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									I n d us t r y u p da t e

NSDL IPO Scam and
                                                                                    SEBI passed a disgorgement order in
                                                                                    November 2006 and directed the NSDL,
                                                                                    CDSL and eight DPs to disgorge Rs

Role of CB Bhave
                                                                                    115.81 crore within six months. In gen-
                                                                                    eral, funds that were received through
                                                                                    illegal or unethical business transac-
                                                                                    tions, such as defrauding creditors or
                                                                                    cheating investors, are disgorged, or
                                                                                    paid back, with interest to those
                                                                                    harmed by the illegal and/or unethical
                                                                                    actions of the wrong-doers. During
                                                                                    February, 2007 the SEBI issued another
                                                                                    interim order directing the NSDL to
                                                                                    ensure that certain demat accounts are
                                                                                    not utilized for manipulation of IPO al-
                                                                                    lotment in future. Further, the SEBI
                                                                                    imposed a monetary penalty of Rs. 5
                                                                                    crores on the NSDL under Section
                                                                                    15HB of the SEBI Act.
                                                                                       At that time, CB Bhave was the Chair-
                                                                                    man of the NSDL and hence was under
                                                                                    the scanner of the SEBI. But as it is com-
                                                                                    mon in India, the man who was heading
                                                                                    the company accused of malpractices,
                                                                                    became the Chairman of the SEBI itself
                                                                                    in 2008. In the midst of the investigation,
                                                                                    Bhave assumed office of SEBI Chairman
                                                                                    on February 18, 2008. Bhave had been at
                                                                                    the helm of the affairs of the NSDL since
                                                                                    1996 until he joined the SEBI. His ap-
                                                                                    pointment at the SEBI was criticized by
                                                                                       In addition to the IPO irregularities,
                                                                                    the Committee was also asked to look
                                                                                    into the proceedings against the DSQ
                                                                                    Software Limited company as the
                                                                                    NSDL failed to exercise due diligence
                                                                                    in dematerialization of DSQ securities
                                                                                    and Rajnarayan Capital Market Serv-
                                                                                    ices Limited. Prima facie, the NSDL
                                                                                    failed to disclose the material facts re-
                                                                                    lating to prevailing uncertainty about
                                                                                    the net worth of Rajnarayan Capital
By A N C H A L K A K R OO                 reserved for retail investors, were       Market Services Limited at the time of
                                          being ‘cornered’ and illegally acquired   registration of the said entity as a De-
    ndia with its fast growing economy    by various entities through thousands     pository participant. It appears that

I   has emerged as the perfect play-
    ground for the foreign investors.
But corruption in the capital market is
                                          of fake demat accounts and fictitious
                                          applications. They were buying shares
                                          on these fake names and then transfer-
                                                                                    Bhave had a conflict of interest as he
                                                                                    was the Chief Managing Director of
                                                                                    the NSDL during the alleged irregular-
one of the biggest and toughest chal-     ring them to their accounts.              ities.
lenges facing official agencies.            National Securities Depositories           The SEBI decided that it would seek
  One such instance was the IPO scam      Limited (NSDL), one of the leading de-    legal opinion on the issue of its legal
unearthed the Securities and Exchange     positories, was questioned by the SEBI    authority to examine whether the com-
Board of India (SEBI) Committee in        as it was the job of the NSDL to check    mittee appointed by the board had
2006. The SEBI, while investigating the   the authenticity of the account holders   acted within the framework and terms
IPOs launched between 2003 and 2005       and ensure that such illegal and cor-     of reference fixed by the SEBI. This de-
found that the shares of the companies,   rupt practices do not occur again. The    cision was dissented by one of the

I n d us t r y u p da t e

members of the SEBI. It was also de-
cided to withhold the orders issued by                       Some of the questions that need to be answered are;
the Committee till legal opinion is
taken.                                                        How come thousands of fake demat accounts were opened and went un-
   The SEBI took the legal opinion of C                           noticed during the tenure of CB Bhave as Chairman, NSDL?
Achutan, former Presiding Officer of                          How come tens of thousands of IPO applications, which were getting
the Securities Appellate Tribunal
                                                                  consolidated into less than a dozen depository accounts even before the
(SAT). He is also a director on the
                                                                  shares were listed for trading, went unobserved?
Board of the National Stock Exchange
(NSE) and a promoter of the NSDL.                             Why was Anurag Goel, the then Secretary, Ministry of Corporate Affairs,
Achutan was the Chairman of the                                   and Member, SEBI, made a member of the three-member committee
Takeover Regulations Advisory Com-                                constituted to investigate NSDL matters at the very first instance? What
mittee, which was set to examine                                  are the reasons for removing him from the committee subsequently?
whether the committee appointed by
                                                              Why the NSDL failed to exercise due diligence in dematerialization of
the SEBI had acted within the frame-
                                                                  DSQ securities and Rajnarayan Capital Market Services Limited? What
work and terms of reference given by
the SEBI. Achutan, given his creden-
                                                                  was CB Bhave’s role in the case of both the companies?
tials, was not an independent counsel                         Why did the NSDL fail to disclose in Form E of SEBI (Depositories and
and therefore the opinion which he had                            Participants) Regulations, 1996, the material facts about the net worth
given was undoubtedly biased and prej-                            of Rajnarayan Capital Market Services Limited at the time of its regis-
udicial.                                                          tration as a depository participant?
   The SEBI at its August 2009 board
meeting concluded that findings
                                                              Why did CB Bhave make the committee report public only after a PIL
against the SEBI were outside the con-                            was filed in the Andhra Pradesh High Court? What were the reasons for
fines of delegation and therefore these                           withholding the report from the public until then?
were without the authority of law. The                        Was C. Achutan awarded by appointing him as Chairman of the Takeover
board declared all the two orders as                              Regulations Advisory Committee (TRAC)?
null and void. The Board reconfirmed
its prima facie findings in November
                                                              Why did CB Bhave (i.e. SEBI Board) arrogate the role of the SAT to him-
2009. The SEBI held that two orders of                            self?
the committee relating to IPO irregu-                         Was the SEBI an appellate authority for the committee order?
larities and the DSQ Software Limited                         Was the SEBI a judicial forum having requisite jurisdiction to review or
as non established. The SEBI decided
                                                                  declare the orders non established?
to make public two non-established or-
ders and also decided that its Board                          There were three Members (i.e., M S Sahoo, Abraham and Prashant
would dispose of these two matters                                Saran) who were reporting to Bhave and had a clear conflict of interest.
afresh.                                                           How were they appointed as the committee members to dispose of the
   “Ever since Bhave assumed the post                             cases related to the SEBI and the NSDL?
of Chairman in the SEBI, the whole in-
vestigation into the alleged IPO scam                    ment were disposed of against the                   Commerce), and OP Bhatt, CMD, State
went haywire”, points out a capital                      NSDL” says another expert.                          Bank of India as the frontrunners for the
market expert. “The committee formed                       Bhave’s tenure is about to end and he             coveted post.
to look into the whole IPO scam was                      soon will be vacating the post of Chairman,           The next chairman has to sort out
filled with officials who were directly                  SEBI. All eyes are on the next Chairman             corruption dwelling in the capital mar-
reporting to Bhave. At the end of the                    and a few names doing the rounds are R.             ket. I
day most of the charges of mismanage-                    Bandyopadhyay IAS (Secretary Ministry of
                                                                         ,               ,                  

           January 2006 – SEBI unearths IPO scam, shares were cornered               February, 2008 – Bhave takes over as SEBI chief. The case is taken out
           in IPOs using multiple demat accounts. SEBI found thousands of            of the purview of the T C Nair committee. Nair was a whole time member

           demat accounts opened for cornering shares. Accuses NSDL of               of the SEBI. SEBI sets up a panel to look into the case
           failure to prevent the scam.                                              December, 2008 – Panel gives its order. SEBI does not accept
           April, 2006 – SEBI issues interim exparte order against NSDL.             the same. It feels that the panel went beyond its brief
           SEBI asks NSDL to revamp its management                                   December, 2009 – SEBI decides to hear the case. SEBI board
           November, 2006 – NSDL, CDSL and a depository participant dis-             hears the case on December 22, 2009
           gorge Rs. 115 crore                                                       February, 2010 – SEBI board exonerates NSDL from all charges
           April, 2007 – SEBI imposes Rs. 5 crore penalties on NSDL. All these or-   September, 2010 – The Delhi High Court rejects a public interest
           ders of SEBI are set aside later by the Securities Appellate Tribunal     litigation petition on the NSDL matter.


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