SEBI probe Karvy's IPO scam roots to 2003 | india | Hindustan Times
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SEBI probe Karvy's IPO scam roots to 2003

The regulator says that it used accounts to corner shares meant for retail investors in share issues, reports BS Srinivasalu Reddy.

india Updated: Jun 24, 2007 22:59 IST
BS Srinivasalu Reddy

An investigation by the Securities and Exchange Board of India (SEBI) has traced the roots of falsely named accounts and multiple accounts against same names opened by the Hyderabad-based Karvy group in the IPO scam to June 2003.

The brokerage house, which is facing suspension of broking work and a freeze on new electronic share accounts on account of irregularities, used such accounts to corner allocation of shares meant for retail investors in share issues, says the regulator.

Though SEBI's first order in the IPO scam was announced on December 15, 2005, followed by two interim orders in January and April 2006, the latest probe finds the genesis of the scandal two years before the first order.

SEBI found the presence of Karvy group companies across the entire chain of the initial public offering (IPO) process, including the funding to benami (falsely-named) accounts through and outside banking system.

“The evolution of Karvy’s role in the IPO irregularities began during the year 2003 when Karvy had presented to Bharat Overseas Bank (BhOB) an idea paper and a process flow ... The investigation conducted by SEBI found that the modus operandi (traced to 2003) had been adopted for cornering of IPO shares in 21 IPOs that came during 2003-2005,” said investigator G. Anantharaman in his 191-page final order on the scam released at the weekend.

The SEBI order said that Karvy group was present in the entire spectrum of the IPO process. The irregularities were resorted to in order to corner the proportion of shares earmarked for retail investors by applying for shares in smaller quantities. Those investors applying for IPO shares amounting to less than Rs one lakh are considered retail investors.

The regulator has suspended the registration of Karvy Sock Broking Ltd (KSBL) for three months from the broking business and prohibited it from opening fresh demat accounts till the end of 2007.

The order against KSBL as a depository participant (DP) will come into force with immediate effect, while that as broker will come into effect on expiry of 21 days from the order date. KSBL is a member of the National Stock Exchange, Mumbai's BSE and the Hyderabad Stock Exchange (HSE).

The manner of opening accounts and dematerialised accounts demonstrated Karvy’s control and its knowledge of the fictitious/ benami nature of these accounts, SEBI said. It also found that in some of these bank accounts, names had been added on introduction of Karvy Investor Services Ltd. According to established central bank rules, banks must ascertain the credentials of the persons wishing to open accounts.

“It was found that as many as 58,938 afferent (benami/manipulated) dematerialized accounts had been opened (during 2003-05) with various DPs by the key operators ... It was found that a substantial proportion of the afferent accounts identified by SEBI were held with Karvy DP,” the regulator's orders said. In all, Karvy cornered more than 80 per cent of these accounts.

The major findings include spawning DP and bank accounts by changing surnames,not taking the mandatory margin money and providing 100 per cent funding to key market manipulators, bidding for shares on behalf of benami accountholders, issue of consolidated refund orders by Karvy Computershare (the registrar and transfer agent from the group) adjustments against loans provided by Karvy Consulting and synchronized off-market transactions even before the listing of shares in depositories.