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No to unjust enrichment

The Securities and Exchange Board of India's recent order of "disgorgement" against the two principal depositories, NSDL and CSDL, and some well known depository participants for their role in the demat scam is unprecedented. In essence, the intermediaries who were named in SEBI's earlier interim order have been held responsible for causing losses to many retail investors and asked to pay Rs.116 crore within six months. A regulatory device of this nature, though resorted to frequently in the advanced markets, has never been used before in India. As explained by SEBI, its sole purpose is to prevent unjust enrichment at the cost of genuine retail investors. The logic that those who gained through unlawful means should be stripped of their gains is unexceptionable but a regulatory order based on it bristles with practical difficulties. SEBI's case rests on its own findings of rampant malpractices indulged in by the same set of people, principally rogue investors and financiers, aided and abetted by the depository participants and the depositories, in the booming market for initial public offers between 2003 and 2005. Its vastly improved surveillance helped in detecting the fraudulent practices that basically involved cornering of shares earmarked for retail investors. The modus operandi has been to open multiple demat accounts in the same names or even fictitious ones, evidently with the active connivance of the depository participants. With the chances of getting shares allotted thus considerably enhanced, the unscrupulous investors proceeded to book their gains even before the issues got listed.

The regulatory order seeks eventually to return the ill-gotten gains to the aggrieved genuine investors and this is going to be a thankless job. Of more immediate concern is to ensure that its order is upheld at the appellate level so that a valuable precedent is set. While the order penalises the market intermediaries, it expects them to proceed against the unscrupulous persons behind the benami/fictitious accounts — they are the people who have enriched themselves. A rash of civil suits is imminent and that might postpone a just denouement. Irrespective of when and how much they disgorge, the licensed intermediaries have been punished for their failure to uphold the most basic principles relating to account opening and monitoring. More than at anytime before, SEBI is demonstrating its determination to discipline one section of what has been a chaotic market and its participants.

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