The Hindu Business Line : SEBI's salvo on IPO scam

There is merit in SEBI's contention that both the DPs and depository institutions could have easily ascertained what was going on had they cared to find out.

The Securities and Exchange Board of India's order directing the country's two securities depository institutions and a few depository participants to disgorge over Rs 100 crore that it terms as illegal profits from an IPO scam, is unprecedented, both in terms of the quantum of penalty and the nature of transgression that preceded it. But neither of these attributes makes the SEBI action any less sustainable from a legal standpoint. All market participants have now accepted that last year some institutional/high-net-worth investors cornered shares meant for retail investors in an initial public offer. Equally, the artful device employed by some of the market players to achieve this end would not have worked but for the active connivance of local staff of the depository participants. That leaves in doubt only the role of those in managerial positions in the institutions concerned. Their failure to prevent the manipulation of allotment under the retail quota could be either due to negligence or ignorance. But there is merit in SEBI's contention that both the institutions could have easily ascertained what was going on had they cared to find out.

After all, the phenomenon of hundreds of applications for demat accounts being opened from one address ought to have raised the suspicion of even the most credulous of those at the head of these institutions. Whether their fault was negligence or connivance, it is clear that neither the depositories nor their participants assumed ownership of a vital component of public policy — that a portion of public issue of capital shall be reserved for retail participants. That the policy of reservation for retail participants is deeply flawed is another matter altogether. But the official intermediaries in the capital market process cannot forsake their responsibility of implementing official policies nor can the market regulator give out an impression that it condones indifference by intermediaries to such polices.

In the circumstance, SEBI is left with only one course of action. Where, on the available evidence, a market intermediary's conduct permits of an interpretation of either negligence or collusion, it must err on the side of the latter. Once this principle is accepted, the course of action to be adopted will follow. Whether the quantum of illicit profits is indeed as determined by SEBI or the quantum of disgorgement imposed on regulated intermediaries is appropriate are matters of detail that can be settled by the normal legal processes.