Rajesh Mokashi, former MD & CEO of CARE Ratings, has been barred by market regulator SEBI for two years from associating with stock market-related entities after it was found that he was exercising extrajudicial pressure to manipulate credit ratings that helped top corporate lure investors to raise thousands of crores.

SEBI has accused Mokashi of interfering in the rating committee decision while it rated instruments issued by YES Bank, Reliance Communications, Dewan Housing and Finance (acquired by Piramal Capital), and Housing Finance and Infrastructure and Financial Services, a unit of Infrastructure Leasing & Financial Services (IL&FS).

‘Do what he says’

WhatsApp conversation between the key employees of CARE that was unearthed by market regulator SEBI during its probe against the rating agency and Mokashi reveal that the former MD forced his ratings team to “do what he says”.

Several such WhatsApp chats, where employees and members of the credit rating committee are being pressured to manipulate ratings on the orders of Mokashi, have been unearthed by the SEBI. “Analyst kis kam k?” (What for Analysts are?), one of the employees is seen asking in the chats.

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“It would appear that Mokashi had a veto on decisions of the rating committee by asserting his authority, which in turn resulted in inflated ratings,” SEBI order said.

In the same order, SEBI disposed of proceedings against SB Mainak, former chairman of CARE Ratings, without any order.

Fails to take remedial steps

SEBI whole-time member Ashwani Bhatia said in his order that ratings assigned to RCom and IL&FS were called into question and CARE had been put on notice. The rating agency then headed by Mokashi failed to take any remedial steps to address the concerns that were raised.

“In fact, as noted in these proceedings, 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.”

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SEBI has also presented various phone records to substantiate how dealings to manipulate the ratings were done. The regulator said that Mokashi was only “paying performative obeisance” to the regulatory mandate by not being part of the rating committees but was still interfering in rating decisions. The law does not permit the management of a rating firm to be part of the rating committee.

WhatsApp chats

SEBI found WhatsApp chats between key employees that showed the conflict between business development and rating functions at CARE. In the matter of DHFL the rating team and rating committees were not allowed to act independently and were instead guided by the undeniable pressure exerted by Mokashi.

“In the face of such interference by 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. 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 said in its order.  

SEBI said their probe found the existence of a skewed hierarchical relationship allowing 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 Mokashi during the duration of the DHFL ratings for the period from September 2018–February 2019, SEBI said.

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“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–₹7.1 crore. Juxtapose this amount (₹7.1 crore) to the exposure of DHFL of over ₹90,000 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 per cent of the total credit exposure of DHFL,” SEBI said.

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 Mokashi (erstwhile MD and CEO) and Mainak (erstwhile chairman) of interference with the rating process and influencing the ratings are not established,” the rating agency said in a regulatory filing.

In 2019, SEBI had 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 Mainak and Mokashi.

On July 18, 2019, Mokashi was sent on forced leave by CARE Ratings. In December, he resigned. Mokashi has been associated with CARE Ratings since 1993, and in August 2009, he was appointed to the company board.

Mainak, the former MD of Life Insurance Corp 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, 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.