Sweep to shake up depository system

As for the scam, it is well-known that Roopalben Panchal, Purshottam Dudlani and gang had opened tens of thousand benami accounts. It is also clear from earlier investigations that all these accounts used to aggregate the individual allotments cornered by them into a much smaller number of 8216;principal8217; accounts through pre-listing transactions. And it is these principals who seem to have master-minded the scam.

For the purpose of Thursday8217;s order, Sebi has only looked at cases where there are 20 or more common addresses and where more than 500 benami entities have transferred shares into a single account before listing. This criteria has been strictly applied for all entities without any distinction.

For instance, the Indiabulls case pertains to the TCS issue where 533 entities are understood to have transferred their holding to the brokerage firm8217;s account just a day or two before the issue was listed. This raises questions about why over 500 ostensibly genuine investors would not want to wait for price discovery, especially when the listing price in most over-subscribed issues is higher than the issue price.

While the basic nature of what is known as the Demat Scam remains much the same, the surprise in the order is the sweep of 12 Depository Participants DPs and 85 financiers included in the order. We learn that the details found are incriminating enough for Sebi to order two entities being barred with immediate effect.

The order is equally harsh about the role of depositories and we learn that this is based on an independent systems audit of the National Securities Depository Ltd NSDL by an independent security expert. A similar audit of the Central Depository of Securities Ltd has also been ordered.

As a consequence of this report, there are expected to be sweeping changes in the structure and functioning of the depositories and maybe even the depository system in India. We further learn that the brokerage entities that have been barred will be allowed to square up transactions on behalf of clients. They will, however, not be allowed to open new accounts. Similarly, Sebi will advise stock exchanges to facilitate the clients of such brokers to transfer to other brokerage firms.

Among the entities barred by Sebi are Indiabulls Securities and Karvy. The latter has been barred as depository participant as well as Registrar and Transfer Agent. Further, HDFC Bank, Centurion Bank and IDBI Bank have been ordered not to open fresh demat accounts.

While brokers and market intermediaries are burning up the phone lines leading to panic about their ability to trade on Friday morning, top Sebi sources tell us that there are plenty of precedents of such ban orders and there is no reason why the action cannot be implemented smoothly and with minimal hardship to investors.

DEMAT SCAM IN A NUTSHELL

8226; Manipulators cornered IPO shares reserved for retail investors, applied through fictitious demat accounts

8226; Once they got the allotment, these fictitious allottees transferred shares to their principals, who, in turn, transferred the shares to financiers

8226; The financiers, in turn, sold most of these shares on the first day of listing, grabbing the windfall gain between IPO price and listing price

8226; Sebi says some 60,000 fake demat accounts have used this route