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 27th 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

 Nexus between merchant banker, brokers and banks suspected

 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

 No system of fixing accountability of bank officials responsible for

opening of accounts and complying with KYC procedures

 Ineffective monitoring and control

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

 Violations to be dealt with sternly