labels: 2005, investment - general
Thousands of accounts, same investor — the art of manipulating IPOsnews
Rex Mathew
21 December 2005

Manipulators of IPOs are finding new ways to corner allotments to make a fast buck. SEBI has finally acted and has unearthed a racket involved in rigging IPOs. But a lot more needs to be done to clear the system.

The IPO market has been highly active this year, with a large number of issues hitting the market. Some of these issues have been very high profile; thereby raising investor interest in IPO's even more. Returns on some of these IPO's after listing have been nothing short of spectacular.

Because of the exceptional returns from IPO's, subscription levels for most of the issues have been very high. This has lowered the probability of getting an allotment. One has to be extremely lucky to get an allotment in an attractively priced IPO.

It was only a matter of time before this situation led to many fraudulent practices. The recent scam unearthed by SEBI last week, is one such instance where individuals and entities opened multiple demat accounts to get allotments in high profile IPO's.

SEBI investigated the IPO process of Yes Bank and has banned 13 entities from trading in its shares and applying for IPO's. The regulator has also asked National Securities Depository to investigate the role of Karvy Stockbroking, the depository participant in all these cases. SEBI has also requested the RBI to verify the role of two banks.

The most interesting case among these 13 individuals and entities is that of a lady called Roopalben Nareshbhai Panchal. She had submitted a bid for 1,050 shares of Yes Bank during the IPO but did not get any.

After the IPO was closed, but before the stock was listed, Roopalben received close to 9.5 lakh shares of Yes Bank from 6,315 demat accounts through off-market transactions. A day before the listing, she transferred 9.3 lakh shares to six different entities, again through off-market transactions.

Yes Bank shares were issued at Rs45 per share and on the listing day, the entities who received the shares sold 8.3 lakh shares at an average price of more than Rs61 per share. The profit for this group of entities works out to a clean Rs1.35 crore.

Another entity called Sugandh Estates received close to 1.98 lakh shares from 1,315 demat accounts before the stock got listed. Again before the listing, Sugandh transferred 1.96 lakh shares to 3 entities who sold the shares on the day of listing and made a profit of more than Rs32 lakh.

The mystery of multiple demat accounts
All the 6,315 demat accounts from which Yes Bank shares were transferred to Roopalben were with Karvy. Of these 6,315 accounts, 6,221 had the same address! This common address belongs to one Devangi Panchal, who happens to be Roopalben's sister.

Of the remaining 94 accounts, one address is shared by 50 and another address by 44.

Some depository participants, including Karvy, have tried to explain that having common addresses for different demat accounts is a widespread phenomenon. They contend that, sub-brokers who act as investment consultants for many retail investors open multiple accounts on behalf of their clients under the same address.

Individual sub-brokers with more than 6,000 clients! Sounds highly incredible when many full-fledged brokers on the NSE and BSE do not have more than a few hundred clients.

Even if it is true, the depository participant should not have allowed them to open so many accounts under the same address. SEBI has set some guidelines to be followed under a programme called 'Know Your Customer'. The depository participants are required to properly verify the identity of individuals and entities before they are allowed to open demat accounts.

A case of willful negligence by banks
All the 6,315 demat accounts from which Yes Bank shares were transferred to Roopalben Panchal had bank accounts with Bharat Overseas Bank, Worli, Mumbai. In the case of Sugandh Estates, some of the demat accounts which transferred the shares had bank accounts with Vijaya Bank.

Moreover, while bidding for the Yes Bank IPO, cheques having continuous serial numbers on one particular branch of Vijaya Bank were submitted towards application money. In other words, money came from the same bank account for all the applications.

The RBI has been stressing on the need for proper verification of customers before allowing them to have banking relationships. RBI also has a 'Know Your Customer' programme for commercial banks. This programme has been in existence for almost a decade now and banks are required to verify the identity of new customers diligently.

Despite all these, it is still very easy to open bank accounts with false identities. It is a known fact that commercial banks, in their eagerness to acquire new customers, relax the verification requirements considerably.

However, it is nearly impossible for an individual or group of individuals to open thousands of bank accounts with the same bank without the knowledge of the bank employees. It is not easy to individually take thousands of persons to a bank branch and open separate bank accounts, even over a period of time.

Even if they actually did take thousands to the branch to open accounts, the surprisingly large number of new accounts should have aroused some suspicion. Especially since most of these accounts had the same address! These days, when banks claim to have highly advanced software platforms, simple tasks like cross-verification of addresses of customers should not be difficult.

Small investors are always the losers
So far only one IPO, that of Yes Bank, has been investigated. This particular issue was oversubscribed close to 10 times. There have been other recent IPOs where the subscription levels have been much higher.

The high level of fraudulent applications increase the subscription levels dramatically and deny small investors an opportunity for allotment. In fact only very few genuinely small investors manage to get any allotment in these public issues.

After a few disappointing attempts, small investors will start ignoring IPO'sas they would see no point in applying for issues by paying application money upfront if the possibility of getting an allotment is negligible. This would lead to a decline in the depth of the new issues market. If the markets were to turn weak, future IPO's would find it difficult to attract enough bidders.

Post-listing price rigging continues!
SEBI is yet to investigate the unusual price movements after the listing of many IPO's. Some of these stocks have seen incredible price appreciation on very high volumes. Some of them are locked in the upper circuit for a few days after listing.

The small investors, who are disappointed at not getting any allotment, are enticed in to buying the stock from the secondary market. They often wait for a few days after listing, by which time the stock would have peaked. As these retail investors enter the stock, the big time manipulators exit.

This leads to a sell-off and the retail investors who managed to get shares during the IPO also start exiting. The leads to the stock being locked in the lower circuit for a few days. By the time the sell-off subsides and the price stabilises and retail investors who buy the stock after the listing lose money.

The sad fact is that, these suspicious price movements have become a regular feature over the last few months — yet, neither SEBI nor the exchanges have investigated them.

SEBI and the exchanges urgently need to become pro-active in checking the unhealthy practices that sprout in the market from time to time, or else the new issues market would become moribund as happened during late '90s and the early part of this decade.

also see : Other reports by Rex Mathew

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Thousands of accounts, same investor — the art of manipulating IPOs