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IPO scam: 24 operators shown the door

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Last updated on: April 28, 2006 03:41 IST

The Securities and Exchange Board of India on Thursday barred 24 key operators, including Indiabulls and Karvy Stock Broking, from operating in the stock market and banned 12 depository participants from opening fresh accounts for their involvement in the Initial Public Offer scam.

It also banned 85 financiers from capital market activities.

While admitting to a television news channel that its clients would not be able to operate their accounts from Friday, Indiabulls said it would appeal against the order.

The 256-page SEBI interim order released on Thursday, which followed the investigation of the abusive practices in 105 IPOs floated between 2003 and 2005, beginning with Maruti's public offer to the Suzlon issue, said all those involved in the scam would be prosecuted.

In an unprecedented move, the capital market regulator has called for a revamp of the management of National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL).

Several big banks and securities firms have been hauled up for gross violation of know-your-customer norms and facilitating opening of fictitious accounts. SEBI Chairman M Damodaran did not comment on the order. NSDL Chairman CB Bhave also declined to comment claiming that he had not gone through the order.

Finance Ministry sources welcomed the order, saying it would send right signals to market participants. North Block sources also pointed out that the Reserve Bank of India would take appropriate action against the banks involved in the scam.

Market analysts predicted a spate of appeals to be filed by the involved entities. The interim order is in the nature of show cause notices and the parties can file their objections within 15 days with SEBI.

Depository participants Karvy and Pratik have been directed to shut shop while 12 others have been directed not to open fresh depository accounts as they failed to comply with the know-your-customer norms laid down by SEBI. The prominent names in this list include HDFC Bank, Centurion Bank of Punjab, IL&FS, Motilal Oswal Securities, Khandwala Int Fin Services, IDBI Bank and ING Vysya Bank.

The regulator has also directed NSDL to conduct inspection of another 15 DPs, which had more than 500 demat accounts with common addresses. This list includes ICICI Bank, Standard Chartered Bank, UTI Bank, Kotak Mahindra Bank, Indusind Bank, Citibank, Stock Holding Corporation Of India, BNP Paribas, SSKI Investor Services and UCO Bank.

Refering to Karvy DP and Pratik DP, the regulator said, "They do not appear to be fit to deal in securities market as SEBI registered intermediaries. Appropriate quasi-judicial proceedings are being initiated against the two DPs."

It also said that the depositories had failed to exercise oversight over their DPs. In a strongly worded statement, the order said, "The periodical inspection of DPs being done by the depositories appears to be merely a cosmetic exercise. It is unbelievable that thousands of demat accounts in fictitious/benami names got opened by Karvy DP, Pratik DP and other DPs in utter disregard of the KYC norms laid down by SEBI, presumably the same could have taken place either with the connivance of the depositories or depositories turning a Nelson's eye to the happenings in the depository system."

The order further said that the interim findings in this order demonstrate the contributory negligence on the part of the depositories and their management. "It is the responsibility of the promoters to ensure that the depositories are properly managed in the interests of investors," it said.

To that end, the promoters of NSDL and CDSL have been directed to take all appropriate actions immediately, including revamping of the management. SEBI had engaged iSec Services to do systems audit of NSDL, which brought out certain lapses in the systems and internal controls of NSDL.

The latest interim order by the regulator follows a couple of other orders passed earlier relating to investors violating the law by applying for IPOs using multiple applications to corner higher allocation in the IPOs.

Since these multiple applications are made using dubious demat accounts, the regulator has pulled up the depository participants for not adhering to the KYC norms. Similarly, the regulator has come down heavily on the two depositories, the first level regulators for depository participants, for not performing their job efficiently.