Yes Bank IPO Irregularities:

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The Securities and Exchange Board of India (SEBI) identified systemic failure in the initial public offering (IPO) of Yes Bank Ltd. (YBL) and directed the National Securities Depository Ltd. (NSDL) and other market participants, including Karvy Stock Broking Ltd. (Karvy-DP) to keep more vigil while dealing in IPOs. It also suspended 13 entities from participating in the capital market till further orders, pending enquiry. The findings of preliminary enquiry brought out a prima facie case of violation of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Markets) Regulations, 2003.

Multiple DEMAT Account Scam:

In the recent past, during the first three months of the calendar year 2006, there was a great hype for subscription to the IPO’s. Many public issues were oversubscribed several times. The scam was being bursted when it was found that some unscrupulous investors had opened multiple DEMAT accounts for subscribing for the IPO’s. In certain cases the applications were in fake names when there was no such DEMAT accountholder. All this was done just to ensure allotment of the shares in case of an IPO.

SEBI issued guidelines to the Depository Participants (DP’s) under “Know Your Client (KYC)” to obtain various information regarding the DEMAT accountholders prior to opening the DEMAT account. DEMAT stands for dematerialization of physical shares and holding it in an electronic form which is convenient and a must for undertaking trading of the shares. Such know your client guidelines were issued earlier but it was not strictly followed by the DP’s which had resulted into multiple DEMAT account in the some name.

The IPO of YBL opened on June 15, 2005 and its shares were listed on BSE and NSE on July 12, 2005. The case related to one Roopalben Nareshbhai Panchal, who had transferred 9,31,600 shares to various entities in seven off-market transactions on July 11, 2005 that is prior to the listing and commencement of trading on the stock exchanges. In order to get an allotment of 9,31,600 shares, Ms. Roopalben Panchal would have had to apply for crores of shares involving many crores of rupees in application money. However, it was observed that Roopalben Panchal’s name did not appear in the list of top 100 public issue allotees. Roopalben Panchal had used benami names for making share purchase applications in the names of poor people living in the shanty towns.

 

Lessons from the Scams:

Key lessons from the IPO scam are:

1)      There is a need for stringent provisions and a disciplinary mechanism for investors, besides stricter surveillance on all market intermediaries.

2)      Currently, depository-level inspections are minimal. This activity should be done on an ongoing basis with the help of professionals.

3)      Banks should be asked to indulge in core banking, and other capital market-related activities ought to be separated.

4)      The practice of bankers being brokers and depository participants should also be reviewed.

5)      Similarly, having the same entity as broker and depository participant should be discouraged. It should be allowed only after utmost care is taken that internal controls are in place.

6)      Providing finance to apply for IPOs or capital market activities from the bank or branch where broking/DEMAT account is maintained should be prohibited.

7)      Bank and DEMAT accounts should not be activated unless KYC (KNOW YOUR CUSTOMERS) norms are adhered to.

8)      There is also a need to monitor off-market transactions and money transfers.

9)      Providing each market player, including investors, with a unique identification number (like MAPIN) that can check many a market evil.

10)  The unique identification number must be mandated in all primary and secondary market deals, bank accounts, high-value transactions, property registration, vehicle registration, and so on.

 

Some Corporate Examples:

1)      Initial Public Offering (IPO) of Union Bank of India – August 2002.

Union Bank of India, one of the largest public sector banks in the country which has achieved excellence in every sphere of banking and has emerged as a strong bank, hit the capital markets in August – 2002 with an IPO of 18,00,00,000 equity shares of Rs. 10 each for cash at a premium of Rs. 6 per share (at an issue price of Rs. 16 per share) aggregating to Rs. 288 crores of capital. The IPO opened to public on August 20, 2002 and closed on August 28, 2002. The official information declared indicated that the bank intended to divest government equity upto a maximum of around 40%.

The operating profit of the bank improved from Rs. 511 crores in 2000-01 to Rs. 869 crores in 2001-02 and the net profit of the bank has almost doubled from Rs. 155 crores to Rs. 314 crores. This was brought about by bringing down the cost of deposits by way of improving the share of low cost deposits, providing thrust to retail finance, and effective cost control measures.

For its IPO, the bank engaged a host of lead managers which included ICICI Securities, DSP Merrill Lynch, JP Morgan Stanley Private Ltd., SBI Capital Markets Ltd., etc. The bank planned to raise the IPO since the profits generated by the bank were not found to be sufficient to improve its capital adequacy ratio which was 11%. Also the government had already declared that it would not pump additional funds into the bank. A majority of the IPO proceeds was planned to be utilised to meet the growing demand for credit, and for funding its ambitious Information Technology program. It was planned to spend about Rs. 100 crores towards interconnecting about 500 branches in 60 centers across the country, in the next three years.

The IPO was oversubscribed by five times, with the bank collecting an amount of Rs. 1,432 crores from the primary market. The best response of 30% came from Maharashtra, while the South contributed to a tune of Rs. 185 crores. It even attracted contributions from the backward districts of Uttar Pradesh to a tune of Rs. 80 crores. The shares were listed on the Bombay Stock Exchange on September 24, 2002. On the very first day a huge volume of 70.87 lakh shares were traded. On the first day the shares opened at Rs. 17.50 but touched an intra-day low of Rs. 16.50 to close at Rs. 16.30.

2)      The Power Trading Corporation (PTC):

The Power Trading Corporation was set up to develop the market for power so as to achieve optimum utilisation of power resources and catalyse development of mega power projects. Its main objective was to purchase power from power generating/surplus companies/entities and trade the electric power in an optimum manner. PTC an sell power to the State Power Utilities, Licensees, bulk consumers, etc. whether in private or public sector or joint sector undertakings in India and abroad.

PTC came out with an IPO that opened on March 1, 2004 and closed on March 8, 2004. The IPO was of 5,84,99,990 of Rs. 10 each for cash at a premium of Rs. 4-Rs.6 i.e. at a price of Rs. 14-Rs.16 per share aggregating to Rs. 819 mn at minimum price and Rs. 936 mn at the maximum price. Of these, 50 per cent would be allotted to Qualified Institutional Buyers, 25 per cent to retail investors and the balance to high net worth individuals.

The main purpose of the issue was for PTC to raise funds in order to:

a)      To build a long-term capital base to meet its capital requirements.

b)     To provide greater liquidity to its strategic and financial shareholders.

c)      To meet the expenses of the issue.

 

3)      IPO by ONGC:

ONGC is the world’s sixth largest oil company. The recent offer for sale of 10% of ONGC equity was met with great enthusiasm. The offer was oversubscribed by 5.88 times. The issue was finally priced at Rs. 750. Full subscription was reached within minutes of issue opening. The public offering of ONGC attracted bids worth over Rs. 60,000 crores. ONGC offer yielded Rs. 10,512 crore. Five merchant bankers including DSP Merrill Lynch, Morgan Stanley, Uday Kotak, ICICI Securities and HSBC were shortlisted to become advisors for disinvestment of 10% equity in ONGC through a public offer.

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