Performative obeisance, collective exercise in futility: SEBI on CARE Ratings' independence under former MD

SEBI cracks down on CARE Ratings

In a sternly worded order, the Securities and Exchange Board of India (SEBI) barred former MD and CEO of CARE Ratings Rajesh Mokashi from associating with any SEBI-registered organisation, either in a direct or an indirect capacity, for a period of two years.

The order stems from Mokashi's interference with the rating process adopted at CARE Ratings vis-a-vis the ratings given to the fraud-hit DHFL. The bankrupt NBFC was acquired by Piramal Capital and Housing Finance in September 2021. From December 2018 onwards, the market regulator received eight whistle-blower complaints alleging that CARE Ratings was granting AAA ratings to higher fee-paying clients.

The sinking of DHFL highlighted major shortfalls in the corporate governance practices within India Inc, all the while snuffing out millions in savings of investors spread across India. DHFL's downfall prodded India's premier investigative agency- the CBI- to initiate a probe against the DHFL promoters for defrauding Indian banks to the tune of Rs 34,615 crore.

The latest order delivered by Whole Time Member Ashwani Bhatia will only serve to further dim the reputation of the credit rating agency, which has been taken to task by the market regulator earlier as well.

In July 2020, the rating agency found itself under the glare when the market regulator slapped a fine of Rs 1 crore for lapses in assigning a credit rating to the non-convertible debentures of R-Communications (R-Com).

Even in the ILFS case, the market regulator imposed Rs 25 lakh as penalty on CARE Ratings in December 2019 for lack of “due diligence” in credit ratings of ILFS's non-convertible debentures.

"The rating team and rating committees were not allowed to act independently and were instead guided by the undeniable pressure exerted by Rajesh Mokashi. In the face of such interference by Rajesh Mokashi, the measures adopted by CARE to ensure the independence of the rating decisions like independent rating committee, separation of rating and business development,etc. amounted to nothing more than a collective exercise in futility," the order observes.

"In other words," the WTM states in the order, "the insulation did not afford sufficient protection to the members of the rating committee while rating DHFL. Rajesh Mokahi, 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."

The WTM while referring to the earlier orders passed against the rating agency in the R-Com and IL&FS cases pointed out that Mokashi had failed in taking any remedial steps to address the flawed rating given for the two companies.  The WTM said that Mokashi was still directing the rating committee members to rely on projections of the issuers and not refrain from taking an adverse rating stance.

"Despite the fact that the ratings assigned to the issuers (R-Com 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, Mokashi was still “directing” the 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 Ltd. and IL&FS," the order states.