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SEBI calls board meeting to dispose NSDL issues

SEBI's board meeting would ensure that with three whole-time members reporting to the chairman or the finance ministry and outside directors who are subject to their regulation, the NSDL issue will be buried

Market regulator Securities and Exchange Board of India (SEBI) has called a meeting of its board of directors on 22 December 2009 to dispose of all issues related to the National Securities Depository Ltd (NSDL), formerly headed by its chairman CB Bhave.

It may be recalled that SEBI had initiated action against NSDL along with the Central Depository Services (India) Ltd (CDSL) for various lapses leading to the huge initial public offer (IPO) scam of 2006 which revealed how a group of people were cornering the retail investor quota to earn illegal profits.

The SEBI board had earlier declared that two orders by the two-member bench comprising V Leeladhar and Dr Mohan Gopal were null and void and that the full SEBI board will take a fresh view on the issue. One of these orders pertained to NSDL and the second to DSQ Software (more details later).

The meeting on 22nd December will be chaired by Mohandas Pai, director of Infosys who is on the SEBI board. NSDL has been asked to present its case before the board.

Curiously enough, although Mr Pai is on the SEBI board as an outside representative, his company, Infosys, is indirectly under SEBI regulations. The three whole-time members of SEBI will also be present at the meeting. Given that the representatives from the Reserve Bank of India and the Ministry of Corporate Affairs (MCA) on the SEBI board are new, it seems like a foregone conclusion that SEBI will clear NSDL and close the hugely controversial issue which has damaged SEBI's reputation and that of its chairman.

Incidentally, the decision to declare the two orders non-est were based on an opinion by Mr C Achuthan, former presiding officer of the Securities Appellate Tribunal (SAT). Mr Achuthan, however, is on the board of the National Stock Exchange (NSE), the promoter and significant shareholder of NSDL, which is in the dock. Legal circles wonder how Mr Achutan's opinion regarding the quasi judicial orders could pass muster on grounds of the kind of propriety that is expected from a regulatory body.

What exactly has the Gopal-Leeladhar bench said about NSDL and DSQ Software? In a nutshell, NSDL is indicted for failing to detect hundreds of accounts opened by the same entity to corner the retail quota of public issues. The DSQ Software case is more dubious. NSDL dematerialised 1.3 crore shares allotted on preferential basis to four entities and allowed them to be delivered in settlement without verifying if they had obtained listing permission. It also dematerialised 30 lakh shares issued as employee stock options without the mandatory lock-in. The preferential allotment was a big scam engineered by Dinesh Dalmia who is languishing in jail for the past three years.

The Gopal-Leeladhar order has directed NSDL to conduct an internal inquiry and fix individual responsibility for failure to put in place appropriate systems. It also asks NSDL to conduct an independent audit of its systems and operations in different aspects of its functioning. In fact, it specifies that the directives issued to NSDL are not punitive but aimed at strengthening the regulatory framework to prevent the recurrence of large-scale fraud.

But NSDL refuses to admit any problem whatsoever; it invariably argues that everything that went wrong is due to criminal activity rather than any operational or systemic failure. But the bench has refused to accept NSDL’s “erroneous and excessively narrow view” that it is a mere operator of the depository system and a record-keeping agency.

As for the NSDL issues, it was decided that the “board as a whole (excluding chairman Mr Bhave) would dispose of these two matters afresh.” This ensures that with three whole-time members reporting to the chairman or the finance ministry and outside directors who are subject to their regulation, the issue will be buried.
— Sucheta Dalal

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