NSDL takes on Sebi over demat scam

Says market regulator did not follow the principles of "natural justice".

The National Securities Depository Ltd on Monday took on the market regulator for pulling up the depository for weak surveillance, as revealed by the demat scam in the Yes Bank initial public offer.

The depository said in a filing that the Securities and Exchange Board of India had not followed the principles of "natural justice".

The order was passed without giving NSDL an opportunity to see the material or documents that Sebi had relied upon to arrive at a conclusion. Besides, the contentions of Sebi were not born out of facts or law, NSDL said.

NSDL said the supervision of the IPO allotment came under the purview of the market regulator, and NSDL had no role to play in it. NSDL also said allotting IPOs was the job of an issue's registrar, which was again governed by Sebi.

NDSL said it was not concerned in any manner with the issue of fictitious or benami accounts as all applications of investors for an IPO were forwarded to an issue's registrar.

"Scrutiny of applications for the IPOs are done by a registrar who works under the overall supervision of the market regulator. Sebi has also notified the regulations for supervising and regulating the activities of registrars. NSDL has no role to play when applications for an IPO are made."

The filing further said that the if there had been any abuse or cornering or manipulation of the IPO process as alleged by Sebi, then the regulator, through various statutory provisions, could put in place a "system surveillance" and initiate actions in accordance with law to ensure that violations referred to in the order did not occur.

Sebi had passed an interim order on December 15, banning 13 entities from trading in the shares of Yes Bank and in ensuing IPOs. The order said Sebi had it found these entities guilty of misusing the system to ensure higher allotments in the Yes Bank IPO by operating through multiple demat accounts.

Bharat Overseas Bank and Vijaya Bank were refereed to the Reserve Bank of India for a scrutiny of their roles in opening accounts of benami entities. NSDL and CDSL were asked to increase their surveillance and the former was also instructed to inspect the records of Karvy DP to see if the know-your-client norms were complied with.

On the issue of inspecting the records of Karvy DP to see if the norms were met, NSDL said it was examining the issue and a report would be submitted to the market regulator soon. The depository has asked for a personal hearing.

It may be recalled that in an interview with Business Standard a day after the Yes Bank order was passed, NSDL Chairman CB Bhave had said the regulator's suggestion to strengthen surveillance was welcome as no institution could ever claim to have the last word when it came to this subject.