Mumbai, May 5: The Securities Appellate Tribunal (SAT) has set aside the order of market regulator Securities and Exchange Board of India (SEBI) against Karvy Stock Broking to ‘disgorge’ alleged illegal gains made in the initial public offer (IPO) scam during 2003-2005.

Earlier, Sebi had directed 10 entities, including Karvy Stock Broking, to disgorge (give up profits made by illegal acts) about Rs 115 crore. Karvy’s disgorgement is estimated to be around Rs 50 crore. In the scam, certain entities cornered IPO shares reserved for small investors by making benami applications in the retail category through thousands of fictitious applications. Karvy had contested the Sebi order, arguing it was not the beneficiary.

In its order issued on May 2, SAT has come down heavily against Sebi, which had asked two depositories and their participants to disgorge illegal gains made by them even when the regulator had found that it was the financiers who were the ultimate beneficiaries of the IPO scam.

“We cannot resist expressing our anguish over the irrational manner in which the board (Sebi) proceeded to pass the impugned order only against the two depositories and their participants,” SAT said.

According to the tribunal, Sebi itself had found that the financiers of the key operators were the ultimate beneficiaries of the scam. The regulator went on to identify 82 financiers and even computed the illegal gains made by some of them in that order. Yet, according to SAT, Sebi issued no directions to them to disgorge the illegal gains made by them. Instead, the two depositories and their participants against whom enquiries are pending have been ordered to disgorge the entire amount of illegal gains without even recording a finding that they made any such gains, SAT said.

“If the illegal gains were made by financiers it was they who ought to have been directed to disgorge the amount. One is left guessing why the board did not issue such directions to them. It did not even initiate disgorgement proceedings against them for reasons better known to the board,” SAT said. After identifying the financiers who were the ultimate beneficiaries of the scam, the board turned a Nelson’s eye towards them and chose to proceed against the depositories and their participants and that too, ex-parte which, to say the least, was most unfair, SAT observed.

“What is really amazing is that the board has noticed the correct position in law of the impugned order but did not follow the same and ordered disgorgement against those entities against whom no findings of ill-gotten gains have been made, leaving out those against whom such findings had been recorded in the ex-parte order of April 27, 2006,” SAT said.