Sucheta Dalal :SEBI Board exonerates NSDL finally
Sucheta Dalal

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SEBI Board exonerates NSDL, finally  

February 4, 2010

Stock market regulator, the Securities and Exchange Board of India (SEBI) has exonerated National Securities Depository Ltd (NSDL) for the depository's alleged failure in preventing the initial public offer (IPO) scam during 2003-2005. (Moneylife had published a report on this issue in December, “SEBI calls board meeting to dispose NSDL issues” (see here).

The SEBI Board held a meeting on 2nd February. However, even after more than 24 hours there was no official communication on the Board’s decision. Later in the evening, SEBI put up the order on its website. The Board order said: "None of the directions issued under the 1st Interim Order needs affirmation and no further directions are required. In view of the above, in exercise of the powers of the Board under Sections 11, 11B and 11(4) of SEBI Act and Section 19 of the Depositories Act, 1996, we dispose of the ad interim ex-parte Order-cum-show cause notice (SCN) dated 27 April 2006 against NSDL accordingly."

The IPO scam goes back to 2006 when SEBI investigations conducted by the then chairman M Damodaran, unearthed that shares reserved for retail investors were illegally acquired by various entities through tens of thousands of fake dematerialised (demat) accounts and fictitious applications. From the facts, it appeared that NSDL was liable for poor oversight that allowed fake demat accounts to be opened. NSDL’s then head CB Bhave denied any responsibility for the scam even though the banks that had opened the fake demat accounts were penalised by the Reserve Bank of India (RBI).

Based on the prima facie findings, SEBI issued various directions against 82 financiers, 24 key operators, 12 depository participants (DPs) and two depositories. The order also asked NSDL promoters to take all appropriate actions including revamping of management, that clearly has allowed matters to come to such a sorry pass, without further loss of time.  

After CB Bhave took over as SEBI chairman, a two-member bench was constituted to look into the IPO scam as well as the DSQ Software Ltd case. The bench comprising G Mohan Gopal (director of National Judicial Academy) and former RBI deputy governor V Leeladhar passed an order against NSDL, directing it to carry out an independent enquiry to establish individual accountability for the failures of NSDL in the IPO scam.

This was followed by a one-year effort to bury the orders of the two-member bench. Finally, under pressure from a public interest litigation (PIL) filed in the Andhra Pradesh High Court, the SEBI Board met and was forced to release the three orders of the Bench into the public domain. But the Board sought to kill the application of the orders by declaring that two of the orders as void or 'non est' since the Bench had gone beyond its brief in criticising the regulator itself.

Dr Gopal had objected to this action taken by SEBI. His reservations were echoed by Justice JS Verma, former Chief Justice of India, who declared that such quasi-judicial orders can only be reviewed and quashed “by a judicial forum with requisite jurisdiction, at the instance of a petitioner with standing to seek relief.” Justice Verma is one of the most respected jurists whose opinions are not for sale.

It is reliably learnt that Justice Verma’s opinion was formally put before the regulator’s board meeting on 22 December 2009, which was headed by Mohandas Pai. Curiously enough, although Mr Pai is on the SEBI board as an outside representative, his company, Infosys, is indirectly under SEBI regulations. The three whole-time members of SEBI were also present at the meeting held on 2nd February. Given that the representatives from the Reserve Bank of India and the Ministry of Corporate Affairs (MCA) on the SEBI board are new, it was more like a foregone conclusion that SEBI would clear NSDL and close the hugely controversial issue, which has damaged SEBI's reputation and that of its chairman.

Citing the Securities Appellate Tribunal (SAT) orders, the SEBI Board said, “In substance, the Hon’ble SAT has held that NSDL cannot be faulted for any lapses or deficiencies on those counts. In view of this finding by Hon’ble SAT in its order and submission made by NSDL as in paragraph 11 above, we do not find it necessary to examine the very same aspects any further and issue any fresh directions."

Earlier, the SEBI board had also sought the legal opinion of C Achuthan, former presiding officer of the Securities and Appellate Tribunal (SAT), in relation to this matter. Dr Gopal had officially pointed out that Mr Achuthan’s position was conflicted because he had represented one of the IPO accused (Karvy) in a matter before the Andhra Pradesh High Court. Mr Achuthan is also a director on the NSE board, a SEBI-regulated entity. NSE is the promoter and major shareholder of NSDL.

Separately, the SEBI Board also exonerated NSDL in the DSQ Software case. In an order, the Board said: "We are unable to find any compelling evidence that can lead to a finding that NSDL is guilty of the violations charged in the notice. In the light of what we have discussed, we do not find it necessary to continue this proceeding against NSDL. In exercise of the powers of the Board under Section 11 and 11 B of the SEBI Act and Section 19 of the Depositories Act, we dispose of the Show Cause Notice accordingly."

In the DSQ Software case, NSDL dematerialised 1.3 crore shares allotted on preferential basis to four entities and allowed them to be delivered in settlement without verifying if they had obtained listing permission. It also dematerialised 30 lakh shares issued as employee stock options without the mandatory lock-in. The preferential allotment was a big scam engineered by Dinesh Dalmia who is languishing in jail for the past three years.

The Board order further said: “Clearly, there were lacunae in the regulatory framework that allowed the company to exploit them and perpetrate the fraud. Was it due to omissions or commissions, deliberate or otherwise, on the part of NSDL? As discussed above in our order, we do not find evidence to this effect. This was the first time that an issuer had perpetrated such a fraud of this type on its investors and that too on such a massive scale. SEBI as the regulator responded to the problem effectively through a circular that further strengthened the due diligence requirements precedent to the listing of stocks.”


There has been evidence that SEBI officials have worked overtime to protect Mr Bhave from the controversy, by delaying the proceedings relating to this case. Finally, the Board not only exonerated NSDL but also SEBI and its chairman Mr Bhave in a short order without going too deep into the merits of the case against NSDL.

(Read the complete orders of the SEBI Board here


-- Sucheta Dalal