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Sebi unearths demat racket

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December 16, 2005 10:20 IST

The Securities and Exchange Board of India has unearthed a demat racket involving entities that opened thousands of demat accounts and applied for the Yes Bank public issue through multiple applications to ensure higher allotments in the retail portion of the offering.

Sebi has advised the two depositories in the country -- NSDL and CDSL -- to step up their surveillance and referred Bharat Overseas Bank and Vijaya Bank to the Reserve Bank of India for examining their roles in opening bank accounts of benami entities and funding their initial public offer (IPO) applications.

The market regulator has also instructed NSDL to undertake a comprehensive inspection of depository participant Karvy, particularly focusing on the systems and procedures put in place by the firm for implementing "know your client" norms.

The IPO Fraud
  • Roopalben Panchal applies for single application in own name, gets no allotment
  • But ensures herself 9.47 lakh shares by operating through 6,315 demat accounts
  • All demat accounts with depository participant Karvy, most had the same address
  • All bank accounts with Bharat Overseas Bank

    Sebi Action

  • NSDL and CDSL asked to increase their surveillance
  • NSDL to inspect records of Karvy to see if systems are in place to implement KYC norms
  • Bharat Overseas Bank and Vijaya Bank refered to RBI to examine their role in opening accounts of benami entities
  • 13 entities barred from dealing in Yes Bank shares and ensuing IPOs

  • The move comes as part of the order passed by the regulator in a matter relating to allotments in the Yes Bank IPO. Whole-time Sebi member G Anantaraman banned 13 entities from buying, selling or dealing in shares of Yes Bank and other ensuing IPOs for manipulating the bank's IPO.

    For instance, one Roopalben Panchal had applied for the issue in her own name as the first applicant for only 1,050 shares amounting to Rs 47,250 and apparently did not get any allotment.

    However, a day after the shares were credited to the allottees, she received 150 shares each from 6,315 demat accounts totalling 947,000 shares. Of the 6,315 demat accounts, 6,221 entities had the same address and had bank accounts with Bharat Overseas Bank.

    In a similar instance, Sugandh Estates and Investments Pvt Ltd had received 150 shares each from 1,315 demat accounts totalling 197,000 shares.

    Twenty randomly selected accounts had the same address and all of them issued cheques bearing continuous serial numbers drawn on Vijaya Bank, Ambavadi, Ahmedabad, towards payment for the application. These two entities, apart from 11 others, have been barred from dealing in the Yes Bank issue as well as other forthcoming public offers.

    The Sebi order also says that further probe is required for examining the systemic fault, if any, of Karvy (registrar to the issue) and lead managers DSP Merrill Lynch and Enam Financial Consultants in identifying and weeding out benami applications.

    Besides, the order said, "There is a likelihood that benami and front entities may end up acting as conduits for laundering of ill-gotten funds that may arise out of proceeds of crime, drug trafficking, terrorist financing and a host of other related activities."

    As for Karvy, it may be recalled that the regulator had recently passed an adjudication order against the company for not adhering to KYC norms.

    BS Markets Bureau in Mumbai