Capital market regulator SEBI (Securities and Exchange Board of India) has barred former CARE Ratings MD and CEO Rajesh Mokashi with immediate effect from associating with any SEBI registered intermediary, directly or indirectly, in any manner for a period of two years.
The SEBI action comes amid a probe into the matter of interference in the rating process at CARE and granting AAA ratings to clients paying higher fees, including Dewan Housing Finance Ltd (DHFL).
CARE Ratings Ltd (“CARE”) is a SEBI-registered and RBI-accredited credit rating agency, which is listed on BSE and NSE.
SEBI says it started receiving several whistle-blower complaints from December 2018 onwards, which accused Rajesh Mokashi, former MD and CEO, of violations of securities laws.
The regulator in its order said in the course of these proceedings, the findings arrived at upon a consideration of the material available on record have brought to the fore the existence of "skewed hierarchical relationships" that allowed him to exert influence on the employees of CARE for ensuring favourable ratings towards certain issuers.
"It cannot be without reason that members of the Rating Committee had repeatedly exchanged WhatsApp messages lamenting the repeated interferences by Noticee 2 (Moakshi) during the duration of the DHFL ratings for the period from September 2018–February 2019," the order said.
According to SEBI, the dependence created through the unequal relationship between Mokashi and the employees of CARE affected the sanctity of the rating process adopted. Mokashi had a veto on decisions of the Rating Committee by asserting his authority, which in turn resulted in inflated ratings assigned for DHFL, SEBI observed.
As per SEBI, it is pertinent to note that the information relating to fees charged during the financial year 2018–19...the highest fees received were from DHFL – Rs 7.1 crore. "Juxtapose this amount to the exposure of DHFL of over Rs 90,000 crore to its creditors and we realise how important it is for a 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."
SEBI said there was an "inherent conflict of interest" in the ‘Issuer pays’ model by seeking to insulate the Rating Committee members and analysts from the pressures of business development to mitigate the possibility of the ratings issued being linked to the fees charged.
It also said that the conflict between business development and rating functions at CARE is writ large in the WhatsApp conservations between key employees. "In the matter of DHFL, the Rating Team and Rating Committees were not allowed act independently and were instead guided by the undeniable pressure exerted by Mokashi," the order said.
Notably, Mokashi was appointed as MD and CEO for a term of five years in August 2016, but was later advised to proceed on leave from the post of MD and CEO of CARE from July 17, 2019.
