New Delhi: Sebi has asked NSDL to conduct an independent audit of its functions and take corrective steps, as the capital market regulator has decided to implement an order revealing lapses at the depository during the stocks scam of 2002-06.

NSDL has been asked to complete the audit by January 2012 and inform the Securities and Exchange Board of India (Sebi) about the proposed corrective steps by April.

A senior official said that Sebi, in its last board meet, decided to release the orders of a sub-committee looking into NSDL's role in the IPO scam and another case of irregularities in dematerialization of the shares of a company.

In 2009, Sebi had dismissed these orders as non-existent, but agreed to revisit that decision after being asked by the Supreme Court to do so in March this year.

After reconsidering its earlier decision, Sebi decided on July 28 to implement the order passed more than two years ago.

Sebi informed the Supreme Court on last Friday about this decision, the official said.

As per the board decision, Sebi has asked NSDL to comply with the orders of the sub-committee, he added.

Officials from NSDL, the country's leading depository that enables holding of shares and other securities in demat or electronic format could not be contacted for comments.

NSDL has been asked to conduct an inquiry within six months, from July 28, to establish individual responsibility for its failure in meeting legal duties in the two cases, submit the inquiry report to Sebi and then take the follow-up actions within three months.

NSDL has been also asked to conduct an independent audit of its various systems and operations within six months, and then inform Sebi within three months about a "comprehensive set of proposed measures to correct any deficiencies".

The orders, in the two different cases, were passed by the Sebi committee in December 2008, but were later dismissed as "null and void" by the board of the market regulator.

The irregularities during 2002-06 by NSDL relate to cases of the IPO scam and trading in unlisted shares of a company, DSQ Software, after irregular dematerialization.

The committee, comprising the then Sebi board members G Mohan Gopal and V Leeladhar, was formed in 2008 to look into NSDL's role and had found lapses on the part of the depository and had asked NSDL and Sebi to take corrective measures.

However, Sebi had dismissed the findings saying that the committee breached its mandate in making these charges.

Besides, Sebi had also dropped its proceedings against NSDL in the DSQ Software matter, where the depository was charged with lapses in dematerializing 1.30 crore shares of DSQ Software, which were later sold in market without listing.

With Sebi having implemented these orders, NSDL would have to comply, unless it decides to challenge them.

This is the first instance of Sebi revisiting an issue previously dismissed by it, as also an unprecedented case of the regulator being open to a report wherein its own role was criticized.

Commenting on the development, a former Sebi board member said that it was a welcome move as the regulator has accepted the need for its own introspection and has opened up to its own criticism, at least by its own committee.

He said that conflict of interest was becoming a major issue for the market and regulators like Sebi can send a strong message by taking strong actions in such cases.

Sebi had declared the committee's probe into the matter as 'non-existent' at a time when NSDL's former chief C B Bhave was serving as chairman of the regulatory authority.

Bhave served as Sebi chairman for three years till February 17, 2011. Prior to joining Sebi, Bhave was heading the country's leading national depository.

While Bhave had rescued himself from the meetings whenever the NSDL matter was discussed, it was alleged in the court petition that he might have influenced the decision of other Sebi board members.

NSDL came under scanner in 2006 in connection with the IPO scam, wherein various entities had fraudulently cornered shares reserved for retail investors and sold them later after the listing.

The depository was accused of not following best practices to detect opening of thousands of fictitious accounts in the name of retail investors for share allotment in IPOs between 2002 and 2006.

After investigating into the matter, the Mohan Gopal Committee submitted in December 2008 that NSDL failed in its duty and also made adverse remarks about the manner in which Sebi had handled the issue of IPO scam.

The matter reached the Supreme Court earlier this year after a special leave petition was filed in the apex court against Sebi's rejection of the committee report.