'NSDL, CDSL were aware of multiple a/cs since 2003'

IMPACT OF SEBI INTERIM ORDER ON DEMAT SCAM

The Securities & Exchange Board of India (Sebi) has castigated depositories and NSDL in particular, saying they were aware of the possibility of multiple accounts as early as 2003.

Moreover, they had not put in place a system to detect such accounts or take appropriate action, particularly in the case of HDFC Bank and Karvy Stock Broking, the regulatory body said.

In doing so, the depositories failed to conduct themselves in a manner which is in the interest of investors and the securities market, it said.

In its summary of findings, relating to role of depositories in the IPO scam, Sebi has called depositories' inspection of depository participants, casual, cursory and perfunctory.

Coming down on their inspection systems, Sebi has said the depositories were aware of the possibility of existence of accounts being opened without proper Know Your Customer (KYC) Process as early as 2003. Moreover, they had not put in place a system to detect such accounts and take appropriate action.

Sebi issued a detailed 252-page investigation report Thursday night, which for the first time catalogues the modus operandi behind the multiple account IPO scam as well as the complicity of the banks and depository participants.

The report is based on extensive audits conducted on scores of financial market players. Sebi has barred or banned most of the 24 operators from either participating or accessing the market.

In its report Sebi has said that NSDL was thus aware of irregularities in connection with opening of accounts from year 2003. "This is evident from the inspection report of HDC Bank, Karvy Stock Broking. They failed to take prompt action against DPs and failed to inform Sebi of the same," the report says.

Sebi has said there is a recurrence of errors relating to account opening "as noticed in inspection after inspection and NSDL has commented on them in their reports year after year. "However, says Sebi in its report, the same error recurs and the cycle goes on. "This has made non-compliance. while account opening. a regular feature," Sebi said.

The report also says NSDL's sample size chosen during its inspections is `woefully' inadequate'. Moreover, NSDL had not taken appropriate penal action against DPs for repetitive violations by them, as observed during inspections.

NSDL's action has never gone beyond imposition of monetary penalties. As for CDSL, the other major depository, Sebi says, their inspection reports were not indicative at all. From the inspection report, it is very difficult to draw a conclusion as it is in a 'Yes' and 'No' format.

Sebi also charged that the depositories did not `apply' their mind themselves while conducting the inspections.

"The way in which the penalty was imposed and then again waived when the DPs submitted a paper saying they have complied shows a callous attitude towards statutory requirements by depositories," Sebi stated.

Particularly so when the accounting opening deficiencies recur among the large percentage of the sample collected during all inspections from 2003-06, the report added.