NSDL, CDSL absolved of all charges.
In a major relief to the National Securities Depository limited (NSDL) and Central Depository Services India Limited (CDSL), the Securities Appellate Tribunal (SAT) has acquitted them from several charges levelled by the market regulator in the IPO scam that had rocked India's capital markets in April 2006.
The scam involved tens of thousands of fictitious online accounts that cornered company shares set aside for small investors in initial public offerings (IPOs).
The matter assumes importance because there was a face-off between present Sebi Chairman C B Bhave (who was then the NSDL chief) and his predecessor M Damodaran on the issue. In fact, when Bhave was appointed as Sebi chairman in 2008, he had recused himself from all proceedings initiated by Sebi against NSDL.
In the 20-page order pronounced by Justice NK Sodhi and member Utpal Bhattacharya, SAT has observed that "the specific charges levelled by the board are primarily based on a system audit of the appellant which was conducted by the board through an independent body called iSec Services Private Limited."
The pronouncement further says "The adjudicating officer has recorded his findings basing himself solely on the iSec report. Granted that iSec is an expert body , NSDL is also a professional body whose system is operated by personnel who are also experts in designing and operating computerised databases. Faced with the charge of lack of data integrity, NSDL has come up with a detailed explanation, which is prima facie quite plausible. Under these circumstances, there can be hardly any justification for the adjudicating officer to totally ignore the submissions by NSDL and rely entirely upon the views of iSec."
The order has refuted each of the charges levelled by Sebi against NSDL that include failure to notice unauthorised outsourcing by the depository participants (DP), failure to put in place adequate mechanisms for the purpose of reviewing, monitoring and evaluating the controls, systems, procedures and safeguards, failure to prevent the opening/ existence of multiple beneficial owner accounts, failure to verify the infrastructural facilities of the DP and failure to take appropriate action against the DPs for various irregularities repeatedly committed by them.
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The scam was first unearthed in April 2006 and Sebi passed an ex-parte order saying that the depositories “failed to exercise oversight over the DPs” and the promoters of NSDL (and CDSL, another depository) were directed to take “all appropriate actions, including revamping of management”.
Subsequently, in November 2006, Sebi had ordered NSDL and a few others including stockbroking entities such as Karvy stockbroking, HDFC Bank, Khandwala Integrated Financial Services, IDBI Bank, Jhaveri Securities, ING Vysya Bank, Pravin Ratilal Share & Stock Broking and Pratik Stock Vision implicated in the IPO scam to return Rs 115 crore in “illegal profits” made from IPO deals.
Later, NSDL appealed to the SAT which set aside Sebi's disgorgement order of Rs 115 crore against NSDL and others in November 2007. Hearing the arguments of NSDL and others at the time, SAT had said that NSDL and others should have been given an opportunity by the Sebi to explain their position in the disgorgement case in the IPO demat scam. The regulator should have verified facts and figures properly in this case, SAT said. Subsequently, in July 2008, SAT set aside Sebi's disgorgement order against Karvy Stockbroking, paving the way for the brokerage to open new DP accounts.
The order also acquits CDSL of charges such as facilitating the depository participants (DPs) to open beneficial owner accounts without following the prescribed procedure, failing to put in place adequate mechanism for the purpose of reviewing, monitoring and evaluating the controls, systems, procedure and safeguards and failing to enter into agreements with the clearing houses of stock exchanges.
SAT has further remarked that "most of the data on the basis of which the board has conducted investigations into the IPO scam and fixed responsibilities on the key operators and the financiers has emanated from the data bases of the two depositories. Having relied upon and utilised such data gleaned from the two depositories without having any doubts about its integrity, we do not think it is open for the board to allege lack of data integrity in respect of NSDL.”