Sucheta Dalal :11000 demats
Sucheta Dalal

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11,000 demats  

Jan 8, 2006

Even as the Reserve Bank of India (RBI) finds more banks were ensnared by Roopalben Panchal and her family in the demat account scandal, the Income Tax Department has also made major new discoveries. IT officials had earlier found that one Purshottam Budhwani (not Dudlani as wrongly reported in this column earlier) had massive 5,000 demat accounts through which he manipulated IPO (Initial Public Offerings) allotments. Further investigations reveal that Budhwani’s demat accounts have now ballooned to a whopping 11,000. He had used 5,000 demat accounts in one particular IPO that was discovered first. But his modus operandi is to use combinations of a few thousand accounts per IPO. Otherwise the procedure is identical to that of Roopalben Panchal who applied for the Yes Bank IPO through 6,315 accounts and transferred the shares to herself before the scrip was listed. The difference in Budhwani’s case is that the initial three to four thousand demat accounts were opened in the names of actual people who produced proper election IDs. The tax authorities believe that he paid each of them Rs 300-400 in order to use (misuse) their names. The remaining several thousand accounts were in permutations and combinations of the earlier names. In all cases, the demat accounts were jointly opened with Budhwani. All 11,000 accounts were directed to just three addresses - Budhwani’s current address, his old home address and the address of his CA.


Proof of collusion


Tax authorities found that as in the Yes Bank IPO, Karvy was again the main Depository Participant (DP). However, a few hundred demat accounts each were also opened by Budhwani at HDFC Bank, ICICI Bank and IDBI Bank. The search revealed that a financial arm of Karvy had funded Budhwani’s many IPO applications through these thousands of accounts. Further evidence of collusion was discovered in the fact that at least 300 refund slips, for different applications, were allegedly mailed to Budhwani, without even separating them by tearing them at the perforation. These findings indicate that Sebi may need to call in experts to ensure that DP and depository software uses appropriate international algorithms to detect multiple applications through duplication and also flags permutations and combinations of the same names and addresses. This will require correcting conceptual flaws in the software. Sebi will also have to widen the scope of its IPO scam probe to many more primary market issues identified by the IT Department.


Multiple conundrum


The RBI has announced plans to expand the scope of the IPO scam probe beyond Bharat Overseas Bank and Vijaya Bank. It could well be that the new banks being investigated by the central bank are the ones named by the IT authorities. While this development is welcome, it is pertinent to ask what happened to the FM’s assertion that hundreds of crores of cash was being processed through the banking system, because officials were colluding with businessmen to help evade taxes. IT officials had discovered accounts totalling Rs 6.6 crore, deposited in cash, in a single PSU bank in Tirupur over a three- to four-year period for a single individual. The account opening forms were not correctly filled out, had general locations in Tirupur or had fake names and the Bank Manager was fully aware of the identity of the beneficial owner. At times the bank had allowed up to Rs 60 lakh to be deposited in a single day. Worse, it helpfully split the deposits into smaller sums at the time of maturity and renewal in order to help dubious businessmen avoid tax deduction at source. At least two smaller PSU banks and one giant one were found to have accommodated businessmen in channeling their unaccounted income. This misuse has been going on for at least a decade. What is worse, bankers sometimes colluded in order to meet stiff deposit mobilisation targets. Clearly the remedy is not a Cash Withdrawal Tax, but sensible taxation that makes such tax evasion redundant.


Up the stakes


Infosys was considered to be the most generous in compensation to independent directors. They take home over Rs 28 lakh annually. While Infosys itself has impeccable standards of good governance, it has sparked off a debate about what hefty compensation does to the independence of directors. Now, Reliance Industries has topped what Infosys pays by a massive margin. Reliance will soon begin to pay its independent directors a giant, annual compensation of Rs 1 crore. Some say that the directors are being rewarded for their loyalty through the battle for control between the Ambani brothers.


-- Sucheta Dalal