SEBI imposes 116 cr penalty in IPO scam

MUMBAI: The Securities and Exchange Board of India came down like the proverbial tonne of bricks on market intermediaries, slapping the largest penalty ever for their involvement in this year’s IPO scam.

In a “disgorgement order” — India is seeing such an order for the first time —– SEBI has asked them to pay a collective penalty of Rs115.81 crore.

A disgorgement order pertains to return of illegal gains made by the intermediaries. The money may go into the Investor Protection Fund.

The National Securities Depository Ltd, owned by government-owned financial institutions and the National Stock Exchange, and the Central Depository Services Ltd, also owned by financial institutions and the Bombay Stock Exchange, will have to pay up Rs45 crore and Rs12.89 crore, respectively, to the regulator.

Others, such as Karvy Stock Broking, HDFC Bank, Khandwala Integrated Financial Services, IDBI Bank, Jhaveri Securities, ING Vysya Bank, Pravin Ratilal Share & Stock Broking, and Pratik Stock Vision - have been asked to cough up various amounts (see table) in six months in proportion to their involvement in the scam.

The order said these entities can seek contribution from any party other than the intermediaries involved in the scam. “All parties are at liberty to seek contribution or indemnity from any party that they believe is liable to a greater extent than quantified here, as also from individuals and companies which were involved in the IPO cornering or fraud but are not named, not being intermediaries under section 12 of the SEBI Act 1992,” the order said.

Disgorgement, as defined by SEBI in its order, “is a useful equitable remedy because it strips the perpetrator of the fruits of his unlawful activity and returns him to the position he was in before he broke the law”.

SEBI arrived at the amount to be disgorged by multiplying the shares garnered the wrongful allotment with the difference between the listing price and the issue price. This was done in each of the 21 cases where unfair allotment was made.

The “disgorgement order” is the first of its kind from the market regulator. Disgorgement was first introduced in advanced markets to deter others from committing similar frauds. In the past, SEBI has used its discretion to levy stiff penalties on wrongdoers.

When DNA contacted CB Bhave, chairman of NSDL, for a reaction, he said, “We haven’t seen the order yet, so how can I comment?” He said NSDL’s lawyers haven’t read the order either.

Earlier this year, SEBI found that 24 key operators had cornered large chunks of the retail portion of 21 IPOs between 2003 and 2005 by using benami or fictitious accounts. The operators and their financiers are alleged to have used 58,938 such accounts.

After the IPO allotment, these fictitious allottees transferred shares to their principals, who in turn transferred the shares to the financiers who had originally made the funds available for executing the plan. The financiers sold most of these shares on the first day of listing, making huge gains.