IPO SCAMS

YES BANK Ltd. CASE

The modus operandi adopted in manipulating the YES Bank Ltd (YBL)'s initial public offering
(IPO) allotment involved opening of over 7,500 benami dematerialised accounts.

These accounts were with the National Securities Depository Ltd (NSDL) through Karvy
Stockbroking Ltd (Karvy-DP). Of the 13 erring entities, the chief culprits identified by SEBI were Ms
Roopalben Panchal and Sugandh Estates and Investments Pvt Ltd.

While Ms Panchal opened 6,315 benami DP accounts, another entity Sugandh opened 1,315
benami accounts.Each of these accounts applications were made for 1,050 shares, paying application money
of Rs 47,250 each. By applying for small lots (1,050 shares through each accounts), they misused the retail
allotment quota stipulated for IPOs. The shares allotted in IPO to the benamis of Ms Panchal and Sugandh
would have otherwise gone to genuine retail applicants.

The IPO of YBL opened on June 15, 2005 and its shares were listed on the BSE and the NSE on
July 12, 2005.

It was observed that Ms Panchal had transferred 9,31,600 shares to various entities in seven off-
market transactions on July 11 - a day prior to the listing and commencement of trading on the stock
exchanges. In order to get an allotment of 9,31,600 shares, Ms Panchal would have had to apply for crores of
shares involving many crores of rupees in application money.

However, Ms Panchal's name did not appear in the list of top 100 public issue allottees. Thus, it
was suspected that Ms Panchal must have made multiple applications or that other applicants were acting as
a front for her.
 Ms Panchal had applied for only 1,050 shares in the YES Bank IPO, paying the application money
of Rs 47,250. And she did not receive any allotment in the IPO. On July 6, Ms Panchal received 150 shares
each from 6,315 allottees through off-market transactions aggregating 9,47,250 YBL shares.

Curiously, as per the dematerialised account data furnished by NSDL, of the above 6,315 entities
as many as 6,221 entities have a same address in Ahmedabad. There are three more addresses of locations in
Ahmedabad, which have been linked to Ms Panchal. All the 6,315 entities have their bank accounts with
Bharat Overseas Bank and demat accounts with Karvy-DP.

By applying for the maximum possible number of shares per applicant while being categorised as
retail applicant and by putting in large number of applications in the lot of 1,050 shares, Ms Panchal and her
associates (real or fictitious) have attempted to corner the maximum possible number of shares in the IPO
allotment.

This tantamounts to an abuse of IPO allotment process, the SEBI order said.

A similar modus operandi was adopted by Sugandh, which received 150 shares each from 1,315
dematerialised accounts aggregating 1,97,250 shares in off market transactions.

According to SEBI findings, Ms Panchal and others booked profits to the tune of about Rs 1.70
crore on the day of the listing of YES Bank shares.
 SEBI unearths another IPO scam in IDFC
SEBI on Thursday 12th Jan 06 unearthed yet another abuse of IPO norms in the IDFC's initial
public offering (IPO) where a few investors opened over 14,000 dematerialised accounts to corner large
number of shares of the company. This is the second such incident, after a similar such violations were
detected in the YES Bank's IPO.

SEBI said in IDFC's IPO too four investors opened as many as 14,807 dematerialized accounts
with Karvy-DP and "strangely", all these account holders have their bank accounts with Bharat Overseas
Bank Ltd, Ahmedabad. SEBI order said: "further probe is required for examining the systemic fault, if any, of
the registrar Karvy-RTI i.e. Karvy Computer Shares P Ltd, and the lead managers Kotak Mahindra Capital
Company Ltd, DSP Merrill Lynch Ltd and SBI Capital Markets Ltd in identifying and weeding out the benami
applications."

Reference is being made to the RBI to examine the role of BhOB, HDFC Bank, Indian Overseas
Bank, ING Vysya Bank and Vijaya Bank in opening the bank accounts of these benami entities and
apparently funding them.

According to SEBI, Karvy-DP, which was also named in the YES Bank IPO case, has not adhered
to `Know-your-Client' norms, as per the reports of inspection submitted by NSDL and CDSL on the DP. Also,
some of the documents collected by CDSL during the course of inspection show that Karvy-DP has obtained
letters purportedly issued by the banks' concerned such as BhOB as proof of identity and proof of address of
the person for the purpose of opening dematerialised accounts.

"It is seen that one branch manager has on the same date signed as authorized signatory of
different branches of the bank. This raises a doubt as to the authenticity of the bank documents obtained by
Karvy-DP for opening dematerialised accounts," the SEBI order by its Whole-time Director Mr G.
Anantharaman said. SEBI also banned four investors (in whose names the multiple accounts were opened)
viz., Ms Roopalben Nareshbhai Panchal (who was also named in the YES Bank IPO scam), Sugandh Estates &
Investments P Ltd, Mr Purshottam Ghanshyam Budhwani and Mr Manojdev Seksaria from doing any kind of
transactions in the securities market, till further directions.
Another 35 firms were also barred from participating in the IPOs in the future, till further orders, the SEBI
order said.

MARUTI Case

Fictitious Demat A/c’s opened in 2003 itself

`First IPO in which key players took part was Maruti'

The Charges

DPs have been accused by SEBI of not fully implementing the `maker-checker' concept, data
entry errors, scanning of officials' signatures, and appointing themselves as the second holder.

Description
Some of the demat accounts that were used to manipulate allotments in the initial public offer of
Yes Bank and IDFC were opened during 2003, and not in the last year as was earlier believed. The first IPO in
which the key operators have participated was that of Maruti Udyog Ltd, in June 2003, though the numbers
of fictitious demat accounts were not very high then, the interim order from Securities and Exchange Board of
India has said.

SEBI's investigations have now pegged that a "total of 24 key operators have indulged in abusive
practices in respect of 21 IPOs".

The evidence against Karvy DP has stemmed from the fact that almost all the demat accounts
which served as conduits for these master account holders were held with Karvy DP, according to the order.
These 24 operators have 34 demat accounts; of which 16 demat accounts are held with Karvy DP.
Due Diligence Not Taken

The market regulator's investigations have pointed out that, while opening demat accounts the
depository participants were not exercising due diligence. Persons involved in the scam have collected proofs
of identity and addresses from groups of persons and used this to open bogus bank accounts.

Inter-linkages

The master account holders were found to have made off-market transfer of the IPO shares to
various common groups of entities who appear to be their principals. It is seen that some of the master
account holders have also made off-market transfers amongst themselves. This shows that there are inter-
linkages amongst the master account holders as well as between groups of master account holders and their
principals, the order said.

Depository participants have been accused by SEBI of not fully implementing the `maker-checker'
concept, data entry errors, scanning of officials' signatures, and appointing themselves as the second holder.

With some of the DPs also acting as brokers, stock exchanges have been advised to examine the
role and involvement of brokers and sub-brokers by way of participation in IPOs either directly or indirectly
and their dealings in the shares subsequent to listing. Exchanges are to submit a report on this within a
month.
 SEBI bars Karvy, 23 other entities
Alleged involvement in IPO allotment scam

In the dock

Ban on several entities including HDFC Bank, IDBI Bank, ING Vysya Bank and Motilal Oswal
Securities from opening fresh demat accounts.
The regulator also pulled up NSDL and CDSL for `grave management lapses'.

Description

SEBI on Thursday 27th April 2006 came down heavily on stock market intermediaries by banning
several entities including Karvy group of companies, Pratik DP and Indiabulls Securities, for their alleged
involvement in the IPO allotment scam. SEBI has also barred several entities including HDFC Bank, IDBI
Bank, ING Vysya Bank and Motilal Oswal Securities from opening fresh demat accounts.

In an interim order issued today after the second round of investigations, the capital market
regulator has banned 24 entities from buying and selling securities till further orders.

Common address

SEBI also said 15 Depository Participants at National Securities Depository Ltd (NSDL) including
Kotak Securities, Citibank, ICICI Bank, Bank Paribas and IndusInd Bank had more than 500 demat account
holders sharing the common address.

It asked NSDL to conduct inspection on whether all the demat account holders are genuine.
NSDL has also been asked to check whether the Know Your Customer norms of SEBI have been duly
complied with and take action against suspect accounts on verification.
 Analysts felt the SEBI order was akin to capital punishment for the entities involved in the
securities market scam.

"In view of the detailed findings, Karvy DP and Pratik DP prima facie do not appear to be fit to
deal in securities market as SEBI-registered intermediaries. Appropriate quasi-judicial proceedings are being
initiated against the two DPs," the 252-page order issued late in the evening said.

SEBI said the other business groups of Karvy appear to have acted in concert in the gamut of IPO
manipulations. "I further direct Karvy Stock Broking Ld, Karvy Computer Share PVT Ltd, Karvy Investor
Services and Karvy Consultants not to undertake fresh business as registrar to the issue and share transfer
agent," Mr G Anantharaman, Whole-Time Member, SEBI, said.

NSDL, CDSL pulled up

The regulator also pulled up NSDL and CDSL for `grave management lapses'. The findings
revealed "contributory negligence" on the part of the depositories and their managements.

"The promoters of NSDL and CDSL are directed to take all appropriate actions including
revamping of management which clearly has allowed matters to come to such a sorry pass," the order said.

The order, to be treated as a `show-cause notice', has given 15 days time to the parties named for
filing objections.
 IPO scam: HDFC Bank, 2 others fined
The Reserve Bank of India on Monday 27 th Feb 2006 fined HDFC Bank, IDBI and ING Vysya Bank
for violation of Know Your Customer norms and other irregularities in relation to the recent IPO scam.

HDFC Bank has been slapped with the highest penalty of Rs 25 lakh; ING Vysya Bank - Rs 10
lakh and IDBI Ltd Rs 5 lakh.

This is the second time HDFC Bank has been fined for violation of KYC norms. In January, the
bank was imposed a penalty of Rs 5 lakh.

According to an RBI release, these banks have been fined, "for violation of regulations on KYC
norms, for breach of prudent banking practices and for not adhering to its directives/guidelines relating to
loans against shares/ IPO."

Salient Features of IPO scam

Modus operandi
 Current account opened in the name of multiple companies on the same date in the same branch of a
bank

 Sole person authorized to operate all these accounts who was also a Director in all the companies

 Identity disguised by using different spelling for the same name in different companies

 Multiple accounts opened in different banks by the same group of joint account holders

 Huge funds transferred from companies accounts to the individual’s account which was invested in
IPO’s

 Loans/ overdrafts got sanctioned in multiple names to bypass limit imposed by RBI

 Loans sanctioned to brokers violating guidelines

 Multiple DP accounts opened to facilitate investment in IPO

 Large number of cheques for the same value issued from a single account on the same day

 Multiple large value credits received by way of transfer from other banks

 Several accounts opened for funding the IPO on the request of brokers, some were in fictitious names

 Refunds received got credited in brokers accounts.

 Margin money provided by brokers through single cheque

Operational deficiencies
Factors that facilitated the scam
 Photographs not obtained

 Proper introductions not obtained

 Signatures not taken in the presence of bank official

 Failure to independently verify the identity and address of all joint account holders

 Directors identity/ address not verified

 Customer Due Diligence done by a subsidiary

 Objective of large number of jt. account holders opening account not ascertained

 Purpose of relationship not clearly established

 Customer profiling based on risk classification not done

 Poor monitoring and reporting system due to inadequate appreciation of ML issues

 Absence of investigation about use and sources of funds

 Unsatisfactory training of personnel

Measures to prevent scams

 An analysis of IPO scam clearly brings out the laxity on the part of banks to scrupulously implement
the KYC/AML guidelines issued from time to time. It also raises serious concerns about the integrity of
the systems & systemic risks.

 While scams may still happen despite best of preventive measures, it should not undermine the efforts
being made to insulate the financial sector from money laundering. It is going to be a long fight with
constant need to improve and innovate new strategies.

 It is important to understand that the risks banks run as a result of non-compliance with regulatory
and statutory guidelines can cause severe reputational and financial damage to individual banks and
the Indian banking system as a whole

 Need for comprehensive operational framework implementing important aspects of KYC instructions
e.g.

 Documentation procedure for opening of all types of customer accounts;

 Clarity in understanding of risk classification of accounts and proper customer profiling

 Ongoing monitoring of medium and high risk accounts

 Enhanced due diligence in respect of accounts with beneficial ownership, non-face to face transactions,
group companies, high risk businesses and wire transfers etc.

 Prompt reporting of cash and suspicious transactions to Principal Officer by branches

 An effective audit machinery

 Good understanding of regulatory and statutory prescriptions in letter and spirit

 Clear demarcation of duties and responsibilities