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Compensation for IPO investors

Arnav Pandya tells us how the IPO scam 'victims' will be compensated who had lost out majorly.

business Updated: Jan 26, 2008 14:24 IST

There have been talks and reports about the compensation for retail investors who lost out due to the scam in the initial public offer (IPO) process. Indians are not familiar with the manner in which this kind of compensation works and hence they need to be aware of the process. This will help them, as when they are actually eligible for the benefit, understand the exact position on this front.

Returning gains

The entire action works on the concept that in a situation where there were people who benefited in an unfair manner from some action in the market then they cannot be allowed to profit from the situation. In such a position the authorities will identify those who have gained through their action and then take action to tackle the position.

The people who have gained in an unfair manner are asked to give up these gains and then the money is distributed to those who have lost out due to the action of these people. This calls for identifying those who lost out and then compensating them according to the conditions that have been fixed. There is thus a distribution of money to their rightful owners.

No allotment

In case of the Indian IPO case there were several people who did not get any allotment at all. This happened because the issue was heavily oversubscribed and only some people were able to get some allotment for the applications that were made.

The important thing here is that the oversubscription took place as there were a large number of applications that were not actually from genuine small investors and this led to several people not getting any shares at all. There will be a working for this and those who lost out due to such a situation would be eligible if it is so decided.

Short allotment

The point that will also come up is that there were also investors who got allotment of several shares but they were not able to get allotment to the extent that they would have normally got.

Again the reason for this is that there were a large number of applications that were not from genuine retail or small investors. This also led to the losing out of gains for the investor and hence this category of people also needs to be considered for the purpose of looking at any distribution of compensation.

The process

The compensation process consists of identifying the victims and then deciding how these people will be compensated for the loss that they have suffered.

At the present moment this is the intention that has been stated and one has to wait for the actual action to begin before raising expectation of any receipt of the amount as compensation. There will be a lot of details that will emerge on the issue in the coming days and these will have to be followed carefully to understand its full impact.