More than a demat scam

The order of the capital market regulator, the Securities and Exchange Board of India, against several firms and individuals who have participated in the so-called demat scam was both comprehensive and unprecedented in its stringency. Although the rigour of the punishment a ban on participating in one or more capital market activities for which they have a regulatory licence was toned down slightly the next day, it is clear that a strong message has been sent to the stock markets, intermediaries as well as investors. The regulator will act swiftly and impose deterrent penalties to check stock market manipulations. The practice of cornering shares in the quota earmarked for retail investors in public issues of shares, especially those that are expected to appreciate quickly, has been in vogue for long. Even the modus operandi used by the unscrupulous entities submission of applications in fictitious names as well as multiple applications has remained the same over the years. The capital market regulator after investigating 105 recent public issues has come to the conclusion that serious violations of the relevant laws and regulatory rules have occurred. Specifically in the two successful share offerings of the Yes Bank and IDFC, there has been ample evidence pointing to the malpractices for which certain key operators, their financiers and depositories are accountable. The capital market that is now striving hard to maintain a high standard of integrity and transparency has a great deal to lose because of such manipulations. Retail investors suffer because their chances of getting share allotments go down drastically. The indicted parties are certain to go on appeal. Capital market regulation will benefit if important principles are established at the appellate stage. For now what is most disquieting is that nearly all the entities named are among the leading players in their respective spheres. That even banks should flounder in so elementary a procedure as identifying their customers is baffling. Technology adaptation has considerably enhanced the efficiency and transparency of the stock markets, extended their reach, and improved surveillance over them. Yet SEBI's investigations have found that000 of demat accounts could be opened with the same postal address in one branch of a depository participant. Ironically, technology that made paperless holding of shares possible has not been used to detect one of the more elementary malpractices. The demat scam and, more pertinently, the regulator's resolve to check abuse represent an important stage in the functioning of the market. Yet, stock market behaviour in the wake of the SEBI order has been intriguing. After plunging 500 points on Friday morning when news of regulatory action was first received, the benchmark indices recovered during the day and closed for the week on Saturday on a very strong note. One hopes that the market is not demonstrating its habitual cynicism.