Two failed IPOs show that manipulators have withdrawn from the game, for now

With the secondary market sagging, IPO manipulators are not confident of rigging up prices after their offerings

Vaswani Industries Ltd's Initial Public Offering (IPO) was closed for subscription on 3rd May and share allotment details were published on 12th May. After the allotment was published on the registrar's website, retail investors were upset to see that they had received many more shares than what had been allocated. Even though the issue was subscribed 6.83 times in the retail category, investors got share allotment of equivalent to 1.28 times over-subscription in this category. SEBI (the Securities and Exchange Board of India) started its investigation after getting complaints from high net-worth individuals and retail investors. The market regulator has collected bidding data from the registrar to the issue (Link Intime) and has written to the two exchanges-NSE (the National Stock Exchange) and BSE-(the Bombay Stock Exchange) to stop listing of the stock till it completes the investigations into the bidding and the subsequent withdrawal of applications. How did this happen?  

Take a look at another example. Galaxy Surfactants recently withdrew its IPO. The issue was to close on 19th May-but was pulled out abruptly. A statement on the NSE site said: "Book running lead manager to the issue has informed the exchange that the book building issue of Galaxy Surfactants has been withdrawn." At a price band of Rs 325-Rs340, the company was planning to mobilise about Rs200 crore through the offering. At the Thursday close of bidding, the issue was subscribed just 30%. Again, what happened?

The answer to both is sudden low interest of IPO market manipulators-given that the equity market is in complete doldrums.

These two examples show how the IPO market manipulation falls apart when investors and manipulators both develop cold feet.

IPOs are a game played by companies (hard at work to dress up the company financials and present a rosy picture), investment bankers (managing disclosures in prospectuses) and market special IPO manipulators who come in to blackmail or rescue a failed issue.

The game starts when greedy promoters shop for investment bankers who would promise the highest IPO price for their shares. Invariably, the issues get a poor retail response and in the first couple of days after an IPO opens for subscription, panic sets in. The investment bankers then helpfully bring in financiers who demand a 30% to 50% discount to put in applications. These financiers also have the capability of making 4,000 to 5,000 retail applications if required. Yes, the multiple applications scam is thriving, but has only got more sophisticated to evade detection. Our sources say that investment bankers are an integral part of this racket.

Another aspect of the scam is pure extortion. Here, some unscrupulous financiers prey on IPOs that get a poor response on opening. They then put in large applications to corner the retail quota. On issue-closing day, they call the company and its investment bankers and threaten to withdraw their application unless they are given a cash payoff. With little time to rustle up genuine applications, a couple of promoters have succumbed to the blackmail.

In either case, with a block of thinly-traded stock in their control, the price manipulators/financiers get to work once the stock gets listed. They rig the shares up and down, liquidate their entire stake and walk out. What about the exchange and the market regulator? They are in their ivory towers and have not a clue about any of this. They are not interested either.

With the market in doldrums, the manipulators and financiers have withdrawn from the game. That's why these two issues have failed miserably. These two issues were as bad (or good) as the ones that have come to the market over the past few years.



Vaibhav Dhoka

6 years ago

Due to lame & tame regulator like SEBI and greed of companies the IPO market will be doomed.SEBI must look into pricing before it gives signal to prospectus.What fails in India is we have large number of investors who are financially illiterate and this flaw of regulation by SEBI is boon for companies who wish to bring IPO.But one doesn't understand EXCESS ALLOTMENT?

arun adalja

6 years ago

promotors,merchant bankers and lead managers must be punished heavily and they must be not allow to do capital trasactions for next 5 years.

SEBI’s relaxation of rules that govern broker-client relationship really amounts to beating about the bush

The market regulator’s rules which aim to protect investors are toothless, because they don’t take into account the ground realities

The attempts by the securities market regulator to curb malpractices such as the misuse of investors’ funds, by tightening running account authorisation and other norms, are not likely to address the real issues that give rise to a plethora of investors’ grievances. This is mainly because the regulator, which continues to be out of touch with how investor interests are affected by the current system, is not looking at the issue holistically.

With an aim to bring more transparency into the broker-client relationship, the Securities and Exchange Board of India (SEBI), in December 2009, issued a circular that detailed a new model. Under the new model, brokers have to return the money lying in a client’s account at least once in a calendar quarter or a month, depending on the client’s preference; otherwise brokers are required to get running account authorisation. This step was taken to protect the gross misuse of investor’s funds and shares. Moneylife has repeatedly highlighted this issue since way back in 2006-2007. (Read, Powerless by PoA’, ‘Brokers blatantly ignore SEBI instructions on Power of Attorney’)

But the ground reality is quite different.

For instance, Mandar Dixit, a Moneylife reader has a demat account in Religare Securities. Every quarter, his shares are transferred from his pool account to the demat account for which, he says, he is being charged unnecessarily. In January 2011, he was charged Rs 700. Mr Dixit says, he also has an account with another brokerage firm, Kotak Securities, which sends him cheques of the amount lying with them.

According to SEBI guidelines, the running account should be settled both for funds as well as securities. Settlement can be done by transferring unused funds and securities lying with the broker to the customer’s mapped bank/depository account.

When Mr Dixit discovered that Religare was adopting the practice of transferring the shares from the pool account to the demat account, he protested. Responding to our query, a Religare spokesperson said, ”Since Mr Dixit has opted for a quarterly settlement, the securities lying with us are transferred to his depository account and unused funds (if any) are transferred to his bank account at the end of every quarter.”

About the charges, the spokesperson said, “No charges have been levied on Mr Dixit’s depository account, apart from the AMC (annual maintenance charge) and transaction charges for the delivery made to the Religare pool account.”

The company said that the stock and the funds lying in the account are settled as per the running authorisation process. However,

Mr Dixit claims that he does not know when and if at all he signed the running account authorisation.

While Religare might be correct, there exists some confusion due to a lack of information and clarity about the system. So, even if the company has followed the guidelines, it seems that this may not have been communicated clearly to the customer. It is possible that the investor is not aware about the way the running account operates and its possible misuse, and so turned to Moneylife for help. This experience indicates that the rules need to be re-examined, since brokers are following the options as per their convenience, without any fear of the regulator.

This is not just one isolated case. There are millions of investors who are in the dark about SEBI rules and the distorted manner in which they are implemented, usually at the expense of investors. These perverse systemic issues are the main reason behind the ever-dwindling participation of retail investors in the Indian stock market, which Moneylife alone has regularly highlighted.

The fact is that SEBI has framed the rules for settling trades-payment of cheques for purchases and delivery of shares for sales–without taking into account ground realities. The payment of cheques within two days and delivery of shares within one day is too stringent for a variety of reasons.

Most importantly, funds transfer through banking channels is not instant, outside some select cities. It could even be a problem outside the financial system, namely prolonged power cuts. To get around, investors are forced to blindly sign authorisations to brokers and let them handle both cash and shares, through the pool account and get demat slips signed by them to ensure smooth delivery of shares. Almost all big brokers insist that a new investor open a new demat account with them for ease of share delivery, even when they already have one. Some brokers attached to banks (like ICICI Direct), even ask investors to open a new bank account as well, so that both funds and shares are fully under their control.

These facilities are needed by brokers because of impossibly strict norms imposed by the regulator. Unfortunately, such carte blanche to brokers is often misused. The misuse has been so widespread that investors are shunning the stock market as also mutual funds.

Though SEBI has set many rules to protect the interest of investors, malpractices are common. Last year, SEBI imposed a penalty of Rs40 lakh on HSBC InvestDirect Securities for misusing client’s funds and securities. It is true that investors are naiive and sign away documents without reading. A simple assurance from a broker that he will take care of the investment is fine for common investors and most of us sign documents wherever the broker asks to.

However, while it is impossible to educate millions of investors, it is mmuch easier to control a few hundred brokers. Why don’t we ever see SEBI inflict exemplary punishment on brokers so the entire broking community thinks twice before misusing investors’ money or shares? Though SEBI’s norms to avoid malpractices are well-intentioned, brokers get ample space to play with the investors’ money or shares. While the malpractices can be easily attributed to investors’ negligence, it would be easier to control brokers’ practices that happen under the SEBI’s gaze, provided the regulator chooses to act.



valerian rodrigues

5 years ago

i invested 43 thousand rs in share broker agency.but he himserlf operated and made zero balance now .i didnot give any signuture till now.please advice to recover loss

Vikas Gupta

6 years ago

Very informative details. I totally agree with you but Investors don't have any choice.We had to go what our Dealer says otherwise We are facing a hell of problems created by Dealers. Even SEBI does not help investors. Sebi People cooperate Dealers even if we complain in SEBI against them. I myself has experienced such a case against M/S S S Corporate Securities Ltd., New Delhi.


6 years ago

It happens to all the demat a/c holder.Broker keeps the the stock in there pool a/c and again transfer the same to demat a/c with the same broker and in the bargain charges same money.SEBI claiming doing good is creating more problems even in mutal fund operation.NO advisor is ready to vist the customer.


6 years ago

Speed-e service from NSDL can easily eliminate the need for a PoA.
Not one broker in the market offers it !

The only way to safeguard oneself is to have a separate bank and trading account so that re-conciling can lead to discovery of discrepancies.

Ashok Leyland FY10-11 net up 49% at Rs631.29 crore

The company recorded highest volumes both on the domestic and overseas markets in FY10-11. Domestic volumes jumped by 45% to touch 83,800 vehicles and export volumes touched 10,306 units, up by 72% from 5,979 units in the previous fiscal

Chennai: Hinduja Group flagship company Ashok Leyland reported net profit for the year ending 31 March 2011 at Rs631.29 crore, up 49% over Rs423.67 crore for the year ending March 31 last year, reports PTI.

For the fourth quarter ending 31 March 2011, the company reported a net profit at Rs298.22 crore as against Rs222.66 crore in the same period of the previous year, up 33.39%, Ashok Leyland managing director Vinod K Dasari said while addressing the annual press conference here.

The net sales of the company for fiscal ending March this year stood at Rs11,117.70 crore as against Rs7,244.71 crore reported in the same period of previous year, he said.

For the fourth quarter ending 31 March 2011 the net sales of the company stood at Rs3,828.53 crore as against Rs2,939.04 crore reported in the same period of previous year.

The company recorded highest volumes both on the domestic and overseas markets. Domestic volumes jumped by 45% to touch 83,800 vehicles, as against 57,947 vehicles in the previous fiscal.

On the exports side, the company sold 10,306 units in FY10-11, up by 72% from 5,979 units in the previous fiscal.


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