Another fake demat scam under Sebi lens

Market regulator seeks details from Mumbai police on ongoing EOW investigation

The Securities and Exchange Board of India (Sebi) has written to the Economic Offences Wing (EoW) of the Mumbai police in relation to a scam in which fake demat accounts were used to defraud those holding shares in physical form.

A person privy to the matter said, “Sebi has noted the reports on the matter and written to the EoW for details.”

This is not the first time Sebi has probed a scam involving fake demat accounts. Between 2003 and 2005, the regulator had found discrepancies in 105 initial public offerings. At that time, fake demat accounts were used to corner shares meant for retail investors.

DEFRAUD VIA DEMAT

• Fake demats used in IPOs in early and mid-2000s to corner shares meant for retail investors
• Latest scam sought to use fake accounts to grab shares already owned by retail investors
• Victims held shares in physical form and were dormant, not claiming corporate benefits such as bonus issues
• Shares were converted to demat form, transferred to fake accounts and traded for profits
• Police has identified victims across five cities; the scam involved at least 76 different accounts

This time, fake demat accounts are said to have been used to corner shares already owned by investors, with dormant shares in physical form typically being the target. The scam identified those holding shares in physical form who had failed to claim benefits due to them through corporate action such as bonus issues. The holdings of these dormant shareholders would be transferred to fake demat accounts and traded for profits.

Often, these fake demat accounts were opened in the name of the original shareholders, using information, which police believed, was gleaned from registrar and share transfer agents (RTAs). In some cases, the accounts were opened using false identities.



Initial investigations revealed the fake demat scam affected investors in five cities and involved at least 76 different accounts. Investigators had found evidence of the scam in Vapi, Varanasi, Kanpur, Surat and Karnataka. The scam has been operational since 2007.

The police has been looking into the role played by RTA officials, as they believe personal information and signatures required to open fake accounts in the names of the original shareholders could come only from RTAs. An RTA acts as a record keeper, maintaining data on company shareholding.

The police had asked RTAs to submit various documents, including the transfer certificates issued when shares changed hands.

The three RTAs whose role is being probed by the police denied any role in the affair. In a reply to a query from Business Standard, Karvy had said the error didn’t originate from its system, adding it was likely to have come from the external environment. It said it is awaiting communication from the police on the scam.

“We have proper systems in place, which ensure compliance with various regulations. From our end, we have supported enquiries (we) have come across,” said a Bigshare Services spokesperson.

MCS had said it had recently begun dealing with the company whose shareholders were affected. It added a previous RTA might be behind the scam, a stand police sources said initial investigations seemed to support. It did not respond to a subsequent email for comment.

Police inspector Dattatreya Thopte, who was investigating the case, didn’t respond to a request for comment. An email sent to a Sebi spokesperson, too, didn’t receive any immediate response.