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SEBI re-opens Mohan Gopal committee report on NSDL’s role in IPO scam

Chairman UK Sinha says following the direction of the Supreme Court, it will get the country’s largest depository to comply with the findings of the investigation

Mumbai: In an unprecedented move that revives charges against the National Securities Depository Limited (NSDL) that were earlier dismissed as "null and void", the Securities and Exchange Board of India (SEBI) has decided to implement a special committee report that indicted NSDL and others for committing irregularities in the IPO scam of 2003-2006.

Speaking to journalists after a meeting of the SEBI board last evening, chairman UK Sinha said that the regulator has decided to implement the report by the two-member Mohan Gopal committee on the role of the NSDL in the scam.

"Pursuant to the order dated 9 May 2011 of the Supreme Court, the board decided to release the orders of the two-member committee, in the matter of IPO irregularities and DSQ Software, to NSDL for compliance," Mr Sinha said. "We will send it to the company," he said, and added that they would have to implement it.

The committee, comprising of the then SEBI board members G Mohan Gopal and V Leeladhar, was constituted in 2008 to look into NSDL's role in the IPO scam and it found various lapses on the part of the depository, as well as SEBI itself.

At the time, the SEBI board declared the committee’s findings as "null and void" on the ground that the committee had breached its mandate in making these charges. SEBI also dropped its proceedings against NSDL in the DSQ Software share allotment case, in which the depository was accused of lapses in dematerialising 1.30 crore shares of DSQ Software, which were later sold in the market without listing.

But the market regulator, under the charge of a new chairman, agreed to revisit these matters after an intervention by the Supreme Court earlier this year.

NSDL first came under the scanner in 2006, in connection with the IPO scam, wherein various entities fraudulently cornered shares reserved for retail investors and sold them after the listing.

The depository was accused of not following best practices to detect the opening of thousands of fictitious accounts in the name of retail investors for share allotment in IPOs between 2003 and 2006.

This is the first instance of SEBI revisiting an issue previously dismissed by it, as also unprecedented in that it has reopened a report that has also criticised its role.

While it is not clear to what extent the fresh probe into the IPO scam will go, the issue could still open a Pandora's box, as the charges were made against NSDL for acts committed during the period when CB Bhave was heading the depository. Further, Mr Bhave subsequently became chairman of SEBI and it was during his tenure that the SEBI board dismissed the Mohan Gopal committee report.

While Mr Bhave recused himself from the meetings that discussed the NSDL matter, it has been still alleged in various court petitions that he may have influenced the decision of other SEBI board members.

Mr Bhave was SEBI chairman for three years till 17 February 2011. Before his stint with SEBI, he headed NSDL, the country’s largest depository which enables investors to hold shares and other securities in the demat or electronic form.

It was reported that Mr Mohan Gopal has written to the prime minister in December 2010 that the SEBI board had abused its powers in trying to protect Mr Bhave from facing an independent inquiry for his actions as NSDL chairman during the IPO scam.

Mr Mohan Gopal was an independent member of the SEBI board, while Mr Leeladhar was the RBI nominee on the board.

The prime minister’s office is believed to have passed on Mr Gopal’s letter to the finance ministry, which in turn forwarded it to SEBI, but he did not get any reply despite three reminders.

The Mohan Gopal committee submitted in December 2008 that NSDL had failed in its duty and it also made adverse remarks against SEBI for the manner in which it mishandled the IPO scam.

The matter came up before the Supreme Court earlier this year, in the form of a special leave petition challenging SEBI’s dismissal of the committee report.

The Court expressed its unhappiness at the outright rejection of the report, and it asked SEBI to reply on whether it would revisit its decision to give a clean chit to NSDL.

Subsequently, SEBI called a special board meeting on 26th April, wherein it was decided to reconsider the Mohan Gopal committee report. And SEBI informed the Court about this decision on 9th May, after which the Court listed the matter for further hearing in August.

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