Market regulator Securities and Exchange Board of India (SEBI) has barred for two years CARE Ratings Ltd's former managing director (MD) and chief executive officer (CEO) Rajesh Mokashi from associating with any SEBI registered intermediary. However, SEBI disposed proceedings against SB Mainak, former chairman of CARE Ratings, without any order.
In an order, Ashwani Bhatia, whole-time member (WTM) of SEBI, says, "I note that despite the fact that the ratings assigned to Reliance Communications Ltd and Infrastructure Leasing & Financial Services (IL&FS) were called into question and CARE had been put on notice, the rating agency then headed by noticee 2 (Mr Mokashi), failed to take any remedial steps to address the concerns that were raised. In fact, as noted in these proceedings, Mr Mokashi was still 'directing' the rating committee (RC) members to rely on projections given by Issuers and not take rating action – the very practise which was mainly called into question in the proceedings initiated in the matter of Reliance Communications and IL&FS."
"The conflict between business development and rating functions at CARE is writ large in the WhatsApp conservations between key employees. Further, as I have noted in the preceding part of this order, in the matter of Dewan Housing Finance Corporation Ltd (DHFL), the rating team and rating committees were not allowed act independently and were instead guided by the undeniable pressure exerted by Mr Mokashi. In the face of such interference by Mr Mokashi, the measures adopted by CARE to ensure the independence of the rating decisions like independent RCs, separation of rating and business development, amounted to nothing more than a collective exercise in futility. In other words, the insulation did not afford sufficient protection to the members of the RC while rating DHFL. Mr Mokashi, I note, was only paying performative obeisance to this regulatory mandate by not being a part of rating committees, but, as noted above, was still interfering in rating decisions," SEBI says.
The market regulator says its findings have "brought to the fore the existence of an skewed hierarchical relationships that allowed Mr Mokashi to exert influence on the employees of CARE for ensuring favourable ratings towards certain Issuers. It cannot be without reason that members of RC had repeatedly exchanged WhatsApp messages lamenting the repeated interferences by Mr Mokashi during the duration of the DHFL ratings for the period from September 2018–February 2019."
According to SEBI, the dependence created through the unequal relationship between Mr Mokashi and the employees of CARE Ratings affected the sanctity of the rating process adopted. It says, "It would appear that Mr Mokashi had a veto on decisions of the rating committee by asserting his authority, which in turn resulted in inflated ratings assigned for DHFL. In this context, it is also pertinent to note that from the information relating to fees charged during the financial year (FY)18–19, as stated in the forensic audit report (FAR), the highest fees received were from DHFL–Rs7.1 crore. Juxtapose this amount (Rs7.1 crore) to the exposure of DHFL of over Rs90,000 crore to its creditors and we realise how important it is for a credit rating agency (CRA) to give out a fair picture of the creditworthiness of a client. The fee earned by CARE for the relationship is a minuscule 0.0079% of the total credit exposure of DHFL."
Last year in April, CARE Ratings said that the justice BN Srikrishna (retd) panel had given a clean chit to its erstwhile MD&CEO and former chairman. "Justice Srikrishna has issued the final reports, concluding that the charge against Mr Mokashi (erstwhile MD and CEO) and Mr Mainak (erstwhile chairman) of interference with the rating process and influencing the ratings are not established," the rating agency says in a regulatory filing.
In 2019, SEBI received a complaint from a whistle-blower alleging management interference in the ratings of companies, including IL&FS. The forensic audit, prepared by Ernst & Young (EY), reportedly found the involvement of Mr Mainak and Mr Mokashi.
On 18 July 2019, Mr Mokashi was sent on forced leave by CARE Ratings. In December, he resigned. Mr Mokashi has been associated with CARE Ratings since 1993, and in August 2009, he was appointed to the company board.
Mr Mainak, the former MD of Life Insurance Corporation of India (LIC), followed suit and, in February 2020, resigned as chairman of CARE Ratings.
In September 2018, IL&FS, which was rated highly by CRAs (credit rating agencies), collapsed after failing to meet its debt payment obligations, sparking a liquidity crisis in the financial services market.
Almost all rating agencies had given high ratings to IL&FS when the ground reality of the company was different. The rating agencies have been accused of not reporting the deteriorating financials of IL&FS. This prompted SEBI in December 2018 to initiate adjudication against credit rating agencies.
IL&FS and a group company were shareholders in CARE Ratings between 2007 and 2013, during which time the agency rated the commercial papers of the same companies.
