SEBI board finds no evidence of lapses by NSDL in IPO scam

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In disposing of its proceedings against NSDL in the IPO case, the SEBI board noted that it found no evidence of any lapses on the part of the depository in following its own procedures in regard to inspection and audit with respect to depository participants.

The order passed on Tuesday disposed of the ad interim exp-parte order-cum-show cause notice against NSDL made by SEBI in April 27, 2006. In the IPO scam which spanned 2003-05, a large number of fictitious demat accounts were opened and certain operators had used them to corner shares reserved for retail investors.

The show cause notice had asked NSDL to ensure that demat accounts used by 24 specified persons were not used for manipulation of IPO allotment; and to conduct inspection of specified Depository Participants to verify whether all their demat account holders were genuine. It had also asked the promoters of NSDL to take appropriate action including revamping of management.

A second interim order from SEBI in November 2006 had asked NSDL and its DPs to jointly and severally disgorge Rs 90 crore; this was set aside by SAT, which observed that the issues should have been determined only after the final order. After investigations there was another adjudication order from SEBI in April 2007 imposing a penalty of Rs 5 crore on NSDL after holding it guilty of several charges including that of failure to prevent the opening of multiple beneficial owner demat accounts.

All the SEBI proceedings against NSDL were given over to a special committee appointed by SEBI when Mr C.B. Bhave moved from NSDL to Chairmanship of SEBI. This committee too passed adverse orders against NSDL, but two of these orders were annulled by the SEBI board later.

Finally the SEBI board sat afresh on the NSDL case. It noted that NSDL's submissions showed that there were clearly laid down procedures for inspection and audit and that NSDL had followed its own procedures.

SAT had observed that one single reason for the events is the failure of KYC verification, a responsibility cast on depository participant, noted the latest SEBI board order. The system of inspection failed to identify this failure and prevent the massive fraud, noted the order. "This underscores the fact that there is scope for continuous improvement of systems, procedures and practices in conducting inspections. The systems need to be verified by suitable independent experts and a comprehensive and strengthened inspection system needs to be developed and put in place," said the SEBI board.

Taken from

The Hindu Business Line