A panel appointed by the capital market regulator has recommended further strengthening of the framework for depositories to avoid a repeat of the widespread misuse of the systems witnessed between 2004 and 2007,which ultimately led to the IPO irregularities scam.
According to persons familiar with the development,the panel has already prepared its interim report that deals with the inspection aspect of the depositories and has recommended steps to improve the inspection procedures. The interim report has reviewed and recommended improvements in systems like the delivery slip mechanism and whether currently there is any scope for misuse or forgery by the employees, said a person privy to the developments.
The panel has also suggested changes in the safeguards that are now used while opening new accounts and the kind of documents that depositories demand from DPs (depository participants), he said on conditions of anonymity. The panel,which was set up in December 2012,has also recommended increased use of technology to plug many of the loopholes.
The report assumes significance since this is the first time that Sebi would review the depository framework since the IPO scam
report highlighted the drawbacks within the depositories leading to a large number of fictitious accounts being opened to garner shares during an IPO.
The interim report is only the first stage of the committees mandate and the panel members would soon embark on a visit to other countries to study the functioning of their depository framework and,thereafter,recommend changes to the Indian system. According to sources,the final report will be submitted within 3-6 months. It is believed that the regulator would make public the final report to invite comments and feedback from various market participants.
Market participants say that while depositories have been strengthening their systems on an ongoing basis,there is a need to strengthen the guidelines so that entities cannot take advantage of any regulatory loopholes.
According to Sebi’s IPO scam report,the depositories turned a blind eye to deficiencies in the system which… led to the recurrence of error in account opening repeatedly,in a big way later.
While the regulator named National Securities Depository (NSDL) and Central Depository Services (CDSL) in
its probe report,the depositories challenged the findings at the Securities Appellate Tribunal (SAT).