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The court quashed orders of the Securities Appellate Tribunal (SAT) which had set aside Sebi disgorgement orders in the matter of Opee Stock Link and others. The cases relate to what was then commonly known as the ‘IPO scam’ or ‘demat scam’, which led to significant reforms in the stock markets’ Know Your Customer rules.
“The orders passed by SAT are quashed so as to give effect to the orders passed by...Sebi. The said orders shall be acted upon within two months from today,” pronounced a bench of judges Anil Dave and R Banumathi on Monday. Jet Airways listed in March 2005 and IDFC in August that year. Sebi had unearthed large-scale irregularities, wherein hundreds of fictitious demat accounts were used to corner shares meant for retail (small) investors in these IPOs. Hundreds of demat holders transferred their share allotments in the IPO to OpeeStock and other such entities, which then offloaded these at higher prices after listing.
In December 2008, the Sebi wholetime member passed orders for disgorgement of illegal gains made in this process and barred the offending entities from the market. A year later, SAT set these orders aside.
“Upon perusal, we do not find any specific conclusion arrived at by SAT to the effect that the findings recorded by the wholetime member, as well as the adjudicating officer, of Sebi were incorrect. It was open to SAT to re-appreciate the evidence after looking at the facts but we do not find any such finding that the (conclusions) arrived at by (Sebi) were incorrect or perverse for a particular reason,” the SC judgement said.
As the method of operation was similar in applications for shares made in respect of both companies, and the parties concerned were common, the order referred to the issue of Jet Airways. It was found by Sebi that the respondent had received 12,053 shares, of which 3,272 were transferred before the day of listing, 3,598 on the day of listing and 5,183 shares after the day of listing. The said shares were purchased through off-market transactions, from 553 demat account holders who had been allotted shares in the IPO.
These 553 demat account holders sold the shares to the respondent at Rs 1,170 each, though the market value was much more. The shares were thereafter sold by the said respondent at a higher average price of Rs 1,296 each. Sebi’s investigation also indicated most of those 553 holders were fictitious, though the Sebi order said the investigation hadn't got enough evidence to prove this.
It said: “There are name lenders, as alleged...All the 553 accounts behaved exactly in the same manner in terms of price and timing, that too, in the off-market...However, the allegation that these were benami or fictitious does not make any material difference to the main charge that the noticees used 553 demat accounts to corner shares in the retail segment of the Jet IPO.”
This finding by the wholetime member at Sebi is clear that the said respondent had not acted as a share broker. Had it been so, he would have charged brokerage from the demat account holders, the court observed. “In normal circumstances, no share holder would sell his shares through a broker or otherwise at a price below the market value. In the instant case, all the 553 demat account holders have received the same price, viz Rs 1,170 a share. And, some of the demat holders sold the shares on either the date of listing of shares with the BSE/NSE (exchanges) or even prior thereto, when the market price was also not known. In normal circumstances, no man with normal prudence would ever enter into such a transaction but in this case, all the 553 demat account holders did it!”
11 LONG YEARS
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2005: IPOs of Jet and IDFC hit market
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2006: Interim order-cum-show cause notices issued by Sebi
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Dec 2008: Final order passed by whole-time member
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Dec 2009: SAT sets aside Sebi order
- July 2016: SC quashes SAT order
