Sebi unearths IPO fraud

Market regulator Sebi has unearthed large irregularities in the allotment of Yes Bank’s initial public offer (IPO) and directed the Nat...

Market regulator Sebi has unearthed large irregularities in the allotment of Yes Bank’s initial public offer (IPO) and directed the National Securities Depository Ltd (NSDL) to freeze more than 7,600 depository participant (DP) accounts for future IPO allotment process till further orders.

The regulator has decided to continue its crackdown on the alleged manipulation in the allotment process of the IPO and launch a formal investigation into the entire episode. The wide-ranging probe is expected to cover more IPOs where this kind of manipulation could have occurred, Sebi sources said.

According to Sebi’s initial estimates, these entities, which have been restrained for abusing the Yes Bank IPO allotment process, must have made a profit of Rs 1.70 crore in less than two weeks as they exited from Yes Bank counter within days of listing. They floated benami accounts, got the allotment in the Yes Bank IPO and dumped the shares, violating various rules.

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Sebi has asked 13 entities not to deal in Yes Bank shares and participate in ensuing IPOs, directly or indirectly till further orders. The entities are: Roopalben Nareshbhai Panchal, Devangi Dipakbhai Panchal, Seer Finance P Ltd, Excell Multitech Ltd, Zenet Software Ltd, Tauras Infosys Ltd, Rajan Vasudev Dapki, Barghav Panchal (HUF), Jayantilal Jitmal, Sugahdh Estates and Investments Pvt Ltd, Sujal Leasing and Finance Pvt Ltd, Ritaben R Rhakkar and Veenaben Thakkar.

Sebi also asked NSDL and Central Depository Services (India) Ltd (CDSL) to enhance their surveillance and also devise and put in place systems and procedures for identifying multiple dematerialized accounts of suspicious nature.

Coming down heavily on NSDL, Sebi whole-time member G Ananthraman in his order said, ‘‘It is a matter of concern that NSDL, which is a self-regulatory organization (SRO) and within whose regulatory domain Karvy-DP falls, could not detect in advance the apparently systemic deficiencies in Karvy-DP.’’

	Regulator-Talk

			• There is a likelihood that benamis and front entities may end up acting as conduits for laundering of ill-gotten funds • Preliminary probe reveals allotment process in recent IPOs might have been abused • The modus operandi is telling on the rights of retail investors as it encroaches this category in the guise of small investors • Asks NSDL and CDSL to up surveillance

Sebi also directed NSDL to undertake a comprehensive inspection of Karvy Stockbroking, particularly focusing on the systems and procedures, if any, put in place by it for implementing the ‘know- your-client’ (KYC) norms that DPs are required to follow. The regulator said NSDL should should also ascertain from Karvy the particulars of other potential benami accounts.

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According to Sebi, further probe is required to examine the systemic fault, if any, of the registrar Karvy Computershares and the lead managers DSP Merrill Lynch and Enam Financial Consultants in identifying and weeding out the benami applications.

Sebi has also alerted the RBI on the issue and a reference has been made to examine the role of Bharat Overseas Bank (BOB) and Vijaya Bank in opening the bank accounts of these benami entities and funding their IPO applications.

The alleged malpractice came to light when Sebi found that one investor Roopal N Panchal had transferred 9.31 lakh Yes Bank shares to various entities prior to listing and commencement of trading while in the IPO, she had applied for only 1,050 shares by paying Rs 47,250, bidding at Rs 45 per share.

Another entity, Sugandh also followed the same modus operandi and applied under the retail category. But ultimately it had also transferred 1.95 lakh shares to various entities before the listing.

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In the case of Roopal Panchal, there were 6,315 entities (benami/fake) having different DP accounts with Karvy DP, who transferred their allotment to Panchal and associates.

While in the case of Sugandh, there were 1,315 entities (benami/fake) having different DP accounts with Karvy DP, who transferred their allotted shares to its three associates Sujal Leasing, Raita Thakkar as well as Veena Thakkar.

The Yes Bank IPO opened on June 15, 2005, and its shares were listed on the stock exchanges on July 12, 2005.

The retail portion of the YBL IPO was oversubscribed by 9.96 times while the non-institutional portion was oversubscribed by 43.68 times.