CARE is a Sebi-registered and RBI-accredited credit rating agency, while DHFL (now known as Piramal Capital and Housing Finance Ltd) is an NBFC.
The proceedings have emanated from allegations raised through several whistle-blower complaints received by the Securities and Exchange Board of India (Sebi) in December 2018 of interference in the rating process of the credit rating agency by Mokashi.
The finding from the proceedings have brought to the fore the existence of a skewed hierarchical relationship that allowed Mokashi to exert influence on the employees of CARE for ensuring favourable ratings towards certain issuers, including DHFL, Sebi found.
“Members of the Rating Committee had repeatedly exchanged WhatsApp messages lamenting the repeated interferences by Noticee 2 (Mokashi) during the duration of the DHFL ratings for the period from September 2018-February 2019,” Sebi noted.
According to Sebi, the dependence that was created through the unequal relationship between Mokashi and the employees of CARE affected the sanctity of the rating process adopted.
It also found that Mokashi had a veto on decisions of the rating committee of CARE by asserting his authority, which in turn resulted in inflated ratings assigned for DHFL. The information related to fees charged by CARE during the FY2018-19, as stated in the Forensic Audit Report (FAR) of CARE, the highest fee received from DHFL was Rs 7.1 crore.
Sebi noted that there was an inherent conflict of interest in the ‘Issuer pays’ model specifically with the reliance of the rating agency on earnings arising from the fees paid by its clients. In turn, an issuer armed with this leverage would be in a position to get inflated ratings in his favour.
“The conflict between business development and rating functions at CARE is writ large in the WhatsApp conservations between key employees. Further, I have noted, 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 him, 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,” Sebi’s Whole Time Member Ashwani Bhatia said in the order.
Through such acts, Mokashi flouted the regulatory norms and accordingly, the regulator directed that “noticee 2 shall not be associated with any Sebi-registered intermediary, directly or indirectly, in any manner whatsoever, for a period of two years”.
In December 2019, Mokashi stepped down as MD and CEO of CARE Ratings, five months after he was sent on leave.