Former CARE Ratings CEO moves SAT to challenge SEBI ban: Report

Rajesh Mokashi, the former Managing Director and Chief Executive of CARE Ratings, has moved the Securities Appellate Tribunal (SAT) after being barred by the Securities and Exchange Board of India (SEBI) from associating with any SEBI-registered intermediaries for a period of two years, said a report.

The move comes in response to a SEBI order issued in April. The case pertains to interference in the rating process of the rating firm in instruments issued by Dewan Housing Finance Ltd (DHFL).

“The appeal seeks an immediate stay on the market regulator’s order," people aware of the development told Mint. A bench led by Justice Tarun Agarwala will hear the matter on Monday, a court filing showed.

Mokashi is accused of having interfered with the ratings process and granted AAA ratings to clients who paid higher fees.

According to a PTI report, the findings of the proceedings have highlighted the existence of an imbalanced hierarchical relationship that enabled Mokashi, to exert influence over employees in order to secure favourable ratings for certain issuers, including DHFL, according to the market regulator.

"Members of the Rating Committee had repeatedly exchanged WhatsApp messages lamenting the repeated interferences by Notice 2 (Mokashi) during the duration of the DHFL ratings for the period from September 2018-February 2019," SEBI noted.

SEBI's investigation revealed that members of the Rating Committee exchanged WhatsApp messages expressing their concerns about Mokashi's repeated interference during the period when ratings for DHFL were assigned from September 2018 to February 2019.

The market regulator also said that the dependence created by the unequal relationship between Mokashi and CARE's employees compromised the integrity of the rating process.

It further found that Ex-CEO of CARE Ratings held veto power over the rating committee's decisions, leading to inflated ratings being assigned to DHFL.

The Forensic Audit Report (FAR) of CARE indicated that the highest fee received from DHFL during the FY2018-19 was Rs 7.1 crore.

SEBI noted the inherent conflict of interest in the "Issuer pays" model, specifically regarding the rating agency's reliance on earnings derived from fees paid by clients. This created a situation where issuers, armed with this leverage, could obtain inflated ratings in their favour.

SEBI's Whole Time Member, Ashwani Bhatia, expressed in the order that the conflict between business development and rating functions at CARE was evident in the WhatsApp conversations among key employees.

"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.

Despite measures taken by CARE to ensure the independence of rating decisions, such as having an independent rating committee and separating rating and business development, they proved ineffective in the face of Mokashi's interference.

As a result of his actions, Mokashi violated regulatory norms, leading SEBI to prohibit his association with any SEBI-registered intermediary, directly or indirectly, for a period of two years. In December 2019, Mokashi resigned as MD and CEO of CARE Ratings, five months after being placed on leave.

However, SEBI has concluded the proceedings against SB Mainak, the former non-executive Chairman of CARE Ratings, in relation to the same matter.

Also Watch | World’s largest cruise ship, Icon of the Seas, with on-board water park, to launch in January 2024; All you need to know about Wonder of the Seas and other large cruise ships

Also Watch | SGX Nifty now GIFT Nifty; timings, how to check data, other details you need to know