Sebi directs CARE to initiate inquiries into ex-top officials' past conduct

Former CEO'S and chairman's conduct under question

The Securities and Exchange Board of India (Sebi) has directed CARE Ratings to initiate a “full-fledged” inquiry into past dealings of two former officials of the company. 

Under question is the conduct of former chairman SB Mainak and former managing director (MD) & chief executive officer (CEO) Rajesh Mokashi. 

Both left the company after allegations surfaced against them and forensic reports suggested lapses in the rating process. 

“Considering the seriousness of the alleged violations and the observations made in the forensic audit report, the (CARE) board is directed to institute a full-fledged inquiry in the matter of interference by the officials of CARE, including a former chairman and erstwhile MD & CEO in the rating process in the last three years. The board will constitute a committee of independent directors to oversee the inquiry•proceedings,” Sebi said in an order to CARE Ratings. 

The Sebi order further said stringent action is required against Mokashi as the forensic report prima facie suggests interference in influencing the rating process. 

The market regulator has already issued personal showcause notices to both Mokashi and Mainak asking them to explain why they should not be debarred from holding key managerial positions of market intermediaries and listed companies.

Sebi has also asked CARE’s board to submit their observations on the forensic report on an urgent basis. Experts said the regulator’s stringent action against CARE will send a strong signal to the market that Sebi won’t tolerate any lapses in the rating process. The Sebi order against CARE highlights some serious irregularities at the rating agency. 

“There are evidences in the nature of phone conversations, WhatsApp messages and statements of employees, based on which the auditor has not been able to substantiate the charges of interference in the rating process against the ex-chairman. The instances of conversations between the former chairman and erstwhile MD regarding certain issuers/clients have been clearly brought out in the forensic report. The former chairman has stated that these were for the purpose of business development. Yet, the conversations between the former chairman and erstwhile MD just before the issuance of rating does not rule out the possibility of the former having influenced the rating. As a matter of fact, the auditor has brought out the acquaintance of the former chairman with the rated entities,” states the Sebi order. 

Sources said role of the top officials isn’t just restricted IL&FS. The ratings process in case of YES Bank and DHFL, too, seems to have been influenced. 

Analysts said the adverse findings against CARE will impact its credibility in the eyes of investors. Shares of CARE have gone down more than 10 per cent this week.

In December, Sebi had slapped a penalty of Rs 25 lakh each on ICRA, CARE Ratings and India Ratings & Research. 

The regulator had said default by IL&FS occurred due to “lethargic indifference and needless procrastination and laxity” of the rating agencies.

The sources added that the market regulator is planning to review the Rs 25 lakh penalty, which had been imposed by its adjudicating officer on the three rating firms. The settlement amount could be revised up to four times higher.