The Indian capital market is booming like never before. The secondary market is on an upsurge and is reaching new highs every next week. The primary market is also active with lots of initial and follow-on public issues. In such a scenario, investors have to be more specific in their choice of investment. We saw the instances of circular trading and the issues of penny stocks in the secondary market a few months ago. The regulatory body, the Securities and Exchange Board of India (Sebi), unearthed this issue and made the retail investor cautious and more vigilant in picking up the right stocks. Once again, Sebi has done well to detect the violation of regulations in the primary market relating to demat accounts and public offerings. This throws some light on the functioning of banks, depository and registrar. Sebi's stance on this issue will further decide the strength of Indian capital market. This issue of multiple demat accounts has definitely created panic among investors, but it has also prompted them to make cautionary moves in the forthcoming public offers.
From 2004-05, the primary market has witnessed increased activity by Foreign Institutional Investors (FIIs) and others. The sensex moved up by leaps and bounds. Earlier, the great primary market rally was witnessed during the Harshad Mehta Scam in 1992 and later in 1996 when technology stocks were on the rise. In the year 2005, many public offerings came and most of them are now trading higher than their listing price. They opened with a considerable premium at the time of listing. These huge profits in a very short span of time had lured some investors to explore IPO investments. They started applying for the public offerings with more than one demat account. Some unscrupulous people started taking advantage of this situation by opening a number of benami/fictitious demat accounts with the help of bankers and depository participants. They successfully had hidden their identity till they were exposed.
Various reasons can be sited for resorting to multiple demat accounts. Firstly, using more than one demat account for application in a retail investor category of a public offer will significantly swell up the possibility of getting the allotment. Secondly, banks cannot lend more than Rs. 10 lakhs to a single investor for a public issue. This prompts them to open multiple and benami accounts. Thirdly, as per the banking norms and the government guidelines any investment or deposit beyond Rs. 50,000 has to be through a cheque or cash by indicating the Permanent Account Number (PAN). It has also been revealed that the benami account holders created duplicate PAN. And finally, the modus operandi encouraged money laundering.
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