Sucheta Dalal :IPO Scam: Kudos to SEBI
Sucheta Dalal

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IPO Scam: Kudos to SEBI  

January 10, 2012

While SEBI’s investigation department deserves kudos for this action, the larger question is: Will the investigation stand up to the judicial process? Also what about the bigger mess?

Sucheta Dalal

The Securities and Exchange Board of India’s (SEBI) decisive crackdown against rampant manipulation of initial public offerings (IPOs) for several years is welcome. At the end of December 2011, SEBI issued ad interim orders against seven companies—Taksheel Solutions, RDB Rasayans, Onelife Capital Advisors, Brooks Laboratories, PG Electroplast, Tijaria Polypipes and Bharatiya Global Infomedia—and nearly a 100 officials and investment bankers associated with them, barring them from accessing the capital market. The orders exposed their fraudulent intent, diversion of funds and false/fabricated or concealed information.

Inside sources tell us that the orders were entirely the work of SEBI’s investigation department which is headed by IPS officer RK Padmanabhan; the surveillance department was not involved at all, deliberately.  

This is interesting because the apparent failure of SEBI’s surveillance department and its sophisticated software has been repeatedly raised by Moneylife. The regulator has scrapped one expensive ‘inter-market surveillance system’ (of HCL Technologies) and decided to replace it with another from TCS (Tata Consultancy Services) without a word of explanation. The orders also raise serious questions about SEBI’s process of vetting IPOs which is clearly flawed.

While SEBI’s investigation department deserves kudos for this action, the larger question is: Will the investigation stand up to the judicial process? We need to see quick stringent action against these companies and intermediaries. Merely barring them from the market is hardly enough; investors who have been genuinely cheated need to get their money back after segregating those who may have colluded in the fraud. There is also a clear need for internal re-examination of the IPO clearances and surveillance mechanism and, maybe, even vigilance action.

Market intermediaries will tell you that IPO clearances are a painful, bureaucratic process riddled with nitpicking. And yet, SEBI’s own orders indicate that it is either unable, or unwilling, to spot glaring deficiencies and fraud. Shorn of legalese, SEBI’s orders only confirm what the market already knew—that companies collude with investment bankers and a set of market operators or high net-worth individuals (HNIs) to fix the entire process, to rip off investors. In many cases, especially tiny IPOs, the process is so brazen that neither company employees nor institutional investors touched the issue. Also, many promoters are what can be called ‘habitual offenders’; they have ripped off investors with similar fraudulent IPOs in the past and these companies have been abandoned after being suspended by the Bombay Stock Exchange.

Strangely, the regulator appears to have no mechanism for tracking even the big entities through the usual KYC (know your customer) processes such as PAN cards or address proofs, forget about scores of relatives whose names were deliberately suppressed to siphon off issue proceeds. In one case, the promoter changed the spelling of his name and the name of his company as well. Will anyone in the government finally ask SEBI about the quality of its surveillance software, if it fails to catch even large connections such as promoters and directors of listed entities? After all, there are not more than 5,000 to 7,000 such entities, including those that are not regularly traded or are suspended by bourses without any further action or investigation. Clearly, there is need for a complete overhaul of the IPO process.

-- Sucheta Dalal