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Tainted ten to pay for sin

Mumbai, Nov. 21: Eleven months after it unearthed a share cornering fraud in initial public offerings (IPOs) issued between 2003 and 2005, the Securities and Exchange Board of India (Sebi) today ordered two depositories and eight depositary participants (DPs) to pay a “disgorgement amount”' of around Rs 116 crore. The market regulator imposed this amount as it felt that several entities “either deliberately closed their eyes when the wrongdoers perpetrated their illegality or were actively involved in the transactions”.

Accordingly, National Securities Depository Ltd and its DPs, including Karvy Stock Broking, HDFC Bank, Khandwala Integrated Financial Services, IDBI Bank, Jhaveri Securities, ING Vysya Bank and Pravin Ratilal Share & Stock Broking, were asked to pay an amount of Rs 90.02 crore.

Likewise, Central Depository Services Ltd (CDSL) and its DPs — Karvy Stock Broking and Pratik Stock Vision — have been asked to “jointly and severally disgorge” the amount of Rs 25.80 crore. The disgorgement order, which is the first of its kind, was delivered by Sebi whole-time member G. Anantharaman.

Quantifying loss

To arrive at the loss suffered by genuine retail investors and to establish the disgorgement amount, Sebi adopted a methodology wherein details of IPO allotments received by each of the 58,938 demat accounts were obtained from the depositaries.

In respect of each of these accounts for the 21 IPOs, the number of shares received through IPO allotment was multiplied by the difference between the closing price on NSE on the first day of listing of respective IPO and the respective issue price thereby arriving at the gains that accrued to the fictitious/benami demat account holders.

Sebi said the entities named in the order could seek contribution/indemnity from any party, which they believe is liable to a greater extent than quantified. They can also seek contribution from individuals and companies, which were involved in the IPO cornering, but are not named, as they are not intermediaries under Section 12 of the Sebi Act 1992.

Moreover, the parties have been given the liberty to use the means of a civil suit or any other form of dispute resolution to address the quantum of their liability from each other. The amount will be paid and deposited in a special account created for the purpose — Sebi A/c IPO disgorgement.

Unlike the first interim report of April 27, today’s Sebi order said there would be no separate hearing granted to the parties this time round. The findings of the interim order will be co-terminus with the findings of the enquiry.

As to why the depositories and the DPs have been asked to pay the amount, Sebi said the gains made by various market participants involved in the IPO irregularities is in the nature of “unjust enrichment made at the cost of thousands of genuine retail investors who were deprived of their rightful opportunity to get allotment in IPOs under the retail category.”

Sebi is of the opinion that market participants found involved in the illegalities relating to IPOs, may divert the ill-gotten gains for some other purpose to the detriment of investors and securities market and therefore there is a need to disgorge the “ill gotten gains made by the perpetrators’’.

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