Earlier, the market regulator exonerated NSDL and now SAT wants to erase certain adverse remarks against the depository made by the two-member bench of SEBI

The National Securities Depository Ltd (NSDL) now has a squeaky-clean slate following orders from the Securities Appellate Tribunal (SAT) and market regulator Securities and Exchange Board of India (SEBI) in the initial public offer (IPO) scam. SAT, in its latest order, has asked SEBI to erase certain adverse remarks against NSDL made by the two-member bench appointed by the regulator in relation with the IPO scam of 2003-2005.

Earlier, in February, SEBI exonerated NSDL for the depository's alleged failure in preventing the IPO scam. SAT, in its latest order, said that it is satisfied in the light of the directions issued by SEBI. "NSDL has revised its business rules and put in place additional procedures to deal with the accounts of the beneficial owners in the event of deactivation/termination of a depository participant," the order said.

The two-member SEBI bench comprising G Mohan Gopal, director, National Judicial Academy and former Reserve Bank of India (RBI) deputy governor V Leeladhar, had passed a strongly-worded order against NSDL, directing it to carry out an independent enquiry to establish individual accountability for the failures of NSDL in the IPO scam.

The IPO scam goes back to 2006 when SEBI investigations conducted by then chairman M Damodaran, unearthed that shares reserved for retail investors were illegally acquired by various entities through tens of thousands of fake dematerialised (demat) accounts and fictitious applications. From the facts, it appeared that NSDL was liable for poor oversight that allowed fake demat accounts to be opened. NSDL's then head CB Bhave denied any responsibility for the scam even though the banks that had opened the fake demat accounts were penalised by the RBI.

Based on the prima facie findings, SEBI issued various directions against 82 financiers, 24 key operators, 12 depository participants (DPs) and two depositories. The order also asked NSDL promoters to take all appropriate actions including revamping of management, which clearly has allowed matters to come to such a sorry pass, without further loss of time. 

After Mr Bhave took over as SEBI chairman, a two-member bench was constituted to look into the IPO scam as well as the DSQ Software Ltd case.

This was followed by a one-year effort to bury the orders of the two-member bench. Finally, under pressure from a public interest litigation (PIL) filed in the Andhra Pradesh High Court, the SEBI board met and was forced to release the three orders of the bench into the public domain. But the board sought to kill the application of the orders by declaring that two of the orders as void or 'non est' since the bench had gone beyond its brief in criticising the regulator itself.

Dr Gopal had objected to this action taken by SEBI. His reservations were echoed by Justice JS Verma, former Chief Justice of India, who declared that such quasi-judicial orders can only be reviewed and quashed "by a judicial forum with requisite jurisdiction, at the instance of a petitioner with standing to seek relief." Justice Verma is one of the most respected jurists whose opinions are not for sale.

Citing the SAT orders, the SEBI board had said, "In substance, the Hon'ble SAT has held that NSDL cannot be faulted for any lapses or deficiencies on those counts. In view of this finding by Hon'ble SAT in its order and submission made by NSDL as in paragraph 11 above, we do not find it necessary to examine the very same aspects any further and issue any fresh directions."

Earlier, the SEBI board had also sought the legal opinion of C Achuthan, former presiding officer of the Securities and Appellate Tribunal (SAT), in relation to this matter. Dr Gopal had officially pointed out that Mr Achuthan's position was conflicted because he had represented one of the IPO accused (Karvy) in a matter before the Andhra Pradesh High Court. Mr Achuthan is also a director on the NSE board, a SEBI-regulated entity. NSE is the promoter and major shareholder of NSDL.