Identify the bigger bandicoots

Unscrupulous promoters are the greatest beneficiaries of the IPO scam

Chalapati Rao Delhi

Yet another IPO scam has visited the Indian stock market. About a decade ago, it was the vanishing companies that duped the unsuspecting investors and collected huge amounts through the primary market. This time around, it is the turn of vanishing investors who robbed genuine small investors of a chance to get a fair share of primary market offerings. According to some reports, it is not SEBI, the market regulator, which got wind of the goings on; it is a fall-out of the income tax raids on an Ahmedabad businessman which revealed that he was controlling over 5,000 demat accounts. The 35 per cent reservation in a book-built issue for retail investors (maximum application money Rs 1 lakh for each applicant; earlier it was Rs 50,000) and the proportional allotment in case of oversubscription, makes this category attractive. Multiple applications improve the chances of allotment on the one hand and allotment of larger number of shares on the other. The scamsters tried to exploit this provision.

According to SEBI, certain entities had cornered IPO shares reserved for retail applicants by making multiple applications in the names of fictitious applicants. Once they got the allotments, these applicants transferred the shares to their principals who in turn transferred them to the financiers. The financiers sold most of these shares on the first day of listing, making windfall gains. SEBI’s investigation suggests that certain depository participants masterminded the opening of thousands of demat accounts by falsifying documents to facilitate the application process. For instance, at NSDL there were 21 depository participants (DPs) wherein 500 or more account holders were sharing common addresses and the total number of such accounts with these 21 DPs was 44,637.  There is every possibility of many more multiple demat accounts existing than what the SEBI investigations reveal. It has been estimated that through these operations the financiers gained about Rs 72 crores. The scam brought into focus the malfunctioning of many an intermediary: banks, depositories, DPs, brokers, sub-brokers and internal auditors. Often the scrutiny turned out to be perfunctory, bordering on connivance. To the extent SEBI was oblivious of these goings-on, which went on for at least three years, it could be held guilty of not playing its role properly.

Registration of multiple companies

SEBI’s scrutiny was based on common addresses of demat accounts and the inter se transfer of shares. Identifying relationship with common addresses could only catch some culprits. The perpetrators could use multiple addresses. It is also not necessary that all such shares would be sold immediately after the listing.  During the 1980s, some listed companies were moved like kitten, in groups from one place to another in Delhi.  Linkages through board of directors, inter-corporate investments, auditors, stock brokers and bankers to the issue could be established from Assam and Kolkata in the east to Ludhiana in the north and to Mumbai in the west covering on the way places like Kanpur and Delhi (obviously, all these have stock exchanges). Stock brokers seem to have played the central role in creating these networks. Multiple company registrations probably peaked in the 1990s. Kolkata indeed is notorious for multiple company registration.