Mumbai: The Indian capital market regulator’s appellate body on Thursday adjourned the hearing of National Securities Depository Ltd’s (NSDL) appeal against an order passed by the regulator in the initial public offering (IPO) scam of 2003-05 to 14 December.
The Securities Appellate Tribunal (SAT) has given two weeks to Securities and Exchange Board of India, or Sebi, to file its response to the appeal filed by NSDL.
Darius Khambatta, senior counsel for Sebi, asked for a month to file its reply to SAT, which was strongly opposed by the counsel of NSDL, Janak Dwarkadas.
“This adjournment is not necessary at all,” Dwarkadas said. “Sebi should have given us a hearing before asking us to comply with an order passed by a committee that overruled a Sebi board order which had exonerated NSDL in the IPO case.”
Presiding officer N.K. Sodhi said SAT cannot proceed without Sebi’s reply due to the nature of controversy involved.
Meanwhile, one of the two members of SAT, P.K. Malhotra, has recused himself from hearing the case as he had handled the Sebi-NSDL matter during his stint in the law ministry. Prior to his appointment as an SAT member in 2010, Malhotra was additional secretary in the ministry of law and justice. Currently, SAT has two members—Malhotra and S.S.N. Murthy—and a presiding officer, Sodhi, whose term will end this month. This means the NSDL-Sebi case will be heard by Sodhi’s successor on 14 December.
NSDL’s appeal in SAT follows a Sebi decision to take action against the depository for its failure to prevent the opening of thousands of fictitious demat accounts during the IPO scam.
In May, Sebi told the Supreme Court that it will revive the order against NSDL, which was headed by the regulator’s former chief C.B. Bhave at the time the scam took place.
A two-member Sebi committee that looked into the issue found NSDL and its officials responsible for the irregularities.
A Sebi probe during the tenure of chairman M. Damodaran, Bhave’s predecessor, unearthed the IPO scam that involved 21 public issues launched between 2003 and 2005. Investigations showed that shares reserved for retail investors were cornered illegally by large investors through at least 59,000 fake demat accounts.
Bhave took over as Sebi chief in February 2008 for a three-year term. He was succeeded by U.K. Sinha in February.
The two-member panel of G. Mohan Gopal, director of the National Judicial Academy, and former Reserve Bank India deputy governor V. Leeladhar, had passed an order in December 2008 against NSDL, directing it to conduct an enquiry to assess the failure to detect the fake demat accounts.
Both were members of the Sebi board at the time.
NSDL was indicted for failing to put in place adequate risk-management systems and processes to prevent the opening of fake accounts. As Sebi chief, Bhave had recused himself from the case.
The panel had directed the NSDL board to conduct an independent inquiry to establish individual responsibility for the failure to meet legal duties and responsibilities. It also ordered the depository to take necessary action to ensure individual accountability for such failure within six months.
A year later, in November 2009, Sebi declared two of three decisions of the committee “null and void”, and later in February 2010, withdrew all charges against NSDL. Following a board meeting, Sebi disposed of a show-cause notice issued to NSDL, effectively clearing it of all pending charges.
The scrapping of the Sebi order prompted a protest by Gopal.
The issue then went to the apex court after a special leave petition was filed by Delhi-based non-governmental organization Manav Adhikar.
On 28 March, a bench consisting of justices R.V. Raveendran and A.K. Patnaik asked why the Sebi board had stopped the order against NSDL going into effect. The bench asked the Sebi board to reconsider the matter, pass an appropriate resolution and place it before the court for further consideration.
Following a board meeting on 26 April, Sebi, on 5 May, filed an affidavit agreeing to reconsider the order.