The Clean-Up Act

As the first step, market experts argue for strong and swift action against manipulators. 8216;8216;Sebi and the Finance Ministry should take strong action against them and management of banned entities. The financial profit gained by them should be recovered,8217;8217; says Kirit Somaiya, president of Investors Grievances Forum.

Though the Reserve Bank of India fined 9 banks involved in the IPO scam, regulatory circles feel the fine of Rs 5-25 lakh is meagre. But the RBI argues that the amount is not important and what matters is the sullied reputation on account of the fine. That said, as the IPO scam happened due to laxity in following verification procedures and 8216;know you client8217; guidelines, the regulators will have to fix this problem.

Lax KYC norms

Banks and DPs will have to brace up for tough KYC norms. 8216;8216;It8217;s an ongoing process which is essential to check money laundering and other illegal activities. RBI, banks and depositories will have to beef up their KYC norms,8217;8217; said the former chief of a nationalised bank.

It8217;s not only the Reserve Bank of India, even depositories8212;like National Securities Depository Ltd and Central Depository Services8212;should take the onus of verifying the veracity of customers opening demat accounts. 8216;8216;Depositories were aware of the possibility of existence of accounts being opened without proper KYC process as early as 2003 and has not put in place a system to detect such accounts and take appropriate action,8217;8217; Sebi says.

Adds Manubhai Shah, chairman emeritus of Consumer Education and Research Centre CERC: 8216;8216;I believe that the problem is systemic in nature. In this case, we have seen the NSDL raising its hands and saying that they have no responsibility in identification of the demat account owners. The government and the regulator should makes these parties accountable for verifying all DPs before registering with Sebi.8217;8217;

Tasks before regulators

The seed of the IPO scam was sown due to lax 8216;know your customer8217; norms by both the banks as well as the depository participants. 8216;8216;The first thing that the regulators should do is to strengthen the KYC norms for both bank and demat accounts. Even existing accounts operating accounts need to go through the KYC process once again. I also think that the KYC process should be undertaken both at the bank as well as the DP level once again,8217;8217; says Prime Database managing director Prithvi Haldea.

Experts warn that the scam will surface again if the KYC guidelines are not tightened. The stock markets are in a bullish phase and the IPO market has also revived. And the market is flush with talk of benami applications and cornering of retail quota in some of the recent IPOs that hit the market, which were not part of Sebi8217;s probe.

There8217;s another view that the regulator should introduce identification numbers for investors to track their activities in the market. 8216;8216;We need to start using the Unique Identification Number UIN which can be used for tracking participants in the primary and secondary market,8217;8217; Haldea says.

Though the Sebi has decided to resume fresh registrations for obtaining UIN, there8217;s a view that this should be speeded up. The registration process will be resumed in a phased manner. To begin with, the cut-off limit for obtaining UIN with biometric impressions for natural persons has been raised from the existing limit of trade order value of Rs one lakh to Rs five lakh or more. This limit will be reduced progressively.

The market is one place which can use technological innovations to speed up deals, transfers and avoid manipulation. For example, by making electronic clearing system ECS mandatory, the regulator can make the IPO process even faster and simpler as the money will go directly into the account of the investor. Much needs to be done. And, unfortunately, it took another scam for the stage to be set. With

Zeeshan Shaikh