April 19, 2009

life in financial markets: wrong focus by sebi & media in ipo scam

As usual, the attention has got focussed on the small fish (depositories) while the big fish (investment bankers, DPs and banks) in the 2004-05 IPO benami scam case are getting un-noticed.

The lead managers (investment bankers) to IPOs have got away with sheer murder. They had, and still continue to have, complete disregard for their responsibility to incorporate simple software-driven checks on applications with similar addresses that will easily weed out multiple application bids. But no! They do not care! Because Sebi handles them with the softest gloves. Even the current Sebi chairman, C.B.Bhave, has been a coward in bringing them to book.

Here are the excerpts from the IPO norms that impose the responsibility to weed out multiple application bids on the lead managers:




I. The Lead Merchant Bankers shall make interse allocation of the activitie s / sub


II. The lead merchant banker shall ensure that activity wise allocation is properly

delineated and that the Board is advised the name of the Lead Merchant Banker

responsible for each set of activities / sub -activities, well before opening of issue.

This advice must be signed by all Lead Merchant Bankers to issue.

III. Where the circumstances warrant joint and several responsibility of Lead

Merchant Bankers for a particular activity, a co-ordinator designated from among

the Lead Merchant Bankers shall furnish to the Board, when called for, with

information, report, comments etc. on matters relating to the activity (of joint and

several responsibility).

IV. The activities / sub-activities may be grouped on the following lines:

(a) Capital structuring with the relative components and formalities such as

composition of debt and equity, type of instruments.

(b) Drafting and Design of the offer document and of advertisement / publicity

material including newspaper advertisements and brochure / memorandum

containing salient features of the offer document.

(c) The designated Lead Merchant Banker shall ensure compliance with the

Guidelines for Disclosure and Investor Protection and other stipulated

requirements and completion of prescribed formalities with Stock Exchange,

Registrar of Companies and SEBI.

(d) Marketing of the issue, which will cover, inter alia, formulating marketing

strategies, preparation of publicity budget, arrangements for selection of (i)

ad-media, (ii) centres of holding conferences of brokers, investors etc. (iii)

bankers to issue, (iv) collection centres (v) brokers to issue and (vi)

underwriters and the underwriting arrangement, distribution of publicity and

issue material including application form, prospectus and brochure, and

deciding on the quantum of issue material.

(e) Selection of various agencies connected with issue, namely Registrars to

Issue, printers and advertising agencies.

(f) Follow-up with bankers to the issue to get quick estimates of collection and

advising the issuer about closure of the issue, based on the correct figures.

(g) The post-issue activities will involve essential follow -up steps, which must

include finalisation of basis of allotment / weeding out of multiple

applications, listing of instruments and despatch of certificates and refunds,

with the various agencies connected with the work such as registrars to the

issue, bankers to the issue, and the bank handling refund business.

(h) Even if many of these post-issue activities would be handled by other

intermediaries, the designated Lead Merchant Banker shall be responsible

for ensuring that these agencies fulfil their functions and enable him to

discharge this responsibility through suitable agreements with the issuer


(i) Ordinarily, one Lead Merchant Banker shall be responsible for post issue


This month, I wrote two articles on the issue in the magazine I work for.

The second article written by me in mid-April:

As the spotlight in ongoing saga in the 2004-05 IPO benami scam remains only on the dispute between Sebi board and its own two-member board committe, other serious offenders are giving the regulator a slip in the dark.

The Sebi board, in a meeting held on 13 April, decided to refer to a legal counsel the dispute arising from the 4 December order of the committee which was appointed last year to take forward Sebi's investigation of the role of NSDL and CDSL in the IPO scam. C. B. Bhave, as usual, reclused himself from the meeting due to a conflict of interest.

The referment was induced by a single dissenting vote of a Sebi board member who is understood to be one of the two members of the special board committee. He had earlier raised objections in Sebi not issuing the committee's order against NSDL and also about not making it public. Other Sebi board members are of the view that the two-member committee has not properly complied with the terms of reference given to it. There are six board members in Sebi in addition to the chairman.

What is more concerning is the fact that other intermediaries involved in the scam are getting away from Sebi's focus. These include over 50 entities that created over 50,000 benami demat accounts with same addresses in about 20 IPOs, about 15 financiers, the lead managers in these IPOs who failed in its mandated responsibility to weed out multiple application bids and the two depository participants, Karvy Stock Broking and Pratik Stock Vision, who accounted for about 90% of benami demat accounts.

Sebi had itself stated in its earlier orders in 2006 the need to probe the details of these intermediaries. For instance, the 12 January 2006, interim order in the IDFC IPO case, Sebi member, G. Anantharaman, stated "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." Nothing has come out of that so far.

The first article written in the first week of April:

A two-member independent panel, in December, found the National Securities Depository (NSDL) guilty of negligence in the IPO (initial public offer) benami application scam and financial fraud of 2003-05. Over 40,000 fake and fraudulent demat accounts were opened by a handful of depository participants of NSDL as well as of the other depository, Central Depository Services (CDSL). But this panel's adjudication order has not been public by Sebi and allegations of Sebi's board members being responsible for the non-disclosure are being made.

It is exactly the sort of conflict that current chairman of the Securities and Exchange Board of India (Sebi), C.B. Bhave, had apprehensions about when, in February last year, he was offered the chairman's job. At that time he was the managing director of the National Securities Depository (NSDL). Sebi had passed a Rs 116 crore disgorgement order against NSDL in April that was stayed in November 2007 by the Securities Appellate Tribunal (SAT) on an appeal by NSDL.

He had made a precondition of his accepting Sebi chairman's job ofer that all pending Sebi cases against NSDL will be handled by an independent committee or person, outside of Sebi office but with special powers to adjudicate in the matter. In August last year such a committee was formed with two members which four months passed its verdict in the matter. The order does not appear to levy any financial penalty against NSDL but imposes on it a responsibility to levy responsibility on individuals within NSDL that caused it to be negligent during the IPO scam period.

It is not clear yet whether this order has been delivered to NSDL and, if it has, whether NSDL has appealed to SAT. It is also not clear who, in Sebi, is preventing the panel's order from being made public. All Sebi orders have to be displayed by Sebi on its website. Queries sent to Sebi and NSDL were not immediately answered.

It is also not clear whether Sebi's April 2006 interim order of disgorgement against NSDL and CDSL has been reversed by the special panel. Disgorgement amounts from over 10-15 financiers and execuants (who were non-DPs and not connected with the two depositories) have already been collected by Sebi in the last one year through the consent order mechanism. Sebi needs to disclose the details in the case very soon.

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