NSDL’s IPO case is a reminder that former SEBI chairman appointment was made under the most bizarre circumstances

The Securities and Exchange Board of India (SEBI) has challenged an order of the Securities Appellate Tribunal (SAT) letting off the National Securities Depository Limited (NSDL) for its role in the multiple-application scam of 2003-05 and more serious lapses in DSQ Software’s dubious increase in capital just after the dotcom bubble. This has happened soon after the third public interest litigation (PIL) questioning chairman UK Sinha’s appointment was thrown out by the Supreme Court (SC). On 19th November, India’s apex court has asked NSDL to file a response to SEBI’s challenge, giving a fresh life to the most bizarre, but hardly-reported, case in the 25-year life of India’s market watchdog.

CB Bhave shepherded the depository statute through Parliament as executive director at SEBI and went on to found NSDL and head it for the largest number of years in its existence. The depository grew rapidly and extended its operations into tax information and other areas, far beyond SEBI’s ambit.

NSDL’s aura of high efficiency was shattered after an income-tax investigation stumbled on a massive multiple-application scam which had gone unnoticed by the depository, even though the applicants brazenly consolidated thousands of allotments into a few depository accounts before the shares of a manipulated initial public offering (IPO) were listed.

It seemed astonishing that NSDL’s systems were unable to detect multiple applications. But what was scandalous is the saga after that. Under chairman M Damodaran, SEBI ordered an inquiry that indicted NSDL. The depository managed to raise a storm of outrage.

Soon after, Mr Bhave was appointed SEBI chairman, despite pending investigation and regulatory action. An artificial ring-fence was created around Mr Bhave to allow a fair investigation of the IPO scam to continue, but the signal from the finance ministry was clearly that NSDL was wrongly indicted.

In a strange twist, a two-member committee of the SEBI board again indicted NSDL and also discovered the DSQ episode. The report of 2008 lay buried for a year and was made public only when Dr Mohan Gopal, a member of the committee, went public after a PIL was filed in an Andhra Pradesh court.

Did this lead to action against NSDL? No. In fact, the SEBI board, in a bizarre decision, declared the orders of its own committee as void in February 2010! In the process, the board also ignored a legal opinion from none other than the late Justice JS Varma, an extremely respected former chief justice of the Supreme Court.

Finally, SEBI was asked to reconsider its order by the Supreme Court in July 2011. NSDL was then ordered to conduct an inquiry and fix responsibility for the lapses and it challenged the SEBI order before the SAT.

Meanwhile, the case dragged on; Mr Bhave’s term was not extended; this led to several PILs being filed against UK Sinha’s appointment which the apex court has recently called ‘motivated’. NSDL was also bifurcated, to set right issues with its regulation and supervision that Moneylife had pointed out.

Interestingly, in August 2013, SAT decided to quash SEBI’s order of 2008 (implemented only in 2011) saying that fixing individual responsibility at this belated stage was ‘unjustified and unreasonable’. SEBI has challenged the SAT dismissal, ensuring that the highest court in the country hears this sordid saga involving repeated perversion of power, motivated appointments to the SEBI chairman’s post and evasion of responsibility for the IPO scam.