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running lead manager to the issue has informed the exchange that the book building issue of Galaxy Surfactants has been withdrawn."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.