SC scanner on Sebi's rejection of NSDL report

Ashish Rukhaiyar
Mumbai, 12 May 2011

With the Supreme court calling for explanations, the Securities and Exchange Board of India (Sebi) may come to regret its decision on the National Securities Depository Ltd (NSDL) matter. In 2009, the Sebi board had rejected a report by a two-member committee indicting NSDL in the Initial Public Offer scam.

C B Bhave was Sebi chairman and head of NSDL at the time of the IPO decisions. He had recused from the proceedings when Sebi took the decision, but there was considerable controversy when the report was rejected.

On Monday, replying to a notice from the apex court, Attorney-General Goolam E Vahanvati said the market regulator’s board had, in an April 26 meeting, decided to reconsider the special committee’s report, that had indeed found NSDL to be at fault. With the matter gathering steam, a letter written by G Mohan Gopal to the Prime Minister’s Office in December last year has also come into focus. The letter surfaced after a Right to Information (RTI) application was filed in March. It has some damning allegations about the way the NSDL investigation was conducted.

Gopal was part of the committee formed by Sebi to oversee the conduct of proceedings against NSDL. He has mentioned four structural issues in the letter — inadequate transparency, public accountability and parliamentary oversight, lack of protection against conflict of interest, ineffective framework for law enforcement and outdated governance structure — which led to this “abuse of power”.

GRAVE CHARGES
He further alleged he was “threatened” when he objected to the “illegal and unethical actions” of the board. “An informal clique of current and serving bureaucrats, Sebi officials, lawyers and corporate interests orchestrated this subversion of the due process of law. They illegally interfered with an independent Sebi adjudication, manipulated legal opinion, suppressed and misrepresented facts and misled the Sebi board and government officials about the legality of the orders,” says the five-page letter.

In 2008, Sebi formed a two-member committee comprising Gopal and V Leeladhar, former RBI deputy governor, to take over and dispose the then, ongoing quasi-judicial proceedings against NSDL. The committee was formed after Bhave recused himself from the proceedings against NSDL as he was its former chairman and managing director.

According to Gopal, currently director of the National Judicial Academy, Sebi’s stance on the NSDL matter took a U-turn after Bhave became the chairman. “...Every single investigation prior to Bhave joining Sebi had found failures in NSDL’s role under his (Bhave) leadership during the IPO scam. After Bhave took over, however, there has been a stunning reversal of Sebi enforcement actions against NSDL — all Sebi actions against NSDL in relation to the IPO scam have been stopped, dropped or reversed,” it says, adding that “Sebi-under-Bhave” exonerated “NSDL-under-Bhave”. “The court can direct Sebi to set aside the earlier order,” said a securities lawyer.

The main problem, according to experts, was the setting aside of the final order given by the two committee members. “The two-member committee was not formed to give recommendations but pass the final orders. It was illegal on Sebi’s part to set it aside, as it is not bestowed with such powers. So the Supreme Court can say that what you did was illegal and set it aside,” he explained.