Attempts by India’s stock markets regulator to collect stiff fines from two depositaries are likely to end up with the Securities Appellate Tribunal. For the third time.
The National Securities Depositories Ltd (NSDL) is likely to appeal against the Securities and Exchange Board of India’s (Sebi) 27 April order asking it to pay a fine of Rs5 crore within 45 days. The Central Depository Services Ltd (CDSL), the second national depository that has been fined Rs3 crore, could also take the same route, according to people close to both companies who didn’t want to be named.
NSDL chairman C. B. Bhave and its legal counsel Somasekhar Sundaresan declined to divulge any details about their future course of action. CDSL officials declined to comment.
If NSDL does appeal against the fine, it will be the third time that it is moving the tribunal against an order passed by the regulator.
The tribunal is a higher authority that hears appeals against the orders passed by Sebi.
The stakes are very high for both companies.
For NSDL, the penalty represents about 17% of its net profit of Rs30 crore earned during the year ended March 2006. For CDSL, the penalty is close to 20% of its net profit of Rs15 crore in 2006.
The fines come in a protracted dispute. In its investigations, which first began in December 2005, Sebi found that in some 21 initial public offers (IPOs) floated during 2003 and 2005, thousands of duplicate and multiple demat accounts were used to garner shares under the retail quota of each IPO. Typically, these IPOs had allocated 35% of their offerings for retail investors.
In its 252-page order, delivered in April 2006, Sebi banned 85 individuals and entities from investing in IPOs and barred 12 depository participants from opening demat accounts. It also asked for an immediate change in the management of NSDL and CDSL for its lack of oversight in regulating the depository participants.
Third-time lucky? This will be the third time that the depositories will be challenging penalties imposed by the market regulator
In June 2006, the tribunal set aside this directive of Sebi against NSDL on the ground that the regulator didn’t have the powers to ask for a management change.
Subsequently, in November 2006, Sebi passed another order asking the two depositories, along with eight depository participants, to pay Rs116 crore towards disgorgement charges. “...It stands to reason that the depositories and depository participants who enabled the opening of numerous demat accounts in fictitious...names, either by turning a Nelson’s eye to the compliance with KYC (know your customer) norms prescribed by Sebi or by actively participating in the scheme designed by the key operators and the financiers, should be held liable for the loss caused to innocent retail investors,” the disgorgement order had said.
Disgorgement essentially means that any ill-gotten gains made should be restored back to the original parties.
That time, too, NSDL appealed to the Tribunal, which then stayed Sebi’s disgorgement order in January 2007. The tribunal’s presiding officer, justice Navdeep Sodhi, said, “NSDL may have been grossly negligent in not complying with KYC norms, but why are they being...told to pay up for gains which they have not made?”
Sebi’s adjudicating officer Biju S. justified the reasons for imposing the maximum penalty as permissible under law on NSDL in its 27 April order, saying: “On account of various commissions and omissions on the part of NSDL, the key operators opened large number of accounts…hence investors suffered a great loss on account of cornering of shares by the key operators.”