The IPO scam

The demat scam has got larger in size as one more IPO allotment""IDFC""has got added to the Yes Bank episode. The culprits are the same. If Roopalben Panchal had 6,315 bogus demat accounts in the Yes Bank IPO, that number has increased to 14,807 accounts in the IDFC IPO. In all, Sebi has unearthed over 45,000 such bogus demat accounts. Compared to the 13 entities that Sebi had banned in the case of the Yes Bank IPO, the number has increased to 35 entities after the IDFC IPO investigation.

Karvy is the common depository participant, where Panchal and others kept multiple accounts. Karvy-DP is therefore in the hot seat for opening accounts without following the "Know-Your-Client" norm. It is unclear whether depositories too are entirely blameless in this game; surely, thousands of applications from the same address should have some alarm bells ringing. Sebi has also made a reference to the RBI to examine the role of several banks, both private and public sector, in opening bank accounts for the benami identities and funding the IPO application in the IDFC issue. In many ways, the involvement of the banks is even more worrisome, for the systemic failures that have come to light""bringing back memories of the involvement of banks in the Harshad Mehta scam.

It should be obvious that the IDFC and Yes Bank issues cannot be the only two cases where there have been malpractices. More disclosures are certain, and the stain will spread. The government and the regulator have to ensure that the punishment is severe for the offenders, so that the risk of getting caught far outweighs the financial benefits of indulging in scams. Meanwhile, opening demat accounts should require more proof than just a bank account. Every DP account that is opened should have an audit trail, so that any violation of norms can be checked. What may be unavoidable now is a unique identification number for every applicant, be it in the form of the MAPIN or the PAN number, so as to detect and deter bogus applicants.

While the stock market regulator should be complimented for having unearthed this particular scam, and for the zeal with which it is trying to clean up the system, some questions should also be asked of the process by which Sebi has registered some of the stock market intermediaries, after presumably a thorough inspection of their internal systems. Clearly, the registration process needs to be tightened. It is also obvious that the system of share allotment is what created the room for this particular scam, of multiple applications. Creating special allotment procedures and entitlements for retail investors, as compared to high-net-worth individuals, meant that some in the latter category would be tempted resort to dubious and indeed criminal means to make an extra buck""at the cost of genuine retail investors, who would otherwise have got a larger share allotment. The system needs to be changed in order to prevent more such scams, by removing the financial incentive.