The Securities and Exchange Board of India has charged HDFC Bank with not exercising due diligence, resulting in several demat accounts being opened under fictitious names leading to the IPO scam.
"From the inspection of DP operations of HDFC bank, it emerged that HDFC bank had failed to exercise due diligence and has opened demat accounts in the name of fictitious / benami entities," Sebi said in its interim order on the IPO scam, which involved investors opening multiple demat accounts under fictitious names to corner the retail portion of public issues of companies.
Numerous irregularities and non-adherence to the prescribed norms were found in HDFC, the order added.
Sebi also said that during the verification, the bank had confirmed that it has complied with the KYC norms in respect of its demat account clients.
"In the light of the findings of the inspections, the confirmation by HDFC Bank appears to be totally divorced from reality as established," it said.
Citing an example, Sebi said: "286 Savings bank accounts opened by the key operator (Purshottam Budhwani) with HDFC Bank is clearly proof enough for the plan of action to open multiple dematerialised accounts and channelise the funds in the manner they would bury the audit trail."
Purshottam Budhwami was one prolific bank customer. He had 286 savings accounts under different customer IDs with various joint account holders in various HDFC Bank Mumbai branches. And HDFC Bank, by the looks of it, never knew.
This is one of the key findings of the 252-page interim order released by Securities & Exchange Board of India (Sebi) on Thursday night.
Sebi lists Budhwani as a key operator who cornered the retail portion of IPOs from companies like Suzlon Energy. Sebi also lists their financiers. In the case of Suzlon, Budhwani, along with eight other individuals and firms used close to 22,000 accounts to corner 3.74% of the retail portion of Suzlon Energy's IPO.
Scores of market players cornered shares in some 105 initial public offers by unlawfuly creating multiple identities and cornering the retail portion. All this happened between 2003 and 2005.
Regarding banking operations of the bank, Sebi said that some of the bank account transactions examined by it appeared to be of 'suspicious nature.'
It noted that "inspection of HDFC Bank by RBI had revealed violation of KYC norms for IPO subscription and cornering of retail portion of IPO through fictitious benami demat accounts and RBI has levied monetary penalty on HDFC Bank."
"The role of HDFC Bank raises serious concerns on its compliance, while suggesting it had truck with Purshottam Budhwani in so far as it had actively lent its system to be misused by wily operators," it said.
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