The Securities and Exchange Board of India has done a good job of uncovering the fictitious applications in the Yes Bank IPO. The modus operandi in both the cases that have been brought to light was simple. Multiple applications in different names were made and all the applications were for the maximum number of shares that could be allotted to retail applicants. Since the number of applications was very high ? 6,315 in one case and 1,315 in the other ? the chances of allotment increased considerably. The surprising feature, however, was that in each case all the entities had the same address and the same bank branch, and yet this curious fact was not detected by the registrar to the issue, the depository participant, the depository, the banks or the merchant bankers.

Clearly, there are serious loopholes in the system that allow this kind of manipulation to take place, and Sebi has done the right thing by calling for a thorough probe to determine whether systemic faults exist in the whole process of weeding out benami applications. Complaints about the abuse of the IPO allotment process are common and the uncovering of so many benami accounts in just one IPO naturally raises the suspicion that it could be the mere tip of the iceberg. The manner in which the stringent ?Know-your-customer? rules have been flouted in banks and other intermediaries speaks volumes about the ease with which money can be laundered in this country.

In order to detect this type of fraud, the software must be programmed to detect applications from the same address, although they may have different names. But while the sheer volume of applications in the case detected by Sebi would normally call for suspicion, there could well be genuine instances of several applicants having the same address. The revival of market participants and investor database which will allot a unique identification number for each investor has been mooted as a solution. This time, instead of using fingerprints, the proposal is to use a special software, known as dedupe software, which will provide the UINs. The software uses a combination of parameters (presumably one of them could be the address of the investor), in one or more databases, to arrive at unique identities. But at the heart of the matter lies the special allotment system for so-called small investors. Investors who put in Rs 1 lakh for each IPO can hardly be called ?small?. Why not have a fully book-built issue, as in other countries, and allow retail investors, small or otherwise, to pick up the shares from the secondary market? That will not only increase the efficiency of the IPO process, but stop benami applications as well.