In late December 2011, the Securities and Exchange Board of India , or Sebi, barred promoters and directors of seven companies, their directors, merchant bankers and related entities from participating in the securities market till further order for not complying with disclosure norms in their initial public offers, or IPOs.
The seven are Taksheel Solutions, RDB Rasyans, Onelife Capital Advisors, Brooks Laboratories, PG Electroplast, Tijaria Polypipes and Bharatiya Global Infomedia. In most cases, the stock market regulator found that the companies diverted inter-corporate deposits to entities which used the money to buy their shares the day they were listed after the IPOs.
"In these cases, there is a common thread, that the company has not used funds raised in the IPO for the objective stated in the prospectus," says Nikhilesh Panchal, partner at law firm Khaitan & Co.
Financial frauds are hard on your money. And in most cases, it is the small investors who are sitting ducks, with many not even knowing to what extent they have been cheated.
PRICE MANIPULATION & RIGGING
Tijaria Polypipes, one of the companies named in the Sebi order, raised Rs 60 crore in an IPO by issuing 100 million shares at Rs 60 a piece. The shares were listed on exchanges on 14 October 2011.
Be alert and read all the statements sent to you by brokers. Avoid giving power of attorney to brokers.
The stock opened at Rs 62, Rs 2 more than the issue price, rose to Rs 67.80, and then fell to as low as Rs 16 the same day. It ended the day at Rs 18.10 on the Bombay Stock Exchange, or BSE.
A probe by Sebi unearthed price manipulation in collusion with qualified institutional buyers, or QIBs. Investigations revealed that three QIBs, Sparrow Asia Diversified Opportunities Fund (SPARROW), IPRO Funds (IPRO) and Credo India Thematic Fund (CREDO), sold most of the shares allotted to them at a premium to the issue price on the listing day, according to the Sebi order.HOW QIBs GOT A PREMIUM
Tijaria, with related entities, allegedly roped in brokerages, which used clients' accounts to place buy orders at a premium to the issue price. These artificial volumes at a higher price encouraged retail investors to buy more shares.
In addition, the brokers traded in clients' names, suffered losses, but did not collect any margin money from clients. The ledgers of clients who did not have the capacity to enter into large trades were allegedly manipulated to give an impression that they had enough funds in their trading accounts.
These brokers, who had to suffer losses while doing this, were allegedly compensated by the company in the garb of inter-corporate deposits.
To cut the long story short, Tijaria stage-managed a profitable exit for QIBs at a premium to the issue price, inducing genuine investors to buy on the listing day.
IPO MULTIPLE DEMAT SCAM
In this, an individual opens a number of demat accounts and applies for shares in IPOs. More applications increase chances of getting shares, in the process helping the scammer corner shares that will otherwise be allotted to genuine retail investors.
"An IPO scam usually involves manipulation of the market process by financiers and market players by using fictitious demat accounts," says Rohit Mahajan, partner and co-head, KPMG Forensic Services.
A report by Kirit Somaiya, founder-president of the Investors' Grievances Forum, says about 53 IPOs' 50 million shares were siphoned off this way with the help of 100,000 bogus demat accounts in 2004-2005. Investment bankers allotted shares to these fictitious accounts while banks financed individuals applying in these IPOs.
Scams Through Brokers
Frauds by brokers hit you directly. "Brokers provide rates which benefit them while taking telephonic orders and churn portfolios to generate more commission," says Joshi of Indiaforensic Consultancy Services. Since retail investors who trade offline give power of attorney to brokers, the latter misuse it.
"Creating Ponzi schemes by promising returns that are too good to be true and creating unauthorised transactions in client accounts are other types of scams by brokers," says Joshi of Indiaforensic Consultancy Services.
Some offer to manage your transactions and promise a high return. Another fraudulent activity brokers indulge in is entering into transactions in clients' accounts without their knowledge. Many may not even issue contract notes for transactions done in your account if it has been dormant for a long time.
"Brokers can also misuse credit balance and securities of retail investors for meeting the margin requirements of exchanges," says KMPG's Mahajan.
In 2005, Sebi unearthed a classic case in which Roopalben Panchal, a resident of Ahmedabad city, and her associates opened multiple demat and bank accounts using false identities and arranged money from banks and friends to apply for shares in IPOs. They cornered shares of Yes Bank and IDFC. The shares so allotted were transferred to the member who financed the venture and were sold in the secondary market immediately after the companies listed, helping investors make huge gains.
Just to give you a picture, Yes Bank was listed on 12 July 2005 at Rs 65 as against the issue price of Rs 45, a neat profit of Rs 20 per share if you were allotted shares in the IPO. If you applied and did not get any share, the likely reason is these fake demat accounts. In such a case, you suffer a notional loss.
PRECAUTIONS TO BE TAKEN
"You have to do research and check promoters' background," says Siddharth Shah, the chairman of the BSE Brokers' Forum. Investigations revealed that a few promoters of the seven companies listed above had a poor record.
"Retail investors must exercise caution while investing in IPOs. The 'risk disclosure document' provided by the broker and the offer document of the scheme/IPO should be read carefully," says Mahajan of KPMG Forensic Services.
Investors should not get carried away by tips given by the so-called stock experts. Though going through the offer document of a share sale can be tedious, the whole effort is worth it if you intend to do serious investments.
"Also, it is essential that investors carefully watch the grading of IPOs. If the grade is below B, they should be careful," says Mayur Joshi, founder of Indiaforensic Consultancy Services. An investor should also verify quarterly statements of funds and contract notes sent by brokers.
Many brokers may not even issue contract notes for transactions in your account.
"Investors need to be vigilant. They need to make efforts to know about the publicly available information," says Mahajan of KPMG. One should also take a look at the stock statements received by depositories.
"Avoid giving power of attorney to your brokers," adds Mahajan. This is because there have been a number of cases of misuse of power of attorney by stock brokers.
"Do not allow any account manager or relationship manager to trade in your account. If you do not have the expertise to trade in shares, invest in mutual funds," says Joshi of Indiaforensic.
However, despite knowing about the frauds that take place, if you overlook the details of statements sent to you, there is now way out.