Sucheta Dalal :Protect NSDL at Any Cost
Sucheta Dalal

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Protect NSDL at Any Cost  

April 7, 2009


DIFFERENT STROKES  (MoneyLIFE Issue, 23rd April 09)



A couple of issues ago, I wrote that inconsistent actions by independent regulators, such as the Securities and Exchange Board of India (SEBI), are affecting their credibility. I had discussed the case of the National Securities Depository Limited (NSDL), which had been at war with SEBI after it was severely indicted in what is popularly known as the IPO scam. NSDL had denied SEBI’s charges and dragged the regulator to the Securities Appellate Tribunal (SAT) and obtained a stay on most of SEBI’s actions.

Meanwhile, NSDL chairman CB Bhave was appointed chairman SEBI in what was seen as a big vote of confidence from the government. To avoid conflict of interest, the finance ministry decided to have the NSDL issues handled by a committee. Meanwhile, the case before SAT continued and, in December 2008, SAT quashed SEBI’s order seeking disgorgement of illegal profits, without first establishing unjust enrichment by the depositories. SEBI’s order was badly drafted and did not follow due process of serving a show-cause notice to NSDL. So, it was seen as a vindictive action by M Damodaran to discredit CB Bhave. A key fact that got lost in the process was that SEBI’s original order was based on two separate audits by KPMG (between 1996-2000) and iSec Servcies Pvt Limited. Both had found deficiencies in NSDL’s systems and processes.


It now turns out that the two-member board-appointed committee with a quasi-judicial responsibility, comprising

V Leeladhar (former deputy governor, RBI) and Mohan Gopal (director, National Judicial Academy) has also found lapses and deficiencies in NSDL’s operations. The exact details remain a secret, since the committee’s report, submitted on 4 December 2008, has not even been discussed by the SEBI board, says The Economic Times. The newspaper also says that SEBI’s whole-time board members have been picking holes in the adjudication report, to the chagrin of the committee members.


So what happened to SEBI’s avowed transparency, where even its board agenda and minutes are placed in the public domain? I decided to send an email to almost every SEBI board member and the NSDL management to get some answers. Only Dr KP Krishnan, joint secretary, ministry of finance and a member of the SEBI board chose to respond. He explains that when Mr Bhave was appointed and the finance ministry decided to ring-fence NSDL-related issues, it had two choices. First, to allow TC Nair, former whole-time director of SEBI to continue the investigation and get his order vetted by a board committee. Second, set up a committee with quasi-judicial authority to examine the issue afresh and pass an order. When Mohan Gopal and V Leeladhar agreed to be a part of this committee, they insisted on precise terms of reference (TOR) which were finalised after deliberations at two board meetings. Yet, according to Dr Krishnan, their report, submitted on 4th December, “prima facie, far exceeded their terms of reference.” And, hence, the controversy or what seems like an attempt to bury the report.

He also said that “because of problems with the SEBI Act” wherein the same set of issues can be adjudicated twice by two different investigation streams, almost the same set of issues that were referred to the two-member committee were also before SAT. And just around the time that SAT ruled in favour of NSDL, the SEBI committee submitted its report, and it was critical of NSDL’s systems and processes! Is that why it was promptly buried and discredited as having exceeded its brief? And do SEBI’s whole-time members have the right to pick holes in the report without taking it to the board? Clearly, SEBI and the finance ministry are on rather thin ice on this issue. Dr Krishnan says that there has been no time to take it to the board. There have been only two board meetings since V Leeladhar and Mohan Gopal submitted the report and one of these was completely taken up with discussing Satyam.


What about the questions raised by the full-time SEBI directors and Mohan Gopal’s charge that their report can only be challenged before SAT? Mr Gopal told The Economic Times, “There is no provision in the law that empowers the other whole-time members of SEBI to reconsider any order issued by the panel on the completion of adjudication.”


According to Dr Krishnan, the two members were asked if they wanted to take note of SAT’s findings. They refused, saying it was a separate matter. To an outsider, this clearly seems like pressuring them to fall in line with the positive order from SAT. Dr Krishnan says that, ordinarily, a report of such a committee would not go to the full SEBI board for discussion. But in extraordinary circumstances, the board has the right to examine the order of a committee that has been delegated adjudication powers. So a board meeting will be held in the next few weeks and the order of the committee will be put in the public domain.


Creating an ‘extraordinary’ situation out of the committee’s findings, delaying a discussion and having SEBI’s whole-time members pick holes saying the TOR has been exceeded makes a mockery of the entire exercise of ring-fencing NSDL. In fact, it seems like the process is being twisted to ensure a clean chit for NSDL, even if it means questioning the committee’s credibility.

Clearly, there are only two issues here. First, the bizarre SEBI Act that allows the same matter to be adjudicated through multiple streams. A SAT order has already criticised this lacuna in the statute. Since SEBI’s board comprises the senior-most policymakers from RBI, Ministry of Finance and Ministry of Corporate Affairs, isn’t it extraordinary that no action has been taken to amend the statute as yet? Secondly, instead of worrying about whether the TOR  has been exceeded, shouldn’t SEBI be more concerned about deficiencies and lapses in the operations of the depositories and how these can be set right? After all, V Leeladhar and Mohan Gopal, iSec Services and KPMG cannot all be part of an anti-NSDL nexus.


Now that the issue is in the public domain, any ham-handed attempt to discredit its own committee, comprising eminent members, will serious erode SEBI’s credibility as well as that of its chairman CB Bhave.


-Sucheta Dalal

-- Sucheta Dalal