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By Sumit Agrawal
This case pertains to irregularities in various Initial Public Offerings (IPOs) (Commonly known as “Roopalben Panchal Scam” or “Demat Scam”). In the larger scheme of things, it was found by SEBI that a large number of multiple demat accounts with common addresses were opened by a few entities. These multiple demat accounts, which were benami, non-existent or even in some cases, fictitious (using photos from matrimonial portal www.shaadi.com), were used for cornering the shares in the retail category of IPOs.
Since the chances of securing an allotment under the retail segment is normally better than in the non-retail segments, shares reserved for retail applicants were cornered by making applications in the retail category through the medium of thousands of benami applicants, with each application being for a small value so as to be eligible for allotment under the retail category.
After receiving allotments, these benami allottees had transferred shares to their principals (“Key Operators”) who in turn transferred the shares to the financiers. The financiers in turn sold most of these shares on the first day of listing, thereby realizing the gain amounting to the difference between the IPO issue price and the listing price. In a rising market, especially from 2003 to 2005, SEBI found such modus operandi in at least 21 IPOs, including IPOs of Yes Bank, IDFC, Suzlon and Jet Airways.
It is worthwhile to mention here that there were no allegations of involvement of the companies or their promoters but it was directed against a large group of financiers who were using Key Operators to make multiple applications through fictitious/benami accounts to get more and more shares.
SEBI Order against Opee Stock, Ashok Bagrecha and Deepak Jain
In one such case, SEBI’s Whole Time Member (WTM) had passed an order in the year 2008 against Opee Stock-Link Ltd and its director, Mr. Ashok K. Bagrecha, directing disgorgement of ill-gotten profits of over Rs. 14 lakhs made in this process and debarred them from the securities market for one and two years respectively. WTM concluded that Opee and its director acted as Key Operators and together they managed to secure 12,053 shares of the Jet IPO, out of which 3272 shares were transferred before the day of listing of shares of the company with the stock exchange, 3598 shares on the day of listing and 5183 shares after the day of listing.
The said shares were purchased through off-market transactions from 553 demat account holders, who had been allotted shares of the said company. Hence, it was held that they had the control over the 553 demat account holders (name lenders) for the purpose of cornering shares to the detriment of retail investors, and thus unlawfully enriched themselves. Similarly, the irregularities found in the IPO of IDFC, the WTM ordered Deepak Shantilal Jain, a Key Operator, to disgorge Rs. 55 lakh while also restraining him from trading in securities market for two years.
For the same facts, SEBI initiated parallel penalty proceedings under Chapter VIA of SEBI Act 1992, since it is well settled that disgorgement is not a penalty. SEBI’s Adjudicating Officer imposed a penalty of Rs. 25 Lakhs on Opee Stock-Link Ltd.; Rs. 1 Lakh on Ashok Bagrecha and Rs. 10 Lakhs on Deepakkumar Shantilal Jain.
Appeal to Securities Appellate Tribunal
However, on appeals against orders of WTM and the Adjudicating Officer, contrary to SEBI findings, the Securities Appellate Tribunal (SAT) held that unless wrongdoing or illegality is established, there cannot be a question of issuing directions for disgorgement or penalty. It further held the appellants didn’t violate securities laws when they traded in the shares in the secondary market and that the charge against them of cornering shares in the IPO allotment process was not established.
It set aside SEBI orders stating,
“…the shares were allotted to the retail investors not as benamis as they had applied with their own funds and it was thereafter that they had sold the shares to the appellants in the secondary market in off-market transactions at the rate of Rs. 1,170 per share. Off-market transactions are per se not illegal and that was not the charge against the appellants either.
There was nothing to debar the allottees to trade the shares in the secondary market after receiving the allotment under the retail category. Trading and speculation are the two basic activities in the securities market and the Board as a regulator steps in only when such trade or speculation violates the provisions of the securities laws which are meant to protect the market integrity and interest of the investors…”
Supreme Court Order
Now, the Supreme Court has set aside the SAT order, holding that demat account holders were not genuine and either they were benami or fictitious. The shares were purchased on behalf of someone, who had financed these demat account holders and a show was made as if the shares were finally sold to the concerned respondents. Supreme Court considered various facts such as:
The SEBI orders are to be acted upon within two months from the date of the Supreme Court judgment. This judgement also has held certain finer nuances, such as below: –
This Supreme Court judgment is likely to impact all those cases wherever disgorgement is directed by SEBI. This judgment has settled that the reasonable man test should be applied in fraudulent transactions in securities.
Disclosure: The author was part of the surveillance team that investigated some IPO Scam cases while working at SEBI.