IPO Scams

SEBI unearths another IPO scam in IDFC:

SEBI on Thursday 12th Jan 06 unearthed yet another abuse of IPO norms in the IDFC’s initial public offering (IPO) where a few investors opened over 14,000 dematerialised accounts to corner large number of shares of the company. This is the second such incident, after a similar such violations were detected in the YES Bank’s IPO. The Yes Bank and IDFC cases are only a tip of an iceberg, say analysts.

SEBI discovered huge rigging in the IDFC IPO

SEBI said in IDFC’s IPO too four investors opened as many as 14,807 dematerialized accounts with Karvy-DP and “strangely”, all these account holders have their bank accounts with Bharat Overseas Bank Ltd, Ahmedabad. SEBI order said: “further probe is required for examining the systemic fault, if any, of the registrar Karvy-RTI i.e. Karvy Computer Shares P Ltd, and the lead managers Kotak Mahindra Capital Company Ltd, DSP Merrill Lynch Ltd and SBI Capital Markets Ltd in identifying and weeding out the benami applications.”

Reference is being made to the RBI to examine the role of BhOB, HDFC Bank, Indian Overseas Bank, ING Vysya Bank and Vijaya Bank in opening the bank accounts of these benami entities and apparently funding them.

According to SEBI, Karvy-DP, which was also named in the YES Bank IPO case, has not adhered to `Know-your-Client’ norms, as per the reports of inspection submitted by NSDL and CDSL on the DP. Also, some of the documents collected by CDSL during the course of inspection show that Karvy-DP has obtained letters purportedly issued by the banks’ concerned such as BhOB as proof of identity and proof of address of the person for the purpose of opening dematerialised accounts.

“It is seen that one branch manager has on the same date signed as authorized signatory of different branches of the bank. This raises a doubt as to the authenticity of the bank documents obtained by Karvy-DP for opening dematerialised accounts,” the SEBI order by its Whole-time Director Mr G. Anantharaman said. SEBI also banned four investors (in whose names the multiple accounts were opened) viz., Ms Roopalben Nareshbhai Panchal (who was also named in the YES Bank IPO scam), Sugandh Estates & Investments P Ltd, Mr Purshottam Ghanshyam Budhwani and Mr Manojdev Seksaria from doing any kind of transactions in the securities market, till further directions. Another 35 firms were also barred from participating in the IPO’s in the future, till further orders, the SEBI order said.

In the case of Infrastructure Development Finance Co. Ltd.’s IPO it took action against several entities, accusing them of using false identities and bank accounts to secure more shares.

SEBI’s interim order also barred several companies in the Karvy group from conducting any fresh business as share registrar and transfer agents.

It also instructed 12 other depositary participants including HDFC Bank Ltd., Centurion Bank of Punjab, Motilal Oswal Securities, ING Vysya Bank, Infrastructure Leasing & Financial Services Ltd., Khandwala Int. Fin. Services Ltd. not to open fresh paperless share accounts.

SEBI said these depositary participants had failed to meet “Know Your Client” norms and also ordered an investigation into 13 others.

The detailed order is available on www.sebi.gov.in. The entities against which Sebi has taken action can file objections to the interim order within 15 days. They could not be reached for comment.

India’s stock market has been booming in the past four years. It has doubled in the past 16 months and hit a lifetime high of 12,102 points last week. Thursday’s order could hurt market sentiment on Friday, analysts said.

“Logic demands that the market will take a beating in the morning,” Arun Kejriwal, strategist at KRIS Research said.

“In the short run, investors in the secondary market will have to pay for sins of the primary market.”

The buoyant markets have encouraged an IPO boom and the biggest ever, worth $2 billion, from real estate developer DLF Universal, is set to hit the market in the next few months. In 2005, Indian share issues were worth about $15 billion, and offerings worth $20 billion are expected to hit the market in 2006.

IPO Scam:  RBI fines  HDFC Bank, IDBI Bank & ING Vysva  Bank

BS Banking Bureau on February 28, 2006
The IPO allotment scam has claimed more victims. The Reserve Bank of India   imposed financial penalties on Industrial Development Bank of India and ING Vysya Bank and fined HDFC Bank  for the second time since January 23.

The Reserve Bank of India on Monday 27^th Feb 2006 fined HDFC Bank, IDBI and ING Vysya Bank for violation of Know Your Customer norms and other irregularities in relation to the recent IPO scam.

HDFC Bank has been slapped with the highest penalty of Rs 25 lakh; ING Vysya Bank – Rs 10 lakh and IDBI Ltd Rs 5 lakh. The penalties were imposed for violating the know-your-customer norms, breaching prudent banking practices and not adhering to directives and guidelines for granting loans against shares/IPO’s, the RBI said in a statement

According to an RBI release, these banks have been fined, “for violation of regulations on KYC norms, for breach of prudent banking practices and for not adhering to its directives/guidelines relating to loans against shares/ IPO.”

HDFC Bank has been fined for failing to show prudence in opening 271 savings accounts with one common name and multiple unconnected names. These accounts were used by the IPO allotment process manipulators for opening 1,142 demat and 24 loan-against-share accounts.In January 2006, HDFC Bank was fined for violating guidelines on opening of deposit accounts, monitoring of transactions for adherence to KYC norms and failure of internal controls.

The demat accounts opened with HDFC Bank were used for making multiple applications in IPOs. The bank had even issued around 4,000 cheque books with 100,000 leaves to one person who effectively controlled operations in 24 loan-against-share accounts, the RBI said, adding that HDFC Bank had also failed to follow norms for monitoring large-value transactions in customer accounts.

The Bangalore-based ING Vysya Bank has been penalised Rs 10 lakh for failing to adhere to the KYC norms in opening joint savings bank accounts. It especially failed to independently verify the addresses of the joint account holders, solely relying on the principal joint account holder’s identity, the RBI said. According to the RBI, ING Vysya Bank did not apply due diligence in establishing relationships among joint account holders and violated RBI instructions on IPO finance, particularly the limit on maximum permissible finance per borrower.

IDBI has been fined for extending IPO finance in excess of the limit specified for individuals by allowing pooling of funds by certain individuals. The pooling of IPO finance was facilitated by non-adherence to the KYC norms, the RBI said.

MARUTI  Case:

Fictitious Demat A/c’s opened in 2003 itself

`First IPO in which key players took part was Maruti’

The Charges

DPs have been accused by SEBI of not fully implementing the `maker-checker’ concept, data entry errors, scanning of officials’ signatures, and appointing themselves as the second holder.

Description

Some of the demat accounts that were used to manipulate allotments in the initial public offer of Yes Bank and IDFC were opened during 2003, and not in the last year as was earlier believed. The first IPO in which the key operators have participated was that of Maruti Udyog Ltd, in June 2003, though the numbers of fictitious demat accounts were not very high then, the interim order from Securities and Exchange Board of India has said.

SEBI’s investigations have now pegged that a “total of 24 key operators have indulged in abusive practices in respect of 21 IPOs”.

The evidence against Karvy DP has stemmed from the fact that almost all the demat accounts which served as conduits for these master account holders were held with Karvy DP, according to the order. These 24 operators have 34 demat accounts; of which 16 demat accounts are held with Karvy DP.

Due Diligence Not Taken

The market regulator’s investigations have pointed out that, while opening demat accounts the depository participants were not exercising due diligence. Persons involved in the scam have collected proofs of identity and addresses from groups of persons and used this to open bogus bank accounts.

Inter-linkages

The master account holders were found to have made off-market transfer of the IPO shares to various common groups of entities who appear to be their principals. It is seen that some of the master account holders have also made off-market transfers amongst themselves. This shows that there are inter-linkages amongst the master account holders as well as between groups of master account holders and their principals, the order said.

Depository participants have been accused by SEBI of not fully implementing the `maker-checker’ concept, data entry errors, scanning of officials’ signatures, and appointing themselves as the second holder.

With some of the DPs also acting as brokers, stock exchanges have been advised to examine the role and involvement of brokers and sub-brokers by way of participation in IPO’s either directly or indirectly and their dealings in the shares subsequent to listing. Exchanges are to submit a report on this within a month.

SEBI bars Karvy, 23 other entities

Alleged involvement in IPO allotment scam

In the dock

Ban on several entities including HDFC Bank, IDBI Bank, ING Vysya Bank and Motilal Oswal Securities from opening fresh demat accounts.
The regulator also pulled up NSDL and CDSL for `grave management lapses’.

Description

SEBI on Thursday 27^th April 2006 came down heavily on stock market intermediaries by banning several entities including Karvy group of companies, Pratik DP and Indiabulls Securities, for their alleged involvement in the IPO allotment scam. SEBI has also barred several entities including HDFC Bank, IDBI Bank, ING Vysya Bank and Motilal Oswal Securities from opening fresh demat accounts.

In an interim order issued today after the second round of investigations, the capital market regulator has banned 24 entities from buying and selling securities till further orders.

Common address

SEBI also said 15 Depository Participants at National Securities Depository Ltd (NSDL) including Kotak Securities, Citibank, ICICI Bank, Bank Paribas and IndusInd Bank had more than 500 demat account holders sharing the common address.

It asked NSDL to conduct inspection on whether all the demat account holders are genuine. NSDL has also been asked to check whether the Know Your Customer norms of SEBI have been duly complied with and take action against suspect accounts on verification.

Analysts felt the SEBI order was akin to capital punishment for the entities involved in the securities market scam.

“In view of the detailed findings, Karvy DP and Pratik DP prima facie do not appear to be fit to deal in securities market as SEBI-registered intermediaries. Appropriate quasi-judicial proceedings are being initiated against the two DPs,” the 252-page order issued late in the evening said.

SEBI said the other business groups of Karvy appear to have acted in concert in the gamut of IPO manipulations. “I further direct Karvy Stock Broking Ld, Karvy Computer Share PVT Ltd, Karvy Investor Services and Karvy Consultants not to undertake fresh business as registrar to the issue and share transfer agent,” Mr G Anantharaman, Whole-Time Member, SEBI, said.

NSDL, CDSL pulled up

The regulator also pulled up NSDL and CDSL for `grave management lapses’. The findings revealed “contributory negligence” on the part of the depositories and their managements.

“The promoters of NSDL and CDSL are directed to take all appropriate actions including revamping of management which clearly has allowed matters to come to such a sorry pass,” the order said.

The order, to be treated as a `show-cause notice’, has given 15 days time to the parties named for filing objections.

SEBI Barred 24 Entities in Manipulation of IPO:

Mumbai: Bad news from the stock markets, especially for those who were planning to make investments through demat accounts.

As part of an investigation into the demat scam, the Securities and Exchange Board of India (SEBI) has barred 24 entities from the securities market after investigating alleged manipulation of initial public offerings (IPO).

In an interim order passed on Thursday, SEBI said these entities appeared to be key operators in various IPO’s during 2003-2005, “tilting the allotment process to their favour”.

Some of the biggest players in the stock markets, like HDFC Bank, IDBI Bank, ING Vysya Bank, Motilal Oswal, Khandwala Securities and IL&FS, have been barred from opening new demat accounts till further notice.

IndiaBulls Securities Ltd and Karvy Stockbroking have been barred from all market activities, including IPOs. Indiabulls has 250,000 clients and handles $444 million worth of their money.

“There is no wrongdoing by us,” said Gagan Banga, director at Indiabulls Financial Services Ltd., the parent of Indiabulls Securities. “We are going to appeal.”

SEBI said certain firms had cornered IPO shares reserved for retail applicants with thousands of fictitious applications for small amounts that were then transferred to financiers who sold them on the first day of listing for a profit.

SEBI started a broad investigation into IPO allotments after it detected irregularities in the buying of shares of YES Bank for its 2005 IPO, and in December it banned 13 entities from trading in its shares.

In the case of Infrastructure Development Finance Co. Ltd.’s IPO it took action against several entities, accusing them of using false identities and bank accounts to secure more shares.

SEBI’s interim order also barred several companies in the Karvy group from conducting any fresh business as share registrar and transfer agents.

It also instructed 12 other depositary participants including HDFC Bank Ltd., Centurion Bank of Punjab, Motilal Oswal Securities, ING Vysya Bank, Infrastructure Leasing & Financial Services Ltd., Khandwala Int. Fin. Services Ltd. not to open fresh paperless share accounts.

SEBI said these depositary participants had failed to meet “Know Your Client” norms and also ordered an investigation into 13 others.

The entities against which SEBI has taken action can file objections to the interim order within 15 days. They could not be reached for comment.

India’s stock market has been booming in the past four years. It has doubled in the past 16 months and hit a lifetime high of 12,102 points last week. Thursday’s order could hurt market sentiment on Friday, analysts said.

“Logic demands that the market will take a beating in the morning,” Arun Kejriwal, strategist at KRIS Research said.

“In the short run, investors in the secondary market will have to pay for sins of the primary market.”

The buoyant markets have encouraged an IPO boom and the biggest ever, worth $2 billion, from real estate developer DLF Universal, is set to hit the market in the next few months.

In 2005, Indian share issues were worth about $15 billion, and offerings worth $20 billion are expected to hit the market in 2006

SEBI imposes 116 crore penalty in IPO scam on NSDL, CDSL, 8 DPs

This is the largest penalty imposed by SEBI ever – 116 crores in total.

NSDL, CDSL and 8 other DP’s have been find 115.81 crores in total for their involvement in the IPO scam.

In a disgorgement order, SEBI full-time member G Anantharaman held NSDL and CDSL liable for repayment of additional gains made during the IPOs. NSDL owned by NSE and government-owned financial institutions has to pay Rs 45 crores. CDSL owner by BSE and other financial institutions has to pay 12.89 crores. Karvy Stock Broking has been asked to pay Rs 51.50 crore.

Besides, depository participants Karvy Stock Broking Ltd, HDFC Bank Ltd, Khandwala Integrated Financial Services Pvt Ltd, IDBI Bank Ltd, Jhaveri Securities Pvt Ltd, ING Vysya Bank Ltd, Pravin Ratilal Share & Stock Broking Ltd and Pratik Stock Vision Pvt Ltd were also asked to pay up. The time limit set for these payments is six months.

The order however allows the entities to seek contribution from any party other than the intermediaries involved in the scam. The order states “All parties are at liberty to seek contribution or indemnity from any party that they believe is liable to a greater extent than quantified here, as also from individuals and companies which were involved in the IPO cornering or fraud but are not named, not being intermediaries under section 12 of the SEBI Act 1992.” It is not known how the named entities would recover the alleged gains from the persons who opened benami demat accounts for IPO applications.

SEBI arrived at the amount to be disgorged by multiplying the shares obtained in the wrongful allotment with the difference between the listing price and the issue price. This was done in each of the 21 cases where unfair allotment was found.

Disgorgement refers to repayment of funds that were received through illegal or unethical business transactions. The money may go into the Investor Protection Fund or may be used to compensate investors.

The order is an extension of SEBI’s April 27 interim ruling that banned 12 DPs from opening fresh demat accounts for a specified period. Earlier this year, SEBI found that 24 key operators had cornered large portions of the retail segment of 21 IPO’s between 2003 and 2005 by using benami or fictitious accounts. The operators and their financiers are alleged to have used 58,938 such accounts.

After the IPO allotment, these fictitious allottees transferred shares to their principals, who in turn transferred the shares to the financiers who had originally made the funds available for executing the plan. The financiers sold most of these shares on the first day of listing, making huge profits.

Investigations are expected to go on in the case, which pertains to certain individuals opening multiple demat accounts to corner retail portion of public offers through off-market transactions. These transactions were carried out between the date of allotment of shares and listing.

SEBI had looked into 105 IPO’s during 2003-05, beginning with Maruti and other major IPO’s like TCS, NTPC, Jet Airways, Yes Bank and IDFC.

Protests are expected against this order. A DP stated that they at best be fined for being negligent in not following the due process of verification in opening multiple accounts. Since they have not profited by selling the allotted IPO shares, they are not liable for disgorgement.

SEBI in its latest order has also failed to prove that the 10 players had actually profited directly from the IPO scam. For example, NSDL is only a repository of shares for investors and does not trade in shares. It, therefore, could not have profited in anyway in the IPO scam. Says a lawyer defending a DP: “SEBI has failed to nail the actual culprits. This order is just to show itself in good light.”

The government has announced that it will make fresh allotment letters in favour of the deserving applicants and the illegal beneficiaries will be dislodged. The government also wants SEBI to make PAN mandatory for IPO applications

RBI fined HDFC Bank and IDBI Bank again in an IPO scam:

IPO scam: 12 financiers pay to settle dispute

Friday, June 06, 2008

v   SALIENT FEATURES OF  IPO SCAM

Modus operandi:

• Current account opened in the name of multiple companies on the same date in the same branch of a bank
• Sole person authorized to operate all these accounts who was also a Director in all the companies
• Identity disguised by using different spelling for the same name in different companies
• Multiple accounts opened in different banks by the same group of joint account holders
• Huge funds transferred from companies accounts to the individual’s account which was invested in IPO’s
• Loans/ overdrafts got sanctioned in multiple names to bypass limit imposed by RBI
• Loans sanctioned to brokers violating guidelines
• Multiple DP accounts opened to facilitate investment in IPO
• Large number of cheques for the same value issued from a single account on the same day
• Multiple large value credits received by way of transfer from other banks
• Several accounts opened for funding the IPO on the request of brokers, some were in fictitious names
• Refunds received got credited in brokers a/cs
• Margin money provided by brokers through single cheque
• Nexus between merchant banker, brokers and banks suspects

v   OPERATIONAL DEFICIENCIES

Factors that facilitated the scam:

• Photographs not obtained
• Proper introductions not obtained
• Signatures not taken in the presence of bank official
• Failure to independently verify the identity and address of all joint account holders
• Directors identity/ address not verified
• Customer Due Diligence done by a subsidiary
• Objective of large number of jt. account holders opening account not ascertained
• Purpose of relationship not clearly established
• Customer profiling based on risk classification not done
• Poor monitoring and reporting system due to  inadequate appreciation of ML issues
• Absence of  investigation about use and sources of funds
• Unsatisfactory training of personnel
• No system of fixing accountability of bank officials responsible for opening of accounts and complying with KYC procedures
• Ineffective monitoring and control

v   MEASURES TO PREVENT SCAMS

As IPO scams takes place due to the involvement of some masterminds, Banks, Brokers and some other intermediaries but as there is a saying that “Precaution is better than Cure” so, in the same manner some important precautions or measures can be initiated to prevent IPO scams which are as follows:

• An analysis of IPO scam clearly brings out the laxity on the part of banks to scrupulously implement the KYC/AML guidelines issued from time to time. It also raises serious concerns about the integrity of the systems & systemic risks.
• While   scams may still happen despite best of preventive measures, it should not undermine the efforts being made to insulate the financial sector from money laundering. It is going to be a long fight with constant need to improve and innovate new strategies.
• It is important to understand that the risks banks run as a result of non-compliance with regulatory and statutory guidelines can cause severe reputation and financial damage to individual banks and the Indian banking system as a whole
• Need for comprehensive operational framework implementing important aspects of KYC instructions e.g.
• Documentation procedure for opening of all types of customer accounts;
• Clarity in understanding of risk classification of accounts and proper customer profiling
• Ongoing monitoring of medium and high risk accounts
• Enhanced due diligence in respect of accounts with beneficial ownership, non-face to face transactions, group companies, high risk businesses and wire transfers etc.
• Prompt reporting of cash and suspicious transactions to Principal Officer by branches
• An effective audit machinery
• Good understanding of regulatory and statutory prescriptions in letter and spirit
• Clear demarcation of duties and responsibilities
• Violations to be dealt with sternly

RELIANCE POWER LIMITED : RECENT BIGGEST IPO

Reliance Power (RPL), part of the Reliance Anil Dhirubhai Ambani Group (R-ADAG) company, a unit of India’s second-biggest utility by market value, is engaged in the construction and development of various gas- and coal-based thermal power projects and hydroelectric power projects in various parts of the country.

Reliance Power won rights to develop a 4,000-MW mega power project at Sasan in the central state of Madhya Pradesh in June. Its parent, Reliance Energy, is building a 1,200-MW power plant at Rosa in northern Uttar Pradesh state.

The 4,000-MW project is expected to be the largest pit-head coal-fired power project at a single location in the country and is scheduled to be commissioned during the XI Plan. At the same time, the company expects to complete the Rosa Phase-I, 600-MW coal-fired project in Uttar Pradesh, now under construction, by March 2010. The Rosa Phase II (600-MW expansion project) is scheduled to be commissioned by September 2010. The other identified projects are located in Western Region (12,220 MW), Northern region (9,080 MW) and North-Eastern region (2,900 MW). It is also making a big foray into the hydro power projects in Arunachal Pradesh. The power projects include six coal-fired projects (10,620 MW) to be fuelled by reserves from captive mines and supplies from India and abroad, two gas-fired projects (10,280 MW) to be fuelled primarily by reserves from the Krishna Godavari Basin off the East Coast and four hydro power projects (3,300 MW), three of them in Arunachal Pradesh and one in Uttarakhand.

Objectives of the issue:

Achieve the benefits of listing on the Stock Exchanges

Raise capital to fund subsidiaries to part-finance the construction and development costs of certain of 12 power generation projects currently under various stages of development..

General corporate purposes.

Opened on 15 January, 2008

Closed on 18 January, 2008

Issue Type -100% Book Building Issue

Issue Size was 1,300,000,000 Equity Shares of Rs. 10 Each

Issue Price – Rs 405/- (floor Price) to Rs 450/- (cap price) per Equity share

Maximum Subscription Amount for Retail Investor – Rs 100,000/-

Minimum and Maximum Order Quantity

Listing on BSE and NSE

Lead Manager- Kotak,  UBS, ABN AMRO,  Deutsche,  Enam,  ICICI Securities,  JM Financial and J.P. Morgan.

Registrar – Karvy Computershare Pvt Ltd

Application Multiple – 15 and in multiples there off starting with at least 15 shares

v     LIST OF IPO’S ARRIVED IN THE YEAR 2008

Name of the Company Date of Filing with SEBI

Usher Eco Power                                                               03-Nov-2008

Midvalley Entertainment                                                   29-Oct-2008

AMR Constructions                                                           08-Oct-2008

Gujarat Pipavav Port                                                          03-Oct-2008

Mahindra Holidays and Resorts India                                03-Oct-2008

BS Transcomm                                                                   01-Oct-2008

MBL Infrastructures                                                           01-Oct-2008

Aravali Infrapower                                                             30-Sep-2008

Globus Spirits                                                                     29-Sep-2008

Syncom Healthcare                                                            18-Sep-2008

Jindal Cotex                                                                       21-Aug-2008

Astec Lifesciences                                                             13-Aug-2008

Trinity India                                                                       12-Aug-2008

Rishabdev Technocable                                                     08-Aug-2008

NHPC                                                                                07-Aug-2008

Excel Infoways                                                                  05-Aug-2008

Radiant Info Systems                                                         01-Aug-2008

Persistent Systems                                                              16-Jul-2008

Gemini Engi – Fab                                                              11-Jul-2008

C Mahendra Exports                                                           02-Jul-2008

Cellebrum Technologies                                                    30-Jun-2008

Raj Oil Mills                                                                      13-Jun-2008

Edserv Softsystems                                                           05-Jun-2008

Alkali Metals                                                                     04-Jun-2008

Godrej Properties                                                               03-Jun-2008

Triveni Infrastructure Development Company                16-May-2008

Infinite Computer Solutions (India)                                 12-May-2008

Gini and Jony                                                                   09-May-2008

Adani Power                                                                     05-May-2008

Neotric Informatique                                                         30-Apr-2008

Vijai Infrstructure                                                              30-Apr-2008

Ajanta Manufacturing                                                       15-Apr-2008

Rites                                                                                  03-Apr-2008

VRL Logistics                                                                   02-Apr-2008

Bharat Oman Refineries                                                   01-Apr-2008

20 Microns                                                                       25-Mar-2008

Chiripal Industries                                                           24-Mar-2008

Apollo Health Street                                                        19-Mar-2008

Vishal Information Technologies                                    13-Mar-2008

Fineotex Chemical                                                           05-Mar-2008

ARSS Infrastructure Projects                                           26-Feb-2008

Future Ventures India                                                       25-Feb-2008

Mutli Commodity Exchange of India                               22-Feb-2008

Microsec Financial Services                                             06-Feb-2008

Reliance Infratel                                                              05-Feb-2008

Cox and Kings India                                                        28-Jan-2008

JSW Energy                                                                     25-Jan-2008

Ashoka Buildcon                                                             22-Jan-2008

Sea TV Network                                                              22-Jan-2008

Pipavav Shipyard                                                             22-Jan-2008

Virgo Engineers                                                               22-Jan-2008

Popularity: 42% [?]

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1. IPO – Initial Public Offering
2. Definitions & Abbreviations in IPO
3. Mutual Fund Terms
4. Mutual Fund Industry
5. SWOT Analysis of HDFC Bank

Tags: IPO, Scams