The Securities and Exchange Board of India (Sebi) has moved to bar two former executives of CARE Ratings Ltd—managing director Rajesh Mokashi and chairman S.B. Mainak—from the securities markets after a forensic audit said they had interfered with the ratings of instruments issued by Infrastructure Leasing and Financial Services Ltd (IL&FS).
Sebi has sent show cause notices to the two former CARE executives, asking why should they be not barred from the securities markets and holding directorship posts in any entity regulated by Sebi, said two people with direct knowledge of the matter, seeking anonymity.
“The two allegedly asked the rating staff to hold ratings and prevented reassessment of ratings even when the material facts pertaining to IL&FS and its subsidiaries changed," said the first person. “They were also found to be in touch with the management of IL&FS in a breach of conduct to prevent conflict of interest," he added.
Rating agencies are facing allegations that they relied excessively on claims made by IL&FS management, failing to make independent professional assessment, getting comfort from the parent company and failing to spot disparities in public disclosures made by IL&FS.
On 11 February, CARE told the bourses that Mainak, who had earlier served as managing director of Life Insurance Corporation of India, had resigned from the ratings agency citing personal reasons.
“However, the actual reason is that Sebi had asked the agency to sack Mainak for alleged lapses," said the second person. “The board has also been asked to hold back all the benefits to these officials," he added.
In a statement on Friday, CARE said the board has decided inquire into the issue of interference by its officials, including Mainak and Mokashi, in the rating process in the past three years.
Last July, Mokashi was asked to go on leave by CARE, and five months later, he stepped down as managing director of CARE Ratings, according to the disclosures filed with the exchanges. But CARE, in its latest statement, said the board has considered the report of the forensic audit and has decided to terminate Mokashi’s employment with effect from 16 July, the date he was placed on leave.
Mint could not reach out to Mainak. Calls to Mokashi went unanswered.
Sebi has commissioned a forensic audit on India Ratings, Icra and Brickwork Ratings for alleged lapses in rating the instruments issued by IL&FS and its subsidiaries.
Sebi has already sent supplementary showcause notices to three rating agencies—CARE, Icra and India Ratings—for enhancing the penalties imposed on them.
Sebi’s fresh notices to rating agencies were issued under Section 15(i) of the Sebi Act, which gives the regulators board powers to review penalties. The IL&FS default left a ₹99,354 crore hole in the financial system, which is the amount owed by IL&FS and its subsidiaries to its lenders. On 26 December, Sebi had passed orders against the three ratings agencies levying a penalty of ₹25 lakh each. The agencies had assigned IL&FS the highest rating of AAA before the default in September 2018, even though its unit had defaulted in June of that year.