The Securities Exchange Board of India, on 27 Apr 2006, unearthed a big scam in the primary market. The regulator came down heavily on the intermediaries (such as Karvy, Indiabulls, among others) for their alleged involvement in the fraud.
In an interim order released last evening the SEBI said -
In the recent past while examining off-market transactions in the IPOs of Yes Bank Ltd. (‘YBL’) and Infrastructure Development Finance Company Limited (‘IDFC’), it came to the notice of SEBI that certain entities had cornered IPO shares reserved for retail applicants by making applications in the retail category through the medium of thousands of beneficiary accounts in the name of fictitious/benami entities with each of the application being of small value so as to be eligible for allotment under retail category. After the allotment, these fictitious/ benami allottees transferred these shares to their principals who in turn transferred the shares to their financiers. Most of these shares were sold immediately on listing.
The entire order can be downloaded from here.
SEBI pulled up some of the best known banks in the country, namely - HDFC Bank, IDBI Bank and ING Vyasa Bank. These banks are also banned from opening fresh demat accounts. So much for the clean image that these banks carry on their shoulders !!
However, I think the bigger problem is not these entities (ie. either pple like roopalben, karvy or the aforesaid banks), but the whole system of quotas (for eg. 25% for retail participants, 50% for institutional investors, etc.) in IPO allotment. I think there is great incentive for pple to apply for shares in IPO via multiple accounts (fictitious or otherwise). Even my 15-yr old cousin could comprehend the way out for non-allotment of shares during IPOs - put more applications. Multiple applications simply increase the probability of individuals getting some shares during the allotment process.
Possible solution (or is it ?)
What if we revamped our IPO process to something like what Google did last year, ie. can companies simply auction their shares without having to resort to any of the intermediaries and without having these quotas. They can be allowed to set a minimum price, but let mkt forces decide the final IPO price (instead of the weird book-building process with a tight price band).
Once the price is decided by the investors bidding for shares of a company, the allocation should be done on a pro-rata basis across-the-board. Further, large investors (QIBs or Institutional) be required to put up application monies upfront. Currently they are exempted from this. This system can (or rather I think it does) attract frivolous applications that can be used to artificially show higher demand. To summarise -
1.Shift the IPO process from a quota-based one to a pure auction process
2. Make allocations on a pro-rata basis
3. Let the market decide the final issue price, instead of the co. providing a small band (5-10%) which is really a mockery of the book-buliding and the price discovery process.
4. Make sure all entities pay application monies upfront, so as to avoid frivolous applications.