Sucheta Dalal :Reining in the Regulator
Sucheta Dalal

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Reining in the Regulator  

December 16, 2009

What started as a move to protect chairman CB Bhave from allegations of interference with the NSDL (National Securities Depository Limited) investigation being conducted by SEBI (Securities and Exchange Board of India) has now turned into a farce that is causing irreparable damage to its credibility. At the time of going to print, it is clear that the twists and turns would continue. On 7th December, Justice JS Verma, one of our most respected former Chief Justices of the Supreme Court, had opined that “the recent decision of the SEBI board to review and declare as ‘non-est’ two quasi-judicial orders of SEBI violates established legal and Constitutional principles.”
Justice Verma also expressed concern at “executive interference in the independence and integrity of the judicial process.” According to him, the board cannot simply declare the orders of the Mohan Gopal-Leeladhar bench as void; they will continue to stand and can only be reviewed and quashed “by a judicial forum with requisite jurisdiction, at the instance of a petitioner with standing to seek relief.”

This refers to SEBI’s indictment of NSDL in the IPO scam of 2006 (when Mr Bhave was its chairman) which was largely upheld by the Gopal-Leeladhar bench. This was followed by a year-long attempt to bury the order which was thwarted by a public interest litigation filed in the Andhra Pradesh High Court. The board finally released three orders but, simultaneously, declared them to be void. It decided that the NSDL issue will be looked at by the full board. Accordingly, a board meeting has been called on 22nd December under the chairmanship of TV Mohandas Pai (a director of Infosys). Will the machinations to protect Mr Bhave and exonerate NSDL continue? SEBI has already exonerated its rival, Central Depository Services (India) Limited, for its role in the IPO scam in a very dubious decision.

Clearly, we are in for more drama on this issue. The big mystery is: Why has Mr Bhave made this out to be a personal indictment when the Gopal-Leeladhar bench has not accused him of personal impropriety or misconduct? Was NSDL so flawless under his leadership as to be above any inquiry or action? How can the finance ministry stand by and allow the board of directors to make a mockery of established process and destroy SEBI’s credibility?

The Gopal-Leeladhar order asked for an internal inquiry by NSDL to pin responsibility for the flawed systems that led to the IPO scam. A reading of these orders indicates that this is clearly warranted. More pertinently, if the Reserve Bank of India could impose a crippling penalty on some of the top Indian and foreign banks for lapses in their KYC processe, why is the NSDL beyond reproach? After all, the virtual monopoly handles sensitive financial information and it did fail to detect thousands of multiple applications or their pre-listing consolidation of the shares into eight or nine core accounts.

If one goes by Justice Verma’s opinion, the orders of the Gopal-Leeladhar bench remain valid and SEBI’s decision is bound to be challenged in court. Will SEBI go ahead with the 22nd December board meeting (minus chairman Bhave) and exonerate NSDL?

Tailpiece: Over the past week, we at Moneylife have received frantic calls from some of the big money managers who shall remain unnamed. They were persuaded by all the media hype over investment in art to invest substantial chunks—of Rs10 lakh each—with the Osian Art Fund. ABN AMRO was the bank which helped Osian collect over Rs30 crore. The Fund, a product of the 2006 hype, did quite badly. It was refusing to return money on maturity; after repeated reports by Moneylife Digital, Osian began to return the original investment, but again there was a catch. One manager received 90% of his principal investment, while another received 85%. Some were still to receive their cheques. The question is: Isn’t this Fund a collective investment scheme that should be subject to mutual fund regulations? Clearly, the big plantation company scam of the 1990s has not taught the regulator to be more alert!

-- Sucheta Dalal