Follow the Money, Not the Rating – U.S & India Never Fixed the 2008 Problem and how you can protect your Portfolio.

Now here is an interesting story,

In the years before the 2008 crash,

The Credit rating industry followed an Issuer pay Model,

Where the Banks & Financial institutions hire and pay for their own ratings Agencies (Standard & Poor’s, Moody’s, and Fitch Ratings)
and these Agencies had their Revenues from Structured finance ratings grew more than 4X between 2000 to 2007

That was a huge signal that something’s cooking, something toxic.

And they were a public company who’s financials were public for all to see,
yet we only saw it in hindsight.

Their incentive structure itself predicts the whole outcome.

So always watch out for such signals and money flows to understand whats going on and you can deduce from that like a financial detective.

Now Did American government fix the root cause and change the issuer paid model?
Of course not,
they just added more compliance and oversight and called it a day

But lucky for you, this is a good thing for intelligent investors
as these signals are vital to understand where the economy is and will be soon, So use them.

Now,

The same model is followed in India to this day

Which resulted in cases of:

DHFL and IL&FS in 2018

Yes Bank AT1 bonds and the Franklin Templeton debt funds in 2020

All the Banks, NBFCs and companies hire & pay for their own Audits & Ratings.

and if these Auditors and Ratings Agencies aren’t friendly, cooperative and lenient to an extent, then they will be fired and replaced with others,
So there is a huge financial & survival incentive for these agencies to mostly do as they’ve been asked.

So anytime you do your research, look out for these trails and incentives,
And you might just see something that others don’t.

Good Night,

Good Luck.

DETAILS:

The Pattern, Live in India

IL&FS, 2018
In March that year, ICRA put out a note on IL&FS still praising its “experienced senior management team” and “significant track-record” in the same note where it admitted the company was “very highly leveraged,” debt-to-equity north of 13:1. Read that again. The agency saw the number. It rated the company anyway. IL&FS’s consolidated debt had climbed from ₹486.7 billion in 2014 to ₹910.9 billion by 2018, interest outgo nearly doubling alongside it all sitting in public filings, all ignored, until the money stopped moving.

Then it happened fast. AAA and AA ratings held until August 7, 2018. By September 9, ICRA had cut it to junk ‘BB’ from ‘AA+’. By September 17, it was ‘D’ default and only after multiple actual defaults had already occurred. AAA to junk to default in about six weeks, after years of the leverage being visible on paper.

DHFL, 2018–19
Same script, different logo. Cobrapost went public on January 29–30, 2019, alleging DHFL had siphoned ₹31,000 crore through a web of shell companies. The rating agencies didn’t move until February 4 five days later when CARE finally cut ₹1.2 lakh crore of DHFL’s bank facilities from AAA to AA+. The company actually missed a payment on June 4. The ‘D’ rating landed a day or two after that. By then, mutual funds holding DHFL paper had already seen their NAVs crater 30–50% in a single session. The rating didn’t warn anyone. It confirmed what the market already knew.

Yes Bank AT1 bonds, 2020
This one isn’t even a ratings story it’s a distribution story, which is the same disease wearing a different coat. Under Rana Kapoor, Yes Bank sold AT1 bonds to retail investors, pension funds, and mutual funds, marketed as basically an FD with a better coupon. Moratorium hit on March 5, 2020. On March 14, the administrator wrote down ₹8,415 crore of those bonds to zero. People who’d been told “safer than an FD” got wiped out. It’s still in the courts Bombay HC quashed the write-off in 2023, Supreme Court has reserved its final order. The fact that this is still being litigated years later tells you how thin the actual disclosure to buyers was at the time.

Franklin Templeton debt funds, 2020.
Six schemes, roughly ₹25,215 crore in AUM, quietly stuffed with lower-rated, illiquid corporate bonds to juice returns and climb the fund-ranking tables which is exactly what drives distributor commissions and fresh inflows. On April 23, 2020, all six were wound up overnight. Investor money locked up for years. And here’s the kicker: SEBI later ordered Franklin to disgorge ₹512 crore in management and advisory fees collected between June 2018 and April 2020 meaning the fund house kept collecting fees on schemes it already knew were turning illiquid. That’s not a market accident. That’s a business model.

And the confession nobody talks about: SEBI killing IPO grading.
This is as close as India gets to a regulator admitting the whole thing on record. In January 2008, at the absolute peak of the bull run, CRISIL handed Reliance Power a 5-star IPO grade right before it became one of the most infamous flops in Indian market history. SEBI had made grading mandatory back in 2007. By December 2013, the board quietly voted to make it voluntary, effective February 2014, citing global principles on reducing reliance on credit rating agencies. Translation: the regulator looked at an issuer-pay grading system, realized it produced grades that protected nobody, and instead of fixing the incentive, it just switched the whole thing off. Nobody protested. That silence should tell you something too.

Why This Keeps Happening

Banks, NBFCs, and companies in India hire and pay for their own audits and their own ratings. If the auditor or the rating agency isn’t friendly, cooperative, and lenient they get fired and replaced with someone who will be.

That’s not a hypothetical. That’s a standing, structural, financial-survival incentive for every auditor and every rating agency in the country to mostly do what they’ve been asked to do.

So when you’re doing your own research, don’t start with the rating. Start with the money behind it:

Where is a rating agency’s revenue actually growing plain corporate ratings, or structured finance and securitisation? CRISIL, ICRA and CARE all posted decent five-year revenue CAGRs (12.6%, 6.8%, and 6.4% respectively) but the real tell is which segment is outrunning the real economy underneath it. That’s the 2000–2007 American pattern, replaying in Indian filings.
Mutual fund AUM growth in credit-risk and low-duration debt categories, and the trail commissions being paid to push that paper. That’s exactly what fed the Franklin Templeton blowup.
Related-party lending and shell-company diversion. Both IL&FS and DHFL had this visible in filings years before any agency acted.
Promoter share pledging rising while the credit rating sits flat. A leading indicator that regulators and analysts actually watch now, post-2018 because they had to learn the hard way.
Who’s doing the audit, relative to the size of the company. A tiny, unknown audit firm signing off on a giant balance sheet is a flag every time Satyam in 2009, Adani in 2023.

Anytime you’re looking at a company, a fund, or an agency in India, don’t wait for the letter grade to change. Look at the books, Look who’s getting paid, by whom, and whether that money is growing faster than the business underneath it justifies. The rating is the last thing to move. The money moves first and all the data is sitting in public filings the entire time, waiting for someone to just Look.

Sources:

IL&FS