New Delhi: Moody’s Investors Service’s India unit has put its chief on leave amid a probe into a controversial rating decision, in the latest sign of trouble in the nation’s credit evaluation industry.

ICRA Ltd. ’s board has decided to place Chief Executive Officer Naresh Takkar on leave, the company said in an exchange filing on Monday evening. The rater is examining concerns raised in a whistle-blower complaint, sent to it by the regulator, that its executives interfered to guarantee top ratings for a financier that plunged to default just two months later.

The rating company was probing certain matters related to a debt score it assigned to a client and its subsidiaries, ICRA said in May, without naming the client. ET Now television channel had reported that the complaint says the executives meddled to ensure systemically important Infrastructure Leasing & Financial Services Ltd. would receive a AAA rating, citing people it didn’t identify.

The board’s decision comes at a time when financial regulator Securities and Exchange Board of India is tightening rules for rating companies. Those firms have come under fire for missing warning signs like the infrastructure financier’s soaring debt load, which jumped 44 per cent between 2015 and 2018. The default of IL & FS sent shock waves across the country’s credit markets, triggering a liquidity crisis that is still reverberating among the shadow lenders.

“The current credit market turbulence is eroding the market’s confidence on credit rating companies,” said Hemant Dharnidharka, chief executive officer at Dharni Wealth, a firm that provides financial advisory services to high net-worth individuals. “There have been cases where there has been no warning or action by rating companies and the borrower has defaulted on debt repayments.”

Debt premium

A year after the IL & FS crisis broke, Indian shadow banks’ woes are continuing to mount. Investors are demanding nearly the highest premium in six years to hold the financiers’ short-term debt. An expanding list of firms including Edelweiss Financial Services Ltd. and Piramal Capital & Housing Finance Ltd. have been downgraded or placed under watch by rating companies.

Competition in India’s credit-rating industry has increased over the years as more firms have set up business, and because of that “quality has suffered,” said Dharnidharka.

IL & FS’s bonds and loans held AAA ratings until August 2018, when ICRA cut the issuer to AA+, the second-highest rank. A month later, a unit of the company defaulted on short-term debt obligations and ICRA hit the company with a 10-step downgrade to BB, a junk grade. The shadow lender was cut yet again to D, a rating reserved for debt in default or expected to be in default in a matter of days.

ICRA appointed Group Chief Financial Officer Vipul Agarwal as interim chief operating officer. The New Delhi-based company declined to comment when reached by Bloomberg, while emails seeking comments from Agarwal and Takkar remained unanswered.

Indian credit rating companies rely on the same “issuer-pays” model common in the US that allows the entity issuing a financial instrument to pay credit analysts upfront to rate the underlying securities. S&P Global Ratings, Moody’s and Fitch Ratings were criticised for placing profits before investors when rating mortgage securities in the run-up to the US financial crisis in 2008.

Rajiv Kumar, India’s banking secretary, said in an interview last year that there’s “definitely a case” for re-examining the nation’s rating framework, and that there needs to be “some kind of accountability.”