IPO Scam

by Kuppusamy Chellamuthu

During my high school days, we had gober gas facility for our farm house. That more than sufficed cooking gas needs of our family. We never really needed kerosene that we could get at subsidized rate with our ration card. There were many other such farmer families in our hamlet. Kerosene quota of these families was used by others who did not have this bio gas setup for themselves. The needy would borrows ration cards and utilize the provision available on the cards. This is not a bigger sin as long as it is used for family!! How about a big provisional store owner fabricating multiple ration cards with various names (with the help of greedy card issuing authorities) to obtain goods at damn cheap rate and consequently sell thee same with high margin on the same day or in a week?? This kind of act is not only unfair but also unforgivable. You are misusing the quota that is meant for needy people.

Recently heard Initial Public Offer (IPO) scams are not too different. In every IPO, retail investors get 35% quota of the issue size. If the issue size of say Rs1000 cores, Rs350 crores are to be offered to the retail investors. A retail investor by definition can apply for maximum of Rs.1 lakh. If some one who is rich wants to apply to the tune of Rs 50 lakhs, he would come under non institutional investor category. Quota for this section is roughly one third of retail section and also the demand (from such wealthy people) would be high. The chances of getting allotment owing to oversubscription are very minimal. On the other hand if he could find 50 retail investors who don’t apply for this particular IPO? He cold pretty well (like the ration card borrowing example) requests his 50 friends to apply Rs 1 lakh each on their account on his behalf. This way his chances of getting more shares are enhanced. Is it not a pain to go after 50 worthless people for this high network individual for the sake of an IPO? Answer might be a probable YES. What about opening 50 bogus demat account with fake names?? If the officials involved – like out ration card issuing authorities – help in opening such multiple accounts, his mission is accomplished.

For any one to have a demat account, there should be a savings bank account attached to it. For people who open trading accounts in ICICI, you get saving bank a/c, demat a/c and trading account in one go with one company. Unlike ICICI, many brokers who only operate demat and trading accounts don’t have banking business on their own (example Karvy). Even if Karvy aggress to open multiple bogus accounts for you, it is imperative to have multiple banking accounts with some bank. You need to know some one at such banks who can open accounts on non-existing people’s names. Banks need photo, names, signature, etc to have an account with them.

A lady Rupal Panchal and her associates commenced a photo shop and offered free photos as part of their promotional (???) initiatives. Rushed with such an offers people took free photos from the mentioned studio. Studio successfully mobbed thousands of faces for them to use. With photos collected this way, they opened saving accounts with various banks and demat accounts primarily with Karvy, a Hyderabad based stock broking firm. From a single address she was able to have more than 5000 demat accounts. She massively applied from all these accounts to the YES bank and IDFC IPO, transferred allotted shares to a single account a day before listing & massive sell on the first day of listing. Set ready for next IPO……

After many investigations SEBI came out on 29-April-2006 heavily on Karvy, India bulls and some other brokers. Look at a report:
“ Some of the demat accounts that were used to manipulate allotments in the initial public offer of Yes Bank and IDFC were opened during 2003, and not in the last year as was earlier believed. The first IPO in which the key operators have participated was that of Maruti Udyog Ltd, in June 2003, though the number of fictitious demat accounts were not very high then, the interim order from Securities and Exchange Board of India has said.”

This could have been avoided if the IPO lead manager had checked all applications with the same address (may be more than 6 or 7 as various members of the same family can apply for same IPO). The banks and brokers clearly violated KYC (know your customer) norms before opening such accounts. It often takes a scam to tighten the rules – leave alone reform - to create a fair system for common retail investors. Even ICICI bank opened few such accounts and it was let go free with a fine of Rs 5 lakhs. How fair??? Nonetheless the SEBI order is most solicited; though late, it did occur.

If you find some delays in opening a new account due to reasons like first name & last name mismatch, address mismatch, sign improper, PAN card not present etc, you are not alone. Another rule is in place to block off market transfer before the day of listing. These should be in the best interest of none but people like us.

In the coming days, we have no choice but to believe that (# of times) oversubscription legitimate. It better be!!!!