Despite the IPO scams in the past, why do market manipulators still have a field day?  

May 20, 2011

Two IPOs have just failed, possibly because the “market help” was not available. The bigger issue is why are the regulators so silent, given that we have had such a huge IPO scam in 2005 which involved banks, depositories and brokers?

Moneylife Digital Team

Yesterday, (Two failed IPOs show that manipulators have withdrawn from the game, for now ), we had highlighted the rot in the IPO (Initial Public Offering) process.

Manipulators get to work once the stock is listed. They rig the shares, liquidate their entire stake and walk out. If they are not involved, average issues (not the Coal India variety) find it hard to sell. The manipulators are able to mobilize tens of thousands of retail applications. And the exchanges and the market regulator? They are in their ivory towers and have no clue about any of this. In fact, they seem not to be interested either.

Why is this rigging still going on? Haven't the regulators learnt from the IPO scams of 2003 and 2006? The negligence on the part of the market regulator, the Securities and Exchange Board of India (SEBI), has become more evident from the fact that even today, smaller IPOs are relying upon these market manipulators to 'succeed'.

In the past, SEBI has taken action but it seems to have led to no change. When the regulator started scanning an entire spectrum of IPOs launched over 2003, 2004 and 2005, it ended digging up wagonloads of dirt and probably prevented a larger conspiracy to completely hijack the market. SEBI had barred brokerage firms like Karvy and Indiabulls from the market. It had also directed HDFC Bank and IDBI Bank not to open new demat accounts for share transactions.

Following are some actions that SEBI has taken in the past:

• 24 entities banned from primary and secondary market, including Indiabulls and Karvy

• Quasi-judicial proceedings against Karvy Depository Participant (DP) and Pratik DP, banned from the market

• 12 DPs told not to open fresh demat accounts, including HDFC Bank, IDBI Bank, Central Bank, ING Vysya Bank, IL&FS and Motilal Oswal; 15 more under scrutiny, including ICICI Bank, Citibank, and Standard Chartered.  

• 85 financiers barred from the market.

The regulator also pulled up NSDL (National Securities Depository Limited) and CDSL (Central Depository Services (India) Limited) for 'grave management lapses'. The findings revealed contributory negligence on the part of the depositories and their managements.

As per SEBI's order, the promoters of NSDL and CDSL were directed to take all appropriate actions including revamping of management which clearly had allowed matters to come to such a sorry pass.

In the interest of attracting more investors to the stock market, SEBI needs to ensure that companies do not use IPOs as a one-time, fund-raising exercise with a plan to avoid accountability and compliance through the best available delisting opportunity.  

Earlier, SEBI had said that certain entities had cornered shares reserved for retail applicants in the name of fictitious entities in the IPOs of Yes Bank and Infrastructure Development Finance Company (IDFC).

Apart from the Yes Bank fraud, SEBI reportedly had definite data about two IPOs where retail allotments were rigged, but market observers believe the scam was far bigger. The Yes Bank and IDFC cases were only the tip of the iceberg.

The Reserve Bank of India (RBI), to curb this malice, had sought an explanation from banks in which benami accounts were unearthed in the IPO scam. The RBI had fined three banks for violation of ''know your customer'' (KYC) norms relating to loans against shares and investing in IPOs. These three banks were HDFC Bank (slapped with the highest penalty of Rs 25 lakh), followed by ING Vysya Bank (Rs10 lakh) and IDBI Bank (Rs 5lakh).

The retail investor continues to become more disenchanted every day. Our investor population has already nosedived from around 20 million to just about eight million.

The trend in almost all recent IPOs indicates that investors are disgusted with the high valuations and have shunned the primary market. This is why lesser-known issues need the help of manipulators. So restoring the confidence of retail investors and growing the investor base ought to be the challenge before all the concerned regulators. But the opposite is more likely to happen-the retail investor may actually become extinct, looking at the manipulation that takes place with any IPO issue.