Five years after the initial public offer (IPO) scam surfaced, the Securities and Exchange Board of India (Sebi) has exonerated the National Securities Depository Ltd (NSDL) for the alleged deficiencies in services that contributed to the scam. The Sebi order defuses an embarrassing situation for NSDL and its former chairman CB Bhave, who is now the Sebi chairman. Given the conflict of interest, Mr Bhave correctly recused himself from the meeting which was chaired by Mohandas Pai of Infosys. The scam modus operandi was simple and sweeping. Roopalben Panchal ran a photo studio in Ahmedabad. The details and photographs of her customers were culled to open fictitious savings and demat accounts, clustered across a few addresses. Those benami accounts were used to apply for IPO retail quotas. Under the lottery system of retail allotment, multiple applications greatly increase chances of allotment. A cartel of operators financed the operation and sold the shares upon listing. In the IDFC IPO, as many as 12 million shares out of the total retail quota of 14 million shares (Issue size: 404 million shares at Rs 34 per share) were allotted to 44,000 accounts, managed by eight agents. These shares sold at Rs 64 on listing. Some 950,000 shares were cornered via 6,000 accounts in the Yes Bank IPO. These two deals generated Rs 65 crore in windfall gains. The same methods were employed in at least 20 other IPOs, including blue-chips like NTPC, TCS and Suzlon Energy. A committee under Justice DP Wadhwa examined the issue and worked out a formula for utilising the frozen assets to compensate cheated retail investors. Sebi has said that it will now expedite the administrative processes of compensation and that is undoubtedly welcome.
However conveniently things may seem to have worked out, the depositories have got off lightly. Even the proposed fines were minor, given the scale of the scam. Demat accounts, allotments, share transfers, everything runs through the depository system. It beggars belief that no eyebrows were raised at any stage about literally thousands of individual demat accounts being registered at the same address. The processes of NSDL and CDSL undoubtedly required review and investigation. One result has been a tightening of the Know Your Client norms across both banking and depository participant services. Verification methods have improved. The retail quota’s system of allotment is also overdue for review. It remains to be seen if the loopholes exposed by the scam will all be plugged.
