Mumbai: India’s capital markets regulator, the Securities and Exchange Board of India (Sebi), will on Tuesday take a fresh look at the suspected involvement of National Securities Depository Ltd (NSDL) in a 2005 scam involving initial public offerings (IPOs).

Some market participants used 59,000 fictitious demat accounts to corner share allotments meant for retail investors in the scam.

Current Sebi chairman C.B. Bhave was heading NSDL at that time.

NSDL will present its case before the Sebi board, which will be headed by Mohandas Pai, a director of Infosys Technolgies Ltd. Bhave has been staying away from the board proceedings to avoid any potential conflict of interest. “I have no comments on the issue," Pai said.

The critical hearing comes after Sebi declared two of the three decisions of a special committee that was set up to look into NSDL’s role in the scam as null and void in November and said the matter will be heard afresh.

Graphics: Ahmed Raza Khan / Mint

It penalized NSDL along with a few other market intermediaries and even called for a revamp of its management, but these orders were set aside by the Securities Appellate Tribunal, or SAT, that hears appeals against Sebi.

The committee, consisting of two Sebi board members Mohan Gopal and V. Leeladhar, in December 2008, passed an order directing NSDL to conduct internal enquiries and fix individual responsibility for the lapses that allegedly aided the IPO scam.

It had also said that Sebi had failed as “a regulator" while disposing of matters relating to the IPO irregularities and dematerialization of shares of DSQ Software Ltd. In the DSQ Software dematerialization case, too, NSDL was allegedly involved.

Initially, Sebi neither implemented these orders nor made them public as its board felt that the panel had exceeded its terms of reference.

In January 2009, Sebi counsel did not mention the order when the NSDL appeal came up for hearing at SAT, which eventually set aside Sebi’s order that penalized NSDL and another depository, Central Depository Services (India) Ltd (CDSL), for negligence in opening demat accounts.

“We have considered...the specific charges...and find that...none of the charges can be said to have been established," said the SAT order, signed by presiding officer N.K. Sodhi.

The regulator decided to seek an independent legal opinion on the committee’s locus standi after the committee chairman Mohan Gopal told the media that Sebi was illegally withholding the order.

Sebi referred the case to former SAT presiding officer C. Achuthan for an independent legal opinion, but there was no development on this front till September when a writ petition was filed in the Andhra Pradesh high court by V. Narayan Reddy, an investor.

Reddy appealed to the court to declare the Sebi move of withholding the panel’s 4 December order as “arbitrary". He also alleged that Sebi willingly suppressed this order, enabling NSDL to win its appeal at SAT in January.

Reddy also alleged in his petition that “Sebi does not have the jurisdiction to review the quasi-judicial order passed by a committee comprising members of the Sebi board".

Finally, in November, Sebi published the panel’s orders on its website but declared two of them—relating to NSDL—null and void. The Sebi board felt that “the orders (by the committee) went beyond the terms of reference", a Sebi statement said. Sebi also said the committee exceeded its brief by making comments on deficiencies in the working of Sebi.

At least one legal expert has criticized the Sebi move as untenable on the grounds that the orders of the special committee cannot be set aside by the board and are still valid. According to J.S. Verma, former chief justice of India, Sebi cannot simply declare the order of the Mohan Gopal-V. Leeladhar bench as null and void and the orders will continue to stand, unless challenged in a judicial forum.

Market participants will closely follow the Sebi board meeting but none of them is willing to talk on the matter as it has quasi-judicial implications. Moreover, it involves the regulator. There are two government nominees on the Sebi board and in that sense it has a say on what happens in the closed-door meeting.