Sucheta Dalal :Has SEBI declared war against NSDL? Part-1
Sucheta Dalal

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Has SEBI declared war against NSDL? Part-1  

Aug 28, 2007

SEBI’s v/s NSDL – Part I


Has SEBI declared war against India’s premier depository?


By Sucheta Dalal


For the past two years, is open knowledge that the Securities and Exchange Board of India (SEBI) has virtually been at war with India’s largest depository company, the National Securities Depository Limited (NSDL).

In the past two years, the regulator has severely indicted the depository and imposed a hefty disgorgement order of Rs 45 crore in connection with what is called the ‘Demat Scam’ or ‘multiple application’ scam and slapped a Rs five crore penalty against it. More recently, SEBI questioned NSDL’s plan to become the chief record-keeping agency for pension funds. This was recently cleared after imposing several conditions. We will discuss these in another article. However it must be pointed out that SEBI’s conditions, even if valid, carry little conviction due to deafening silence over the multi-faceted scam at Stock Holding Corporation of India (SHCIL) during the tenure of R.Jayaraman Iyer, who was a close friend of SEBI Chairman M.Damodaran. 

As regards the NSDL, many of SEBI’s disciplinary actions followed a detailed investigation by a private IT Security firm called iSec, headed by former cop. Only parts of this report are in the public domain as a part of the bulky, inconsistent and much-criticised IPO scam order of SEBI. We learn that in another quiet move, SEBI has, once again, commissioned the same firm, iSec, to inspect the NSDL again to verify compliance with its initial report.

Is all this a part of some elaborate vendetta of the SEBI top brass against NSDL’s chairman C.B. Bhave? Well, a lot of people in the financial world seem to think so. In fact, every few weeks, bankers, market intermediaries and even bureaucrats have asked whether SEBI’s actions have been fair, or are simply vindictive. It is also a fact that those asking the question are rarely interested in the details. It is a public knowledge that NSDL has challenged most of SEBI’s disciplinary actions before the Securities Appellate Tribunal (SAT) and obtained a stay in most cases.

Yet, SEBI’s attack has certainly hurt NSDL’s image and demoralised the organisation, which had been praised for eight long years for enabling India’s smooth transition into a paperless trading system. In contrast to the National Stock Exchange’s (NSE) celebration a couple of years ago, the NSDL’s 10th anniversary last year went unnoticed and unmarked.  So where do the allegations of vendetta stem from? Well, here are some good reasons.

·          Firstly, SEBI’s IPO order was based on a detailed inspection of NSDL’s systems but the rival Central Depository of Shares Limited (CDSL) escaped such scrutiny.

·          Secondly, the SEBI report was made public and action initiated without giving NSDL the chance to rebut the findings. We learn, that SEBI may have banked upon the fact that the investigation team had asked NSDL to sign off on several findings and conclusions. It still does not absolve the need for a formal show-cause notice.

·          The CDSL inspection, which was commissioned later, turned up far more damaging evidence than that of the NSDL inspection, say informed sources. This report remains nicely mothballed, barring a three-line SEBI order indicating that CDSL’s systems were not up to the mark either.  

·          Yet, SEBI imposed a penalty of Rs 5 crore against NSDL and Rs 3 crore against CDSL for various acts of  "commissions and omissions" by the two depositories. Since the quantum of penalty is not proportionate to the market share of the depositories, it clearly conveys the impression that NSDL’s systems and operations are far worse than those of CDSL. This is certainly not the case.

·          SEBI’s much touted and patently absurd disgorgement order seeking to recover Rs 116 crore from 10 market participants is equally tilted against NSDL. It has been singled out for the biggest disgorgement – Rs 45 crore, followed by the Karvy group and others, while CDSL’s share of the disgorgement was a mere Rs 12 crore. This order has been stayed by SAT. 

Clearly, all these facts do tend to back the allegations about a vendetta, based on personal grouse. What makes SEBI’s attitude to NSDL so glaring is the fact that it is totally silent about the criminal acts at SHCIL.


-- Sucheta Dalal