to the stock exchanges, ICRA has claimed that its decision to sack Takkar was in keeping with the highest standards of corporate governance! 
 
Deep Ramifications 
 
It is difficult to have one standard definition of governance. It, amongst others, stands for the value and ethics which collectively drive any organization, at all levels, to conduct its business in the best interest of all the stakeholders but strictly within the confines of law. Governance can certainly not be person or transaction based. 
 
IL&FS was not the only major failure at ICRA. As highlighted in my earlier article of 9th August 2019, ICRA had miserably failed in its duties when rating Pricewaterhousecoopers Pvt Ltd., and two of its network audit firms, Price Waterhouse and Lovelock and Lewes. 
 
Subsequent events have vindicated what I had highlighted. Last week, the Enforcement Directorate Enforcement Directorate (ED) has slapped a  penalty  of Rs230 crores  on  Pricewaterhousecoopers Pvt. Ltd. (Pwcpl),  its Chairman, Shyamal Mukherjee, two past Chairmen: Deepak Kapoor and Ramesh Ranjan, director, Satyavati Berera, and ex-director, Ambarish Dasgupta, for receiving foreign investments  from Pwc Service BV, Netherlands disguised as “grants” in blatant  violations of FEMA 1999.  
 
ED’s Investigations had started on directions of the Hon’ble Supreme Court pursuant to a Public interest litigation filed before it. Even ED found it fit to issue notices to not just one person but even two past Chairmen!
 
Healthy financial system
 
The basic aim of credit ratings is to facilitate a healthy financial system for the society at large. Had ICRA used basic professional skepticism in its ratings of Pwc, it could have highlighted the systemic defects in the banking system to the Reserve Bank of India for taking corrective action. 
 
Large amounts of “terror money” has allegedly flown in though banking channels. ICRA’s inputs could have helped tremendously in fortifying the country’s banking system. 
 
ICRA could have also helped in saving precious time of the Hon’ble Supreme court as also the needless  waste of public money that has  been expended in the ED’s investigations. 
 
ICRA needs to introspect 
 
IL&FS and Pwc are unlikely to be the only two cases where ICRA has goofed up. So far it has made only Takkar the scapegoat. ICRA must therefore immediately investigate its style of functioning, address the yawning gap in its systems and controls, objectively fix accountability: identify and punish  the others who colluded with Takkar and, amongst others, make its risk mitigation processes more robust  to ensure that it delivers what it is paid to do. 
 
Comments
Shailesh Lal
2 years ago
I wish the authors proofread before posting the article. Thanks
Hudaf Shaikh
2 years ago
The sacking of Talwar is a clear admission by ICRA of it's cupability in selling ratings. One expects the ICRA board now to come forward with an offer to make good the losses suffered by investors in those IL&FS securities it had rated.

Sriram Veeraraghavan
2 years ago
It is very clear that author neither understands the Credit Rating process nor corporate governance.
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