What is a scam worth?

For the victims of the IPO scams that hit the market between 2003 and 2005, fair redressal seems to be in the offing, given the Rs 149 crore 'compensation' package recommended by the Justice D.P. Wadhwa Committee Report.

Rakesh Rai | Print Edition: February, 2010

Justice delayed doesn't always translate to justice denied. For the victims of the IPO scams that hit the market between 2003 and 2005, fair redressal seems to be in the offing, given the Rs 149 crore 'compensation' package recommended by the Justice D.P. Wadhwa Committee Report.

To refresh your memory, here's what happened. In 21 initial public offerings (IPOs), 24 operators and 82 financiers used fake demat accounts to corner shares earmarked for retail investors (see IPOs under the Scanner). The Securities and Exchange Board of India (Sebi) banned the operators and financiers from the market in 2006, and their accounts were frozen. But before this, the scamsters managed to rake in 'unjust gains' of about Rs 95 crore. The committee report says that in many of the IPOs being investigated, the closing price on the day of listing itself was much higher than the issue price. For instance, Dishman Pharma & Chemical Ltd posted an escalation of 209 per cent.

So the committee has recommended using the funds in the frozen accounts to compensate those applicants who were deprived of a chance to receive allotments. The bad news is that the recommendations may not be enforced immediately as the exact quantum of unjust gains and the number of victims can only be determined after the investigations, which are still under way.

But what would be fair value for compensation, given that the allotment process, on paper, is done by drawing lots and the price of shares varies on a daily basis? To be on the safe side, the committee has considered the difference between the closing price of the shares on the first day of listing and the issue price as the base for determining the amount that will be considered for reallocation since this was the scam's modus operandi.

Based on the number of afferent (benami) shares, each unsuccessful investor stands to be compensated for the same number of minimum shares as was initially allotted to retail investors. If any shares are left over after this reallocation, partly successful applicants shall be considered. In the case of the Infrastructure Development Finance (IDFC) IPO, the gain per share works out to Rs 35.50. Since the minimum allotment for retail investors was 200 shares, implementing the committee's solution would mean that every unsuccessful applicant stands to earn a maximum of Rs 7,100.

There's more good news. The victims of the 229 companies that had vanished after raising close to Rs 800 crore of investor money in the early 1990s can take heart. The Ministry of Corporate Affairs has come out with details of the companies against which FIRs have been filed and has asked the aggrieved investors to submit their complaints to the concerned Registrar of Companies or at the police station where the FIRs have been filed. This list is available on the ministry's Website. The catch, however, is that the list includes only 114 errant companies. Though a high-level committee comprising officials from the Department of Corporate Affairs and Sebi had identified 229 such companies in 2001, this number reduced with subsequent enquiries.

Market regulator Sebi has also formed a committee to resolve pending grievances against companies suspended by the exchanges due to compliance issues. "Around 30 lakh retail investors have been adversely affected by this. We've sought the intervention of Sebi and stock exchanges in this matter," says Virendra Jain of Midas Touch Investors Association.

Whether or not you recover the money lost in the market to unscrupulous players, hold on to the share certificates. Who knows, the government might announce a payback scheme some day. And never forget the basic rule of investing in IPOs—be wary of promoters that don't have a good track record.


"The market buzz is that companies will churn good financial results as the economy seems to have improved faster and more than expected."
— Prakash Gaba, Professional Technical Analyst

"An investment consultant is a distributor of financial products; there is bound to be a conflict of interest between what he sells and what a taxpayer needs."
— Suresh Surana, Chartered Accountant

"The global trend of investing in pension products is limited in India as taxation is not so conducive. There is a tax on part of the maturity proceeds, regardless of how they are taken."
— Andrew Cartwright, Chief Actuary, Kotak Life

"In a growing economy like India, a portfolio of well-managed companies can deliver high risk-adjusted returns. Those hoping to save on taxes can look at ELSS products."
— Sukumar Rajah, Managing Director and CIO, Asian Equities, Franklin Templeton Investments

IPOs under the scanner

  • Amar Remedies
  • Datamatics Technologies
  • Dishman Pharma & Chemicals
  • FCS Software Solutions
  • Gateway Distriparks
  • Gokaldas Exports
  • ILFS Investmart
  • Indraprastha Gas
  • IDFC
  • Jet Airways (India) Ltd
  • Nandan Exim
  • National Thermal Power Corp
  • Nectar Lifesciences
  • Patni Computer Systems
  • Sasken Communication Tech
  • Shoppers' Stop Ltd
  • SPL Industries
  • Suzlon Energy
  • TV Today Network
  • Tata Consultancy Services
  • Yes Bank

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