Let’s all share

What happened was that some ambitious and profit seeking entities, like the infamous Roopalben Nareshbhai Panchal, sensing that competition in the 15 per cent category was not going to allow them to get adequate shares to profit from, crafted a network to move to the 35 per cent category of retail investors. (The over-subscription level for Suzlon Energy, the last IPO to be investigated for IS 2006, for the non-institutional portion was over 40 times; the retail portion was over-subscribed by only six times. It doesn’t take a game theorist to decipher who got more shares.) Effectively, if a wealthy individual invested Rs 5 crore in Suzlon at one go, she would get, on a proportionate basis, shares worth Rs 12.5 lakh. The same money, if invested in the names of 500 false entities, would result in shares worth over Rs 83 lakh.

And if the objective of the exercise was to make immediate gains, that is, sell on listing, the returns multiply. While an institutional investor would, in this case, have got 2,451 shares, a retail investor would have got more than six times as much, or 16,340 shares. The profits for the former, if sold on October 19, 2006 at the closing price of Rs 692.85, would be Rs 4.5 lakh; that of the latter, almost Rs 30 lakh. In both cases, the return on investment would be 36 per cent in less than a month. Even if this was done just four times — not really indicative since it poured IPOs during this period, and the gains have been near about or more — an investment of Rs 10 lakh would be worth Rs 34 lakh in a year. While Roopalben and her financiers like Karvy Stock Broking made Rs 2.51 crore from Suzlon, between 2003 and 2005, their total gains added up to Rs 45.82 crore. Add all the players and the illegal profits from IPOs like NTPC, IDFC and so on rise to Rs 72.38 crore. To put this number in perspective, while a retail investor in the IDFC issue was allotted 531 shares, had this manipulation not taken place, he would have got 800 shares.

While that may be statistically insignificant, there’s more than numbers at stake here. Technically, Sebi has defined Roopalben as a key operator or a master account holder, who working through countless benami demat accounts, would work on behalf of financiers like Karvy who would invest the capital, corner shares allocated for retail investors and make listing gains. The flow chart is fairly simple: financier puts money on table, operator creates benami accounts, mis-invests the money, gets shares meant for retail investors, sells them for immediate profit and delivers profits to financier. Of course, there are layers and layers between these transactions — the depositories and their depository participants (DP), the banks, the brokers and so on. Passing through which, Roopalben and Co were able to flout know your customer (KYC) guidelines (a DP is expected to know its customer through a series of mechanisms like photo identity card, proof of address and so on).

And hoodwink the banking channel — talking about Bharat Overseas Bank, the order says: “The Bank meekly came under the leading strings of Karvy and in due course, a part of the manipulative assemblage and this continued so long as the Bank got its margins and revenues without any risk, while the risk of exposure to scrutiny was lost sight of in the burgeoning volume of business in several IPOs.” The order notes that a dozen big names in the DP business including HDFC Bank, Centurion Bank, IL&FS and ING Vysya Bank, have “grossly failed in adhering to KYC norms” and facilitated opening of demat accounts in fictitious/benami names; they have been directed not to open fresh accounts. It also found that Kotak Securities, ICICI Bank, Standard Chartered Bank and UTI Bank are among 15 DPs that had more than 500 demat account holders sharing common addresses and has directed NSDL to inspect them.

But while Sebi stands strong on research and rigour, it has an Achilles’ heel — its poor track record at SAT — where the first arrows are beginning to hit. Within a day, Sebi has stayed the order against Indiabulls, as the latter has contested it saying it is based on “factually incorrect data”. Will this ad interim, ex-parte order meet its nemesis at SAT? To be fair, the regulator has made efficient use of technology to strengthen its case. The minute detailing of names, addresses, bank account numbers, right down to a capital letters, spaces, full stops and so on, have been used to conclude, for instance, that Karvy fabricated documents, forged letters and made “a false appearance of having complied with the KYC norms”. Will this be contested too? The bigger question: what happens to reputations and businesses of companies as investors exit in 15 days?

For its own sake and for ours, Sebi had better get this order right.

gautam.c@expressindia.com