Recently, Securities and Exchange Board of India (Sebi) has taken stern actions against the Depository Participants (DPs) that were involved in the IPO scam. The article analyzes the regulators reaction to the IPO scam and suggests ways to prevent such scams.

The IPO scam which came into light when the Securities Exchange Board of India (Sebi) on its routine surveillance discovered the tainted allotment of shares in the Yes Bank Limited IPO issues and later it found out the same in Infrastructure Development Finance Company (IDFC). Sebi noticed that certain entities like Roopalben Panchal and Sugandh Estates and Investments Pvt. Ltd., cornered shares reserved for retail application by making application in the retail category through thousands of fictitious/benami IPO applications. Subsequent to the receipt of the shares the benami/fictitious allottees transferred their shares to principals who later transferred them to the financiers who had originally made their funds available.

In the wake of IPO scam Sebi to probe in depth advised BSE and NSE to look in the IPOs issued in the past. In October 2005 both the bourses submitted their ascerting Sebi suspect of the possibility of large scale of market transaction immediately after the allotment and before the IPOs were listed on the bourses. The same was found true in the IPO issue of Infrastructure Development Finance Company (IDFC).

The IPO scam came to light in 2005 through an Income Tax raid on a businessman, Purushottam Budwani, and reported of his holding of 5000 demat accounts to Sebi. Later Sebi on its routine surveillance found that, one Roopalben Panchal, a resident of Ahmedabad, and Sugand Estates and Investments Pvt. Ltd., had allegedly opened several fictitious demat accounts and subsequently raised finances on the shares allotted to them through Bharat Overseas Bank branches. Sebi's initial probe detected irregularities in YES Bank IPO issues and on December 15, 2005, Sebi declared how a few people cornered a large chunk of the YES Bank IPO shares and later on January 11, 2006 it further discovered huge rigging in the IDFC IPO, where in the same people through multiple demat accounts cornered IPO shares reserved for retail applicants by making applications in the retail category.

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