In a cleft stick

The case relating to NSDL has taken some curious turns, and put the stock market regulator and especially its chairman in a difficult spot

The case relating to the National Securities Depository Ltd (NSDL) has taken some curious turns, and put the stock market regulator and especially its chairman in a difficult spot. Before taking charge at the head of the Securities and Exchange Board of India (Sebi), C.B.Bhave had been at the helm of NSDL, which Sebi had found guilty of various failures that facilitated the scam related to multiple fictitious applications to corner shares issued through public offers. Thousands of “benami” accounts had been opened at NSDL (as well as at another depository), leading to the charge that NSDL had failed the KYC (or Know Your Customer) test. Mr Bhave had been reluctant to move over to Sebi because the NSDL case had not been settled, and he was persuaded by the government to do so after an arrangement was worked out in which Mr Bhave would not be involved in Sebi’s future handling of the NSDL matter. Also, a special committee was appointed to look into NSDL issues. While Mr Bhave’s appointment was generally welcomed, this was an unusual way to organise matters. And now the chickens are coming home to roost.

Sebi, acting ex parte, had been critical of NSDL’s failures, imposed a fine, and asked the depository to revamp its management. These orders were set aside by the appellate authority subsequently, it being held that Sebi had no power to ask for a change of management, and that the imposition of a fine was a violation of natural justice as the defendant had not been given a hearing. Sebi has the option of filing an appeal against these orders by the appellate authority, passed some time ago, but has not done so as yet—and this puts its chairman in a difficult position. For, although Mr Bhave is not involved in Sebi’s handling of the NSDL case, the challenge is for Caesar’s wife to also appear innocent.

That is not all. The special committee set up to go into NSDL matters submitted its report last December. While the report has not been officially released, it is widely believed to have been quite damning in what it says about NSDL. The failure to make this report public, and the inaction on it for four months, tied in with the failure to file an appeal against the appellate order, followed now by dissension within Sebi on how the special committee’s report is to be treated, has created a piquant situation, the seeds of which lie in the arrangement that was worked out when Mr Bhave was appointed Sebi chairman. At issue within the Sebi board (which appears to be divided) is whether the special committee has overstepped its mandate in asking for responsibility to be fixed for past failures, and in the light of this how the report should be treated. Legal opinion is being sought, and then the next steps will be taken.

If eventually the committee’s report is accepted, Mr Bhave’s position as Sebi chairman could become very uncomfortable indeed. If the report is rejected or simply kept under wraps, his position may be no better because the conspiracy theorists have not gone away. Mr Bhave, being an honourable man, may feel tempted to quit, but may be held back by the thought that doing so might be seen as an admission of guilt. So, whichever way this turns out, he is caught in a cleft stick. Sebi’s own position is little better, because it has to worry about its reputation as an effective and impartial regulator.