Sucheta Dalal :IPOs: Manipulation rules
Sucheta Dalal

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IPOs: Manipulation rules  

June 22, 2011

Will the watchdog watch the IPO process?

Sucheta Dalal

The capital market watchdog needs to work overtime to restore confidence in the primary capital market before it is too late. Moneylife Foundation, our not-for-profit initiative for financial literacy, recommends that retail investors should simply avoid initial public offering (IPOs), except maybe those of public sector undertakings being offered at a discount. After all, stocks of over 225 companies that have listed in the past few years are trading at a discount to the offer price. In November 2009, I had pointed out how a dull IPO market was the happy hunting ground of extortionists and blackmailers. In 2009, these operators were able to put in 4,000-5,000 applications before issue closing. They then blackmailed the promoter to pay them a cash premium to the issue price, failing which they would withdraw their applications, causing the issue to fail. Our sources said that investment bankers were part of the racket and played on promoters’ greed to raise public money at the highest price.

In May 2011, SEBI halted the listing of Vaswani Industries after its IPO. SEBI’s action apparently triggered a demonstration in front of one of its Gujarat offices from financiers who were angry at their funds being blocked pending listing. This happened after 3,000 retail applicants withdrew their applications and others issued stop-payment orders. It is a repeat of the 2009 story and shows that a sleeping watchdog is slowly waking up to the mischief. Again, SEBI needs to inspect the systems and processes of depositories as well as intermediaries to check weaknesses in KYC (know your customer) norms that allow thousands of fake applications to be controlled by three or four large operators in Ahmedabad. While SEBI collected tens of crores of rupees through disgorgement and consent orders filed by those accused in the IPO scam, it has ignored its primary job of stopping extortion.


-- Sucheta Dalal