SAT Sets Aside Orders Against NSDL and CDSL

In 2007, the Adjudicating Officer of SEBI had passed orders against National Securities Depository Ltd. (NSDL) and Central Depository Services India Ltd. (CDSL) imposing a penalty of Rs. 5 crores (Rs. 50 million) and Rs. 3 crores (Rs. 30 million) respectively. The adjudication arose out of the scam in connection with various initial public offerings (IPOs) during the period 2003-05 wherein certain investors submitted multiple applications so as to ensure allocation of shares in the IPO, and who then sold these shares in the market to make huge profits.

Both NSDL and CDSL filed appeals against the orders before the Securities Appellate Tribunal (SAT), and these appeals were allowed earlier this week by an order of SAT. The order sets out an explanation of the depository system and its workings in some level of detail. It appears that several discrepancies arose at the time of the opening of demat accounts by various investors with the depository participants. Although SAT recognizes that the depository participants are agents of the depository, on the fact of the case there was nothing to indicate any omission or failure of duty on the part of the depositories (here NSDL and CDSL), and hence they have been exonerated.

Further, SAT also questioned certain procedural aspects of SEBI’s investigation. For example, in arriving at its findings, SEBI relied on the report of an independent agency (ISec Services) to conduct a systems audit of NSDL. However, NSDL was never allowed to cross-examine the authors of the ISec report, and this was one of the grounds on which the adjudication order was set aside.

Although the SAT order is based largely on the facts of the case involved, it does set out some general principles governing the rights and obligations between the depository and depository participants, and the extent to which depositories are required to oversee and be responsible for actions of the depository participants.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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