For over a year now, the media has been writing about how the Securities and Exchange Board of India (SEBI) has suppressed an order of a two-member bench, comprising Dr Mohan Gopal (who heads the NationalJudicialAcademy) and V Leeladhar (former deputy governor of the Reserve Bank of India). Finally, on 9th November, when SEBI released the order, it turned out that there were in fact three orders—only one was related to the IPO scam, the other two date back to 2003 and thereabouts. The other two were in connection with National Securities Depository Ltd’s (NSDL) role in the DSQ Software case and that of Rajnarayan Capital Market Services Ltd (RCMSL) which was a depository participant (DP).
The DSQ Software order was declared null and void by SEBI's board because it has allegedly criticised the regulator too. The one against Rajnarayan was ordered to be served on the parties, including NSDL. What were these two cases all about? The media seems to have buried them, although the DSQ Software scam made news for years and its owner, Dinesh Dalmia, has been languishing for over three years in a Chennai Jail.
The DSQ Software case and the Rajnarayan case have remained hidden from the media for almost six years. If the SEBI board finally released these orders, it is only because of a public interest litigation filed in the Andhra Pradesh High Court. Here is what they say.
The Rajnarayan case: The case pertaining to RCMSL dates back to 2003 when NSDL renewed registration to the firm although it did not meet the networth criteria. NSDL then took 30 months to terminate the firm as a depository participant (DP) and, during this time, it failed to prevent unauthorised transfer of securities of beneficial owners from the DP account to a pool account. It did not even deactivate the Depository Pool Module terminal for one-and-a-half years after termination.
Meanwhile, a director of RCMSL had quietly opened a beneficiary account in his own name and transferred client shares to that account. Instead of taking action against the DP under its own rules and byelaws, NSDL kept writing to SEBI to initiate action. The Gopal-Leeladhar order finds a lack of urgency on the part of NSDL in dealing with the problem; it says that unauthorised transfer of securities from the account of beneficial owners and delay in detecting and correcting such transfers constitutes a failure to protect investor interest. It has directed NSDL to conduct an independent assessment of its systems and procedures and initiate remedial measures to ensure there is no repeat of this lapse. While the order has finally been served, the reason for SEBI's excruciating slowness in dealing with the issue and how it was kept out of the public domain is a big mystery.
DSQ Software:The findings of the Gopal-Leeladhar bench in the DSQ Software fraud are extremely interesting. It has examined in detail the charges made by SEBI as well as NSDL's explanation of its role. In this case, NSDL had rushed to dematerialise 1.3 crore shares allotted on preferential basis to four entities, without verifying if they had obtained listing permission, and allowed them to be delivered in settlement. As it turned out, the preferential allotment was a big scam and Mr Dalmia had even doubled his capital without bothering to inform the stock exchanges. NSDL too did not verify facts.
How did NSDL believe whatever was claimed by DSQ Software regarding its preferential offer without verification? In fact, it even dematerialised 30 lakh shares issued as employee stock options and failed to ensure even the one-year lock-in mandated by the regulator. NSDL's argument that it is a mere record-keeping agency and not bound to exercise due diligence is rather flimsy. The Gopal-Leeladhar bench has correctly refused to accept this. It points out that NSDL's "erroneous and excessively narrow view" that it is a mere operator of the depository system is incorrect. It asks NSDL to conduct an internal inquiry and fix individual responsibility for failure to put in place appropriate systems to ensure that securities not approved for listing are not delivered in settlement.
The bench also questioned SEBI’s failure to regulate NSDL effectively. In fact, those of us who have been following the capital market very closely, think that SEBI has been at pains to ensure that nothing about DSQ Software or the Rajnarayan case was ever allowed to leak into the public domain—there have only been occasional and vague reports about NSDL having even been questioned in that case. Isn't it ironical that SEBI has again buried this issue by declaring it null and void on the frivolous plea that the bench went beyond its terms of reference in criticising the regulator? According to the SEBI press release on 9th November, the full SEBI board will look at issues pertaining to the IPO scam and DSQ Software and dispose them. Well, we will wait and watch if the full SEBI board dares to punish NSDL after having worked overtime to shield it and its former chairman, CB Bhave.