Behind the scam

In one of its sternest orders ever, the Security and Exchange Board of India (Sebi) has barred 24 market participants from participating in the stock market for their role in the IPO scam. The market manipulators had put in more than one application per person by fraudulent means. Finance companies had helped them by allowing them to open multiple accounts, get allotments and make windfall gains. These companies failed to “know their customer” and turned a blind eye when multiple names were assigned to a single address as in the case of the Yes Bank IPO — Roopalben Panchal created000 of benami accounts. Sebi has taken action against those where more than 20 “individuals” have the same address and where more than 500 benami entities have transferred shares into a single account before listing. The regulator therefore had a clear case of fraud. The order is expected to give a strong signal to the market that manipulation will not be permitted. However, in a situation where the state does not have enough capacity to police every citizen and where there is no unique citizen identity, it will be difficult to expect Sebi to be able to undertake this huge task. In the absence of a biometric identity infrastructure where a unique individual identity is available from the Government of India for Sebi to enforce against multiple applications, it is necessary that the ministry of finance looks into the regulations which govern the IPO market. The quota for individual investors has created an adverse incentive structure in which people try to get allocations by all means, fair or foul, because the price at the first listing is higher than the price at which shares are allotted. This is rationing and the inevitable creation of a black market. India had black markets for sugar and cement when these were rationed. The black markets disappeared only when these items came to be sold in the open market. The way forward lies in changing the structure of incentives. This can be done by allowing all investors to bid for shares in an open auction. No amount of policing stopped gold smuggling, it needed a cut in custom duties that removed the incentives to smuggle, to get the job done.