New Delhi / Mumbai: The board of capital markets regulator Securities and Exchange Board of India (Sebi) on Monday decided to seek external legal opinion on orders issued by an independent committee against the country’s premier depository, National Securities Depository Ltd (NSDL), following differences within the board on whether the committee exceeded its brief.
The committee’s brief was to oversee Sebi proceedings against NSDL in the initial public offering (IPO) scam of April 2006, in which depositories, depository participants and market operators allegedly used or helped some entities use 59,000 fictitious demat accounts to corner shares meant for small investors.
The orders, issued on 4 December, found that NSDL had failed to meet applicable legal standards on the duties and responsibilities of depositories. The panel also directed NSDL to conduct an independent enquiry to establish individual liability, if any.
But these orders were not made public because Sebi’s board had certain reservations regarding them. The Monday board meeting was convened to discuss this.
A Sebi release said: “The board decided, with one member dissenting, that it would seek the opinion of an eminent legal counsel on the issue of whether the Sebi board has the legal authority to examine whether the committee appointed by the board to deal with the matter involving a conflict of interest of the current chairman in relation to NSDL has acted within the framework and terms of reference established by the board resolution.”
C.B. Bhave, current Sebi chairman, was the head of NSDL at the time of the scam. He was not part of Monday’s discussions on the NSDL issue to avoid a potential conflict of interest.
The dissenting member is G. Mohan Gopal, director of National Judicial Academy in Bhopal, and a member of the independent panel set up on 5 March 2008, to oversee Sebi proceedings against NSDL. He was not available for comment.
The board has not selected the legal expert whose opinion it would seek, but one board member, who did not want to be identified, said the legal opinion should be in by the next board meeting of Sebi, which is slated in May.
The board on Monday decided to withhold the orders of the committee till the legal opinion comes in.
The two-member committee consisted of Gopal and V. Leeladhar, former deputy governor of the Reserve Bank of India. Anurag Goel, secretary, ministry of corporate affairs, was also part of the committee, but he recused himself, citing personal reasons.
“Orders such as these (which are quasi-judicial in nature) issued by board members under authority of the Sebi board are immediately served on parties and made public by posting on the Sebi website without being subject to review by any other member,” Gopal had earlier told Mint.
According to the board member Mint spoke to, Sebi did not attempt to suppress the order. The order was discussed in the January board meeting, the first one after it was received, but the meeting was inconclusive on the subject, the member said.
The Sebi-NSDL row began in April 2006 when in an ex parte order, Sebi observed that the depositories “failed to exercise oversight over the depository participants”. The promoters of NSDL—as well as CDSL or Central Depository Services (India) Ltd, another depository—were directed to take “all appropriate actions” and even revamp their management. NSDL filed an appeal against this and the order was stayed by the Securities Appellate Tribunal (SAT), the appellate wing of Sebi.
In November 2006, Sebi passed another order against NSDL and other entities named in the scam, and directed them to pay Rs115.82 crore for alleged carelessness in opening of demat accounts. Of this, NSDL’s share was Rs45 crore.
This time, too, NSDL filed an appeal and in November 2007 SAT set aside Sebi’s orders, describing its action as a clear “violation of the principles of natural justice”. However, the appellate wing left it open for Sebi to initiate fresh proceedings.
In January, SAT set aside yet another Sebi order that penalized NSDL and CDSL for negligence in opening demat accounts. Sebi had imposed a penalty of Rs5 crore on NSDL and Rs3 crore on CDSL in April 2007.