Mumbai: The Securities Appellate Tribunal (SAT) on Tuesday quashed a regulatory order against top depository NSDL, which was passed by Sebi in December 2008, but implemented about two-and-a-half years later in July 2011 after initially being dismissed as 'null and void'.
The orders required National Securities Depository Limited (NSDL) to conduct an independent inquiry to fix individual responsibility for failure at NSDL in the wake of IPO and demat scams between 2002-2006. NSDL board was also directed to conduct an independent audit of its systems and operations to identify the remedial measures.
After hearing NSDL's appeal against these orders, SAT today ruled that independent probes have already been carried out by depositories and remedial measures have been taken after ascertaining that there was no individual complicity.
"Therefore, at this belated stage directing the appellant (NSDL) to institute fresh inquiry to fix individual accountability ... Is wholly unjustified and unreasonable. Accordingly, we quash and set aside the impugned order dated December 4, 2008.
"This order, however, will not come in the way of the respondent to seek compliance of any other remedial measures that may be suggested by the respondent with a view to strengthen the Depository system," SAT said in its order.
The orders were originally passed by a Sebi committee in December 2008, but were later dismissed as "null and void" by the board of the market regulator.
However, an intervention by the Supreme Court in July 2011 forced Sebi to revive the matter and Sebi's board on July 28 that year took an unprecedented decision of reviving the charges declared as "non-existent" in the past.
Subsequently, Sebi implemented the orders and served them to NSDL on July 29 for compliance, which included an independent audit of systems and operations within six months.
This was the first instance of Sebi revisiting an issue previously dismissed by it, as also an unprecedented case of the regulator being open to a report, where its own role had been criticised.
The said irregularities during 2002-06 by NSDL related to cases of IPO scam and trading in unlisted shares of a company DSQ Software upon irregular dematerialistion.
The committee, comprising 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 and had asked NSDL as also Sebi itself to take corrective measures.
However, Sebi dismissed the findings on the ground that the committee breached its mandate in making these charges. Sebi at that time also dropped its proceedings against NSDL in the DSQ Software matter, where the depository was accused of lapses in dematerialising 1.30 crore shares of the company, which were later sold in market without listing.
Quashing Sebi's orders against NSDL, SAT today also observed that Sebi was not justified in accepting and releasing its earlier orders for compliance by NSDL, when proceedings against another depository CDSL (Central Depository Services India Ltd) were treated as closed.
SAT said Sebi had found lapses on the part of both depositories and therefore its decision to close the file in the case of CDSL and proceed against NSDL "is unreasonable and unjustified".
NSDL and CDSL came under scanner in 2006 in connection with the IPO scam, wherein various entities had fraudulently cornered shares reserved for retail investors and sold them later after the listing.
The depositories were accused of not following best practices to detect opening of thousands of fictitious accounts in the name of retail investors for share allotment in IPOs between 2003 and 2006.
After investigating into the matter, the Mohan Gopal Committee submitted in December 2008 that NSDL failed in its duty and also made adverse remarks about the manner in which Sebi had handled the issue of IPO scam.
The matter reached the Supreme Court last year after a special leave petition was filed in the apex court against Sebi's rejection of the committee report.
The court expressed its unhappiness at the outright rejection of the report and asked Sebi on March 28 to reply on whether it would revisit its decision to give a clean chit to NSDL.
Incidentally, Mohan Gopal in December 2010 wrote to the Prime Minister that Sebi board abused its powers to protect its then Chairman C B Bhave from facing an independent inquiry with respect to his actions as NSDL Chairman during the IPO scam.
The PMO had sent the letter to the Finance Ministry, which in turn forwarded the same to the Sebi, but did not get a reply despite three reminders.
The Sebi declared the two-member committee's probe into the matter as 'non-existent' at a time when Bhave was serving as chairman of the regulatory authority.
While Bhave had recused himself from the meetings whenever the NSDL matter was discussed, it has been still alleged in various court petitions that he might have influenced the decision of other Sebi board members.
Bhave served as Sebi chairman for three years till February 17, 2011. Prior to joining Sebi, Bhave was heading NSDL, the leading national depository that enables holding of shares and other securities in demat or electronic format.