| If you think investing in a company’s initial public offer (IPO) is an easy way to get rich, you are not the only one. However, if you are a retail investor, be warned not to get caught in the spiral of rising prices on the first day of listing. Of course, people have made money through this route, but more often than not a huge section of investors has been led by the Pied Pipers of Dalal Street into misery. Last week, the Securities and Exchange Board of India (SEBI) uncovered yet another get-rich-quick scheme and issued an interim order barring Latesh Chheda, Bhavin Chheda, Chetan Rathod, Neptune Fincot, Dhiren Pajwani and RSS Investment from buying and selling securities directly or indirectly on the day of their listing. Though the order does not specify the gains that any of these entities made in the process, the modus operandi this time was a mind game. Operators used large buy orders to create an artificial demand in the market, luring genuine buyers into believing that the stock was in demand, thus jacking up prices. The new Integrated Market Surveillance System of SEBI brought to the forefront a dramatic rise in prices of six ipos—Pochiraju Industries, Cambridge Technology Enterprise, Mindtree Consulting, Shree Ashtavinayak Cine, Pyramid Saimita Theatre, Al Champdany Industries—prompting it to investigate.  | | CON STREET | | | Scams that have visited India’s stockmarket in the past. | | In 2007, SEBI accuses 16 entities along with promoters of Atlanta of price manipulation. These include Rajoo Barot, managing director and Company Secretary Sachin Jain. | | A group of operators, in 2007, rigs shares of Nissan Copper, which got listed in December 2006, ramping its price from Rs 40 to Rs 137 on the day it was listed. | | In 2006, Roopalben Panchal and her associate Deepak Panchal created forged identities and opened D-Mat accounts. They applied for shares in the retail segment that sold for huge profits. |  One-time acolyte of the original bull, Ketan Parekh functioned through a network of brokers and created his own K-10 index before the cooperative banks squealed. | | Harshad Mehta rigs the market again in 1997. He uses money from promoters to ramp up a select group of shares. SEBI cracked down on him before the scam expanded. |  Original Big Bull Harshad Mehta produced bankers’ receipts and generated thousands of crores to trap bear operators, creating a Rs 4,200 crore scam. | | During investigations, SEBI found these entities had placed abnormally large orders of shares at prices much below the prevailing market price. This large order was revealed in full so that the investor universe caught notice of such large buy orders. However, original buy orders were unexecuted at the end of the day or were deleted or modified by the client/broker in minutes. As per trading norms laid down by stock exchanges, only 10 per cent of the total order is revealed. Only when this fraction is exhausted is the other lot made public so that prices are not influenced. But in this instance, the entire lot was in the public domain. Prices quoted for these orders were 28 per cent to 64 per cent lower than the prevailing prices, clearly indicating the investor had no intention to buy. In a tightly-regulated market, ingenious market manipulators have found a new avenue to manipulate prices of IPOs on the day of listing by creating an artificial demand in the market and jacking up prices to astronomical levels. Since there is no circuit filter on the day of the listing, prices oscillate wildly, a loophole SEBI is looking to plug shortly. The history of the equity cult in India is pockmarked generously with scams. From 1992 when Harshad Mehta produced bankers’ receipts to create cash and fund the bull operation to the latest IPO scam, operators have found ways to tread the grey area to gyp investors. Yes, the system is fully digitised and paperless and that the market monitoring system is much more dynamic and alert. Fact though is that scamsters still find ways to lure inexperienced, profit-hungry investors. SEBI in this current calendar year has come up with several interim orders against manipulation of prices in IPOs as prima facie evidence suggests that there is a nexus between the FIIs, the brokers and even lay investors who are colluding to first corner shares, then rig the prices and offload the shares on the day of the listing or within a few months of the listing. Says G. Anantharaman, a whole-time member of SEBI and author of the interim orders: “There is a clear design not to repeat the past antics. The methods employed by the likes of Ketan Parekh, of synchronised deals to create artificial volume and price rise, is a thing of the past. Now more and more clients are lending their names to manipulate stock prices.” | | FIVE STEPS TO AN IPO HEIST | | | | STEP 1 On the day of listing, place large buy orders at a very low price | | STEP 2 The high volume of the bulk order triggers demand for the stock | | STEP 3 Entire bulk order is made public contrary to norms | | STEP 4 Price of listed stock zooms as investors perceive FII interest | | STEP 5 As price zooms, operators exit by nullifying buy orders | | The entry of the common investor into the game of fraud and manipulation is the most disconcerting feature. The details of the Know Your Customer forms in the latest case show that the monetary capacity of Latesh Chheda, Bhavin Chheda, Viren Keia and Chetan Rathod, who placed huge buy orders for the six IPOs, is merely Rs 1 lakh or even less in some cases. Clearly the entities and individuals did not have the wherewithal to execute large orders. Shankar Sharma of First Global says: “On the face of it, there is nothing wrong with a person placing a buy order and then deleting it. In this case, the victim’s identity is not clear, unless there is more to the issue than disclosed by SEBI.” In a market which sees 55 lakh trades every day, it’s no mean task to monitor and hunt down a handful of scamsters or prove conclusively the nexus and criminal intent. Anantharaman believes that the level of control exercised by exchanges does not extend to the clients, which is why the phenomenon is so rampant. Says Jigar Shah, director of a broking firm KR Choksey, “Valuations are going berserk. As witnessed in many stocks, after listing and initial excitement, prices stabilise or even fall. Another rampant practice has been qualified institutional placements after listing.” Criticism has been heaped on SEBI for its interim orders because critics of the regulator feel that it is trigger-happy. Since proof of complicity is impossible, SEBI’s orders have to be based on inference. Says Anantharaman, “Proceedings of SEBI are quasi-judicial and what is required is preponderance of probability in certain cases. Malafide intent needn’t be established before coming out with an interim order.” If SEBI were to wait for the final order, which can take up to two years, enough damage would be done to the market. Evidently, the philosophy of the regulator, under the aegis of current chairman M. Damodaran, is to be safe than sorry. Index |
