Laundering initiatives hit by IPO scam, feel bankers

Bankers have admitted that lapses at bank branches that led to manipulation of IPO allotments, have completely undermined the Reserve Bank of India's (RBI) anti-money laundering (AML) initiatives.

Several senior bankers said total neglect of know your customer (KYC) norms, which form part of the AML plans, helped Roopalben Panchal and her accomplices to perpetrate a fraud on the public issue allotment process.

The Securities and Exchange Board of India (SEBI) too has put the entire blame for the fraud on the banking system.

"But for the opening of benami depository and bank accounts in gross disregard of KYC norms, the IPO issue would have stayed on course without such underbelly of glaring distortions," SEBI said in its interim report on the abuse of the process in the Infrastructure Development Finance Company's (IDFC) IPO.

The chairman of a large public sector bank said, "Our staff is just accustomed to having a look at the documents submitted and it has no reason to doubt their genuineness. If a person approaches us to open an account, we do not go back to our records to check if he already has an account with us or if there is another account with us with the same address."

The stock market regulator, Sebi says the public issue allotment process is "tried and tested" and the only reason it derailed in the case of some IPOs is the failure of the banking system.

The chief executive of a leading private bank said "it is easy for banks to undertake strict KYC procedures in case of savings accounts. When it comes to thousands of demat accounts, it is a herculean task for banks to undertake a similar due diligence. This is a loophole, which needs to be addressed."

Roopalben, Purshottam Budhwani, Sugandh and Manojdev Seksaria had "mastered the art of taking full advantage of the loopholes at banks," said the chief executive of another private sector bank.

The modus operandi was to transfer shares received by benami allottees in an IPO to their principals, who in turn transferred the shares to the financiers that had originally made available the funds for executing the game-plan.

The financiers in turn sold most of these shares on the first day of listing, thereby, realising windfall gains on difference between the issue and listing prices. In the Process, a chosen few virtually monopolises the retail segment, by elbowing out genuine retail investors.

Citibank, Centurion Bank of Punjab, IndusInd Bank and Industrial Development Bank of India (IDBI) too figure in the list of banks that were used as conduits.

One of the key figures in the scam, Budhwani, had 22 dematerialised accounts in Citibank, Centurion Bank and six other non-bank depository participants.

The other banks used in the IPO process manipulation included Bharat Overseas Bank, HDFC Bank, Indian Overseas Bank, ING Vysya Bank and Vijaya Bank.

In fact, the RBI went on record to say that its investigations had already revealed that Bharat Overseas Bank was at fault.

"The detailed scrutiny by the Reserve Bank revealed that the (practice of) funding IPOs through multiple accounts was being followed by Bharat Overseas Bank," RBI said.

SEBI said banks played their part by opening bank accounts and providing a pro-tempore loan to these fictitious entities with the objective of earning interest and other charges.

"The entire problem is not with the allotment process, which has by and long come to stay as stable and secure, but the way in which banks and DPs (depository participants)in some cases have connived with the key operators in derailing the tried and tested process of fair and transparent allotment of shares in IPO," Sebi said.