Sebi cracks the whip, bars 24 players

In what is being seen as its sternest order ever, market regulator Securities and Exchange Board of India (Sebi) today cracked down on manipulation and systemic failures in the demat scam that has compromised the initial public offering (IPO) system. In a scathing, 252-page interim order, Sebi has banned 24 key players—including Indiabulls Securities and Karvy Stock Broking—from operating in the stock market. It has also banned 12 depository participants—or DPs, including HDFC Bank and IDBI Bank—from opening fresh demat accounts. DPs are the link between investors and the two central depositories. Sebi said it investigated the abusive practices in 105 IPOs during 2003-05, from Maruti’s public offer to Suzlon Energy’s issue, and all those involved in the IPO scam will be prosecuted. “In view of the grave emergency arising out of the conduct of parties with the added risk that such devious practices, if unchecked, would be continued with impunity in future, there is a need for immediate regulatory intervention,” said Sebi whole-time member G Anantharaman. The immediate implication for investors is that Indiabulls, a big financial services group with 250,000 clients, and Karvy, a leading firm in IPO management services and stock broking, won’t be able to operate in the capital market. Indiabulls, for one, has said it will appeal the order. Other players are also expected to appeal within the stipulated period of within 15 days. Sebi also directed National Securities Depository Limited (NSDL) to conduct inspection of 15 DPs and submit a report within a month to verify whether all the demat account holders of these DPs are genuine and know-your-customer norms have been followed. These DPs include Kotak Securities, ICICI Bank, Standard Chartered Bank, UTI Bank and Citibank. Apart from Indiabulls, the infamous Roopalben Nareshbhai Panchal, Sugandh Estates and Investments Private Limited and Purshottam Budhwani are among the 24 entities/persons— who functioned as key operators in various IPOs during the years 2003 to 2005— banned by Sebi. Sebi said that many of these 24 entities made further off-market transfers to other entities, indicating that they themselves must have acted as intermediaries for their financiers, who appear to be the ultimate beneficiaries. The regulator also banned 85 financiers of these master account holders from buying, selling or dealing in securities market including in IPOs, directly or indirectly. The harshest words have been reserved for two key players in the IPO process. “In view of the detailed findings against Karvy DP and Pratik DP in this order...(they) prima facie do not appear to be fit to deal in securities market as Sebi-registered intermediaries. Appropriate quasi-judicial proceedings are being initiated against the two DPs,” Sebi said. It has banned them from the market till the completion of enquiry and passing of final order. Since the other business groups of Karvy have appeared to have acted in concert in the gamut of the IPO manipulations, Sebi has directed Karvy Stock Broking Limited Karvy Computershare Private Limited Karvy Investor Services Limited and Karvy Consultants Limited not to undertake fresh business as a registrar to issue and share transfer agent, excepting those businesses already contracted as on date. “There is a heightened investors’ concern on the IPOs as reflected in the tenor of demands made on Sebi and the same calls for a timely response from Sebi as regulator to restore the confidence of the retail investor,” Anantharaman said in his order. In sum, the scam broke in October last year, when Sebi found that certain entities had cornered IPO shares reserved for retail applicants through000 of fictitious and benami demat account. Once they got the IPO allotment, these fictitious investors transferred shares to their principals, who, in turn, transferred the shares to the financiers. Finally, the financiers sold most of these shares on the first day of listing, thereby realising a windfall gain from the price difference between the IPO price and the listing price. Sebi’s Stick • 24 entities banned from primary and secondary market, including Indiabulls, Karvy Securities • Quasi-judicial proceedings against Karvy DP and Pratik DP, banned from the market • 12 DPs can’t open fresh demat accounts, including HDFC Bank, IDBI Bank, Central Bank, ING Vysya Bank, ILand FS and Motilal Oswal; 15 more under scrutiny, including ICICI Bank, Citibank, Stanchart • 85 Financiers barred from the market