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