IPO scam: SEBI starts disgorgement process

Securities market regulator SEBI on Thursday passed the first set of consent orders in the case relating to the IPO share allotment scam of 2006, signalling that the process of compensating retail investors who had lost out in share offerings is on course.


SEBI has signed the first set of consent orders with members of the Dadia family, who were identified as errant financiers in the IPO scam. In the process the regulator has said it had managed to collect Rs 71.75 lakh. Other entities such as financiers and market operators are also expected now to adopt this course of action to settle the proceedings initiated against them by SEBI.


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SEBI is expected to sign consent orders with several other entities who were accused of irregularities in the scam. The ill-gotten gains of these entities after disgorgement will then be used to compensate thousands of retail investors who had applied for shares in a raft of IPOs in the boom time period of 2005-06, but got short-changed as the allotment process was manipulated.


Retail investors who applied but failed to gain allotment in over 20 IPOs during 2005-06 will be compensated in line with the recommendations of the Justice Wadhwa Committee. For that to happen, SEBI will need to complete the consent orders with several other entities (reckoned to be over 80) disgorge the funds and then ensure that the total kitty is adequate to compensate investors. This could take some time but the process of disgorgement is now on track, an official said.


Last month, the Securities Appellate Tribunal in its order on Karvy said “it appears that after identifying financiers and beneficiaries of the scam, the board turned a Nelson’s eye towards them and chose to proceed against depositories and their participants and that too ex-parte.”


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“It is just a matter of days now,” said an official familiar with the development. “There are quite a few consent orders that are past their final draft stage and will be released as soon as they are signed by the authority concerned,” he added.


The SEBI-mandated committee headed by Justice Wadhwa, appointed to work out the modalities of compensating investors who were cheated in the IPO scam, had suggested that they be compensated in monetary terms. It had worked a compensation of Rs 92 crore for the investors who had applied for shares in the retail category in the said IPOs.


This money was to be part collected through selling the frozen shares of the entities implicated in the scam, an amount estimated to be between Rs 60 crore and 90 crore. The case goes back to 2006 when SEBI barred various individuals and entities from dealing in the securities market directly or indirectly until further directions.


These included Roopalben Panchal, Karvy Stock Broking, Magnum Equity Services, Deep Stockbroking, Anagram Securities, Jhaveri Securities and Indiabulls Securities, among others. Further, entities like HDFC Bank, IDBI Bank, Centurion Bank of Punjab, Motilal Oswal Securities and Jhaveri Securities were barred from opening fresh demat accounts for failing to adhere to ‘Know Your Client’ norms. However, few of the aggrieved parties managed to get some respite by appealing against the order.


Meanwhile, the compensation package was to be based on the closing price on the listing day for all these IPOs, which include IDFC, Jet Airways and Suzlon. In essence, investors who lost out in these IPOs should be paid the difference between the offer price and the closing price on the listing day, the committee had said in its report. People who did not get any allotments were to be compensated first. Recently, SAT vacated the appeal file by SEBI against the depositories, saying since the depositories were not actually directly responsible in the scam (as in not ‘gorged’ any money, disgorging from them was illegal.)


Interestingly, legal experts are not surprised that the market regulator has taken recourse to consent orders for winding up the IPO scam investigations. Entities that request for a consent order have to furnish a written waiver from taking any legal proceedings against SEBI concerning any of the issues covered by the consent order. The recent past has been witness to few instances where the Sebi order was turned down by the Securities Appellate Tribunal (SAT).