How Rajesh Mokashi’s interference led to DHFL pratfalls for CARE Ratings?

Last week, SEBI cracked down on Rajesh Mokashi, former MD and CEO of CARE Ratings, barring him from accessing any SEBI-registered entity for a period of two years.

Credit rating agencies (CRAs) have had a chequered track record in India, and the latest Securities and Exchange Board of India (SEBI) order on the matter of DHFL has only added to this dismal picture.

Last week, SEBI cracked down on Rajesh Mokashi, the former managing director and chief executive officer of CARE Ratings, barring him from accessing any SEBI-registered entity for a period of two years. The order follows a trail of rating failures that have embarrassed CARE Ratings and cost it a pretty penny as well.

With its latest order, the market regulator has gone the extra investigative mile. Snippets of WhatsApp conversations between employees have been laid out in great detail, which exemplify how good intentions and steady judgment can often come undone under the glare of domineering interference from a senior professional. All in all, the SEBI order reveals how by pulling rank and authority, Mokashi unilaterally ran roughshod over the will of the rating committee and foisted his own rating despite outspoken opposition.

The steps leading up to the crisis

Before we take a look at how Mokashi's interference led CARE Ratings astray, we need to rewind the clock back to December 2018, when SEBI started receiving several whistle-blower complaints alleging that Mokashi was interfering in the rating process and granting AAA ratings to firms that were willing to foot higher fees.

Jump to August 2019, when Ernst and Young (EY) was appointed as a forensic auditor to look into the allegations of interference. Based on the allegations in the whistle-blower letters and discussions with SEBI, EY identified ratings assigned to eleven issuers for review. The forensic audit report or FAR delivered a damning account of the state of affairs afoot at the rating agency, and this FAR became the basis of the show cause and supplementary show cause notices on which SEBI launched into action.

In the course of its investigation, SEBI cast its net far and wide, and ratings issued to several companies like DHFL, IL&FS, YES Bank, RCom and Patanjali were picked up. However, it was only in the case of DHFL that the market regulator found adequate evidence to act against Mokashi.

It is, perhaps, instrumental to note here that S B Mainak, the non-executive chairman of CARE Ratings who was also under the SEBI scanner deleted all his WhatsApp records, whereas Mokashi changed his phone before such records could be acquired by EY.

The IL&FS bombshell

The seeds of the DHFL collapse can be traced back to the IL&FS downfall. The collapse of a biggie like IL&FS sent shudders through the non-banking financial company (NBFC) eco-system. As the dust from the IL&FS shock settled, market participants started picking up clues that DHFL could soon emerge as collateral damage despite its mammoth Rs 90,000-crore balance sheet.

Soon, DHFL's scrip resembled that of a boulder rolling downhill. On June 1, 2018, the scrip traded at Rs 610. From there, it foundered all the way to Rs 230 on November 1 of the same year. Adding to the gravity of the fall, to a degree, was DSP Mutual Fund's decision to sell off DHFL's debt instrument at a deep discount on September 19.

Unfortunately, the sell-off by DSP Mutual Fund didn't really send alarm bells ringing for Mokashi. Even as DSP Mutual Fund brokers were busy disposing off the toxic debt instruments of DHFL, CARE Ratings was reaffirming the AAA rating of the company.

"With the benefit of hindsight, the decision taken by DSP Mutual Fund to sell DHFL debt securities should be commended. It is rare for an investor to sell AAA instrument at a deep discount to its issue price. Anyone who would have sold would have done so with deep conviction while keeping the interest of unitholders uppermost on their minds. The fact that the share price of DHFL plunged by over 40 percent after the sale of securities by DSP Mutual Fund on September 21, 2018, was a clear signal that all was not right at DHFL...Despite these red flags and material events, CARE reaffirmed the AAA rating of DHFL on the same day, i.e. September 21, 2018," the market regulator notes.

Mokashi's excesses

A key point in the CARE Ratings' and DHFL story comes on January 29, 2019 when Cobrapost, a media portal broke a scathing story on how DHFL's promoters had siphoned off more than Rs 31,000 crore of public money through the grant of loans and advances to shell companies.

Four days earlier, on January 25, Mokashi had reversed a January 18 decision of a rating team to put DHFL on 'credit watch' and reaffirmed the AAA rating. Interestingly, a new rating team was formed to greenlight the AAA rating and set aside the previous 'credit watch' rating.

Between October 29, 2018, and March 30, 2019, DHFL's rating repeatedly faced the possibility of being downgraded, but the downgrade was either deferred or completely shot down by Mokashi's recurrent interferences.

For instance, this is what Ranjan Sharma, the rating committee group head, had to face when he went against Mokashi's opinion.

"We had to update Mokashi before forming any view on DHFL, or for that matter any large BFSI client, as he expected that from us. We would argue and deliberate on the case and raise the concerns that we would have. However, many times, in the case of DHFL, our arguments would be defeated. At times when the rating team would stick to a certain view, the discussion would turn sour and Mokashi would be agitated by our rigidness and biases for a downgrade. He would ask us not to be rigid and think with an ‘open mind’," Sharma told SEBI.

Mokashi also generously spouted advice that has proven to be gravely erroneous in hindsight.

"Specifically, in my case, he would say that my understanding of BFSI is still “developing” and I need to gain more experience before forming any strong views. Hence, beyond a point, there was a limit to which we could argue with him and had to give in to his arguments. At times, I felt he had greater belief in what Kapil Wadhawan had to say than his own rating team," Sharma said.

It didn't help that Mokashi ran roughshod over all norms of propriety and non-interference in the credit rating eco-system.

On January 9, DHFL board chairman Kapil Wadhawan met Mokashi in the CARE office premises. Inscrutably, none of the rating team members were present at the meeting.  Even the market regulator found this meeting unusual given that in his submissions before SEBI, Mokashi argued that he would be present in meetings with clients only for protocol purposes and to facilitate access to the top management of issuers.

Perhaps, one reason why Mokashi was so amenable to DHFL stems from the fee details, as divulged in the EY forensic audit report. As per the report, DHFL was amongst the highest billed clients of CARE for three financial years -- FY17 to FY19. The business DHFL gave to CARE in FY17 stood at Rs 4.70 crore; in FY18 it was Rs 6.20 crore, and in FY19, it climbed to Rs 7.10 crore.