The Telegraph
Since 1st March, 1999
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- Sebi and the Yes Bank public issue

A month ago I got a phone-call from a stranger deep in Gujarat. He went on about the Yes Bank public issue, and about its manager, Karvy Consultants. Sensing a story, I passed on the telephone number to a junior colleague, who assigned it to his mental waste-bin.

There it rested until last week, when the caller rang me up again. What he was alleging was that the issue managers had improperly made millions in the Yes Bank issue, and that instead of punishing them, Sebi was going after small 'retail' investors. This time I decided to understand the issue myself first. I got hold of two orders issued by G. Anantharaman, whole-time member of Sebi ' a 15 December one on the Yes Bank issue and a 12 January one on the IDFC issue.

The first thing I noticed was the enormous improvement in drafting. The last time I had read Sebi reports with some attention was when it banned Ketan Parekh, Shankar Sharma and other brokers, those 'naked short sellers', because they had the nerve to make the market collapse after Yashwant Sinha's budget of 2001. I was appalled by the reports. The standard format was that Parekh, Sharma, or any other of the people Sebi wanted to nail, sold some shares on day X and time Y, the price fell at time Y+1, so they were guilty of having caused a market meltdown. On the basis of those reports, which Sebi never dared publish, it banned the targetted persons from the market. The government was not content with such a mild punishment.

It hurled income tax authorities and any other minion it could find at them and imprisoned them. After a few months it discharged them. The entire action had extremely questionable factual basis and no legal basis. No one was convicted of anything. But fear was instilled: defy the BJP government and you will lose your liberty and livelihood. The Ketan Parekh affair and the Tehelka affair: they were the worst blots on the record of the BJP government.

Compared to those sloppy, incompetent reports, the new ones were much better written. In D.R. Mehta's and G.N. Bajpai's times, Sebi used to do slavish, slapdash reports and punish brokers and traders on their basis. Those affected used to go to the Special Appellate Tribunal or the courts and get the orders turned down, and then Sebi had to retract its punishment. In his last months, Bajpai learnt the lesson. He persuaded the government to appoint two new full-time members ' Madhukar and Anantharaman. Of the two, Anantharaman has proved invaluable. His language is so mellifluous that it will bowl over any judge. His investigation is meticulous, and he overwhelms the reader with facts; so a judge is likely to look only at Sebi's power to impose the punishment Anantharaman imposes. Hence his orders are much less likely to be overturned.

Let me now come to the content of the two reports. Both catalogue an operation located in Ahmedabad, whose major character is one Rupalben Nareshbhai Panchal. Yes Bank made its public issue in June. Sebi normally allows four weeks for the issue, at the end of which the shares are rationed out amongst applicants. Sebi ordains that a certain proportion of the shares must be allotted to 'retail' investors, who cannot be given more than a small number of shares each. Soon after allotment, Rupalben bought the 150 shares allotted to each of 6,315 applicants at Rs 45. When the shares were listed in the market, the price settled around Rs 61. She sold off most of her holdings at that price. And she was not a lone ranger; there were a score of relatives, friends, and financial firms around her. They all participated in this game. On an investment of about Rs 50 million, they made about Rs 18 million in a matter of four weeks.

IDFC made its issue in July. This time Anantharaman wrote a more elaborate, 49-page report. He traced the transactions of Rupalben and her gang, and drew neat little bubble diagrams showing how many shares were sold by whom to whom. They made almost 44,000 applications, or about 17 per cent of the total; they were allotted 11.7 million shares ' 8 per cent of the issue.

This time Anantharaman did not calculate the profit made by his subjects, but my reckoning is that they made about Rs 30 million. Not bad at all. By writing out perhaps 15,000 applications and cheques, they had made roughly Rs 50 million on an investment of twice as much.

This Anantharaman finds shocking and invidious. He chooses his words carefully; but his outrage cannot be concealed. His language comes to life; I really love this sentence: 'The entire gameplan, craftily designed, masterminded and executed by a coterie of operators acting in concert, in a tout ensemble through the mechanism of front-entities of name-lenders seeking to impart a veneer of acceptability to a deal which is otherwise sham in an agonistic aggression in the market through predatory cornering is a clear abuse of the very process of IPO, meant to shore up the participation of retail investors.' It must make one's blood boil ' whatever it means.

Except that the racket operated by Rupalben and her associates is one that was rife in the 1980s. Then there sat a joint secretary in the finance ministry with the grand title of Chief Controller of Capital Issues. He gave out permission to make public issues; the cream of Indian industrialists used to queue in the sandstone corridor outside his office to see him. He used a formula based on past sales and profits which systematically underpriced the issues ' the better the company, the greater the underpricing. As a result, one could make immediate profit by getting an allotment and selling the shares as soon as they were listed. The CCIE also laid down a quota for what then were called 'small' investors. There was a scramble for those shares; and many made multiple applications and made big profits, despite its being illegal. Rupalben was only repeating history.

Except that I thought we had ended that history. In 1992, the finance ministry abolished the CCIE, and transferred his powers to Sebi, which had been set up in 1988 but given nothing to do. But it deliberately did not transfer the power to price issues, which was the source of all the racketeering. It abolished that power.

Against our intentions then, Sebi has reacquired the power ' by rationing issues between so-called promoters, Qualified Institutional Buyers, and 'retail' investors. Now, the price is essentially negotiated by the issue managers with big institutional investors. And they extract their pound of flesh ' in the Yes Bank issue, they pocketed a quarter of what the company raised. What my caller was saying was that the issue manager takes bribes from QIBs for underpricing the issue; the two together make most of the money at the expense of the isuing company. What Rupalben made was peanuts compared to investment bankers and mutual funds. And Sebi will never touch them, for they are only participating in a racket which owes its existence to its allocation rules.

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