The SEBI board met on 2nd February to discuss the alleged failure of NSDL during the IPO scam of 2003-2005. There is no official word yet on what the Board has decided, only selective leaks

Stock market regulator, the Securities and Exchange Board of India (SEBI), held a Board meeting on 2 February 2010 to take a final decision on the alleged failure of National Securities Depository Ltd (NSDL) in preventing the initial public offer (IPO) scam during 2003-2005.

However, even after a full 24 hours later, there is no word from the regulator as to what has been decided in the Board meeting. There has been no press conference and neither is there a press release on what the board has decided. There have only been selective leaks to the media that the Board has exonerated NSDL. But there is no official communication as yet on an issue of utmost importance in proving the transparency and independence of the regulator. 

The IPO scam goes back to 2006 when SEBI investigations conducted by the 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 Reserve Bank of India (RBI).

A two-member bench was constituted to look into the scam after CB Bhave took over as SEBI chairman. The bench comprising G Mohan Gopal (director of National Judicial Academy) and former RBI deputy governor V Leeladhar passed an order against NSDL, directing it to carry out an independent enquiry to establish individual accountability for the failures of NSDL in the IPO scam.

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.

It is reliably learnt that Justice Verma’s opinion was formally put before the regulator’s board meeting on 22 December 2009, which was headed by Mohandas Pai.

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.

There has been evidence that SEBI officials have worked overtime to protect Mr Bhave from the controversy, by delaying the proceedings relating to this case. It remains a mystery that if SEBI has exonerated NSDL entirely and rejected the two-member bench's order, why should there be no official communication?