Mumbai: Hyderabad-based Karvy Stock Broking Ltd (KSBL) has been barred by the Securities and Exchange Board of India (Sebi) from taking up any new primary market assignments for a period of one year for alleged irregularities committed in 21 initial public offers (IPOs) between 2003 and 2005. The matter relates to a case in which few market participants reportedly used close to 60,000 fictitious demat accounts to corner share allotments meant for retail investors.
The scam was unearthed after stock markets complained to Sebi in October 2005 about large scale off-market transactions immediately following the date of allotment and prior to the listing on the stock exchanges. Following this, Sebi ordered NSDL and CDSL to examine all 105 IPOs listed between 2003 and 2005. Of these, the practice of using benami demat account holders to corner retail quota was noticed in 21 IPOs during this period.
However, the stock broking firm has been allowed to continue with its primary market activities that have been undertaken prior to the regulator’s order. The market regulator alleged that KSBL as a syndicate member had played an active role in assisting, aiding and abetting the key operators in cornering the shares issued in the IPOs.
In March 2014, Sebi prohibited KSBL from taking any new assignments including opening of fresh demat accounts for a period of six months. However, the above order was challenged before the Securities Appellate Tribunal (SAT), which in January 2015 asked Sebi to issue fresh orders on merits within a period of four months.
The Sebi investigation found that that many individuals/entities had opened various demat accounts in fictitious/benami names and made large number of applications in the IPOs in the category of retail investors (each of the applications being of small value as to make it eligible for allotment under the retail category). After cornering the shares using these fictitious accounts, the same were transferred in off-market to ultimate beneficiaries who were the financiers in the IPOs.
In the show cause notice issued to KSBL in September 2006, Sebi noted that the stock-broker had introduced large number of savings bank accounts to the bank for the purpose of arranging IPO finance from banks, which facilitated the key operators to make multiple applications.
“The only logical conclusion is that each one of Karvy group entities had a pre-assigned role and that all had knowledge about each other’s role. Thus, I conclude that the Karvy group entities have not maintained arm’s length distance between its different businesses in the securities market, starting with the DP, financier, Register and Transfer Issuer and ending with the stock broker. Rather, the chain of events and the manner in which they have occurred, demonstrate that all these entities were hand in glove with each other and were supplementing the activities of each other,” the Sebi order noted.
