The Hindu Business Line : Lessons from Yes Bank IPO scam

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Lessons from Yes Bank IPO scam

Raghuvir Srinivasan

NO SYSTEM is foolproof from someone determined to undermine it. That is perhaps what the manipulation of the allotment process in Yes Bank's Initial Public Offering proves. A combination of factors appear to have led to the scam.

It was a subversion of the system by one individual who applied to the IPO in 6,315 different names, from the same address, to get a large number of shares allotted. It was also a systemic failure as the depository participant (Karvy Stock Broking, in this case) failed to notice the abnormal fact of the same address supporting more than 6,000 different names.

Then, there is the possibility of collusion at the bank branch that extended a loan to so many `applicants' with the same address. This can be ascertained only by an investigation by the bank or the Reserve Bank of India. One cannot help asking the question though: Whatever happened to prudent lending practices that would have required the bank to verify the address of each borrower as also his personal identity?

To be sure, the Yes Bank IPO may not be the only one where the allotment process was manipulated. There are probably others out there who are attempting or have attempted the same though the full picture may never be known.

How do we prevent such acts that are obviously wrong but also patently unfair to investors who stick to the rulebook and are not allotted any shares? There is a suggestion to review the entire system of quotas for retail, high-net-worth individuals and institutional investors. It would be wrong to do away with a system that is desirable, just because one individual has manipulated it. The quota system was, after all, instituted to ensure that the small retail investor is not discriminated against in the allotment process.

There is also talk that all depository accounts with the same address will now come under the scanner. While this will, no doubt, help identify benami accounts and those opened with fictitious names, care ought to be taken because there could also be genuine cases of more than one account having the same address. This will typically happen where more than one member of a family has an account or where an individual has an account in his name and also in that of his HUF. There could also be cases of an investor who already has one demat account with one participant opening a new one with another just to take advantage of lower transaction charges. Just as there is nothing wrong having multiple savings bank accounts so also with depository accounts. The problem arises only when such multiple accounts are misused.

Any filtering exercise to identify fictitious accounts ought to, therefore, be done at the depository level and not at the depository participant level. There also needs to be coordinated action by the two depositories — NSDL and CDSL, in this respect.

One suggestion by Mr C. B. Bhave, CMD, NSDL, is to allot a unique identification number to every investor who will have to quote it in his IPO application. This is a workable suggestion that deserves serious thought. If allotting a unique identification number is a cumbersome process, the regulator can consider using the income-tax permanent account number (PAN) itself as a unique identification tag.

It is now mandatory to quote the PAN for all applications exceeding Rs 50,000 in value; the regulator can consider making it mandatory for all investors regardless of the value of shares applied for. The only problem is that not all investors are income-tax assessees and, therefore, may not have a PAN number. For instance, housewives and retired senior citizens may be investing in the stock market but may not be assessees. However, even a unique identification number cannot help where there is a systemic failure, as in the Yes Bank IPO case. Finding an answer to the following questions that arise from the episode may help.

First, how did the depository participant fail to notice so many accounts with the same address even assuming that they were opened over several months? The sheer number ought to have caught the eyes of the depository participant.

Crucial is a periodic scan of all accounts with a depository participant not just to weed out benami and fictitious accounts but also to prevent other malpractices. Second, how did the registrar to the issue fail to notice thousands of applications with the same address? The mere fact that an IPO generates tens of thousands of applications cannot be an excuse, given that the entire process of allotment is computerised. Does the registrar scan the list of successful allottees at all?

Finally, how did the applicant manage to secure loans under fictitious names to invest in the IPO? This is the most important question of all and deserves to be investigated fully.

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