Markets regulator Sebi has sought explanation from erstwhile managing director and CEO, and chairman of CARE Rating for their interference in the rating process of entities including DHFL, IL&FS and Yes Bank, sources said.
In a letter on February 12, the Securities and Exchange Board of India (Sebi) has also asked why the officials should not be debarred from associating as key managerial person or director of any registered intermediary and listed company, they added.
In addition, the regulator has asked CARE Rating's board to initiate action against the officials and all the staff members involved in the rating process of the IL&FS debt, the sources said.
Incidentally, on the same day, the rating agency announced that S B Mainak resigned as its chairman.
The Sebi action comes after the regulator received the forensic audit report on February 11, which was commissioned after a whistleblower complaint.
The forensic report, prepared by EY, has scrutinised calls, WhatsApp messages and e-mails, and recorded statements of staff members. The audit reportedly revealed the involvement of former chairman and former MD and CEO Rajesh Mokashi.
Mokashi was forced to go on leave in July and after five months, he stepped down from the company in December.
Sebi, in December 2019, slapped a penalty of Rs 25 lakh each on ICRA, CARE Ratings Ltd and India Ratings & Research Pvt Ltd and had said the default by IL&FS occurred due to "lethargic indifference and needless procrastination and laxity" of the rating agencies.
Now, the regulator is considering to increase penalty on rating agencies in connection with lapses on their parts in assigning credit ratings to non-convertible debentures of IL&FS. Officials believe that the fine imposed by the Sebi on these rating agencies was quite low given the seriousness of the lapses on their part following which fresh notices were sent to them.
The crisis at diversified IL&FS, whose board was superseded by the government, came to light in September 2018 and since then, the company as well as related entities have come under the regulatory lens.
According to the CRA Regulations, the rating has to be true, fair, appropriate and accurate and the rating agencies need to follow proper rating process. Besides, rating agencies need to have professional rating committees and all rating decisions, including the decisions regarding changes in rating should be taken by this committee.
Moreover, the norms mandate credit rating agencies (CRAs) to ensure total separation between the business development and the analytical or ratings vertical and therefore, no management interference permitted in rating process.