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Is IPO scam a thing of the past?

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D. Murali
Suresh Parthasarathy

IPO, as a topic, more so with a `scam' tag, has been gobbling up many a column centimetre in newspapers. To those who ask what IPO scams are, here's a zero base to help.

IPO, as you can see on

Encarta

, is short for initial public offering, or a company's first offer to sell stock to the public. The entry appears after `ipm' or inches per minute, and before `ippon', which is "a winning point awarded in judo or karate for perfect technique."

No points, however, for guessing the name of the company that SEBI (Securities and Exchange Board of India) barred in a high-profile IPO action lately. To the curious, there is ready access to the regulator's documents, such as the 40-page pdf dated May 26, on

www.sebi.gov.in

.

Do you know that the Dutch East India Company (

Verenigde Oostindische Compagnie

or VOC in Dutch, literally `United East Indies Company'), established on March 20, 1602, was "the first company to issue stocks"? According to

Wikipedia

, "By 1669, the VOC was the richest private company the world had ever seen, with over 150 merchant ships, 40 warships, 50,000 employees, a private army of 10,000 soldiers, and a dividend payment of 40 per cent."

Joint stock form of business organisation offers the advantages of broad-based and inexpensive funding to the company, and an avenue of income generation and capital appreciation for the investors. Instances have not been rare when greedy promoters exploited the public and vanished. Unbelievably, such disappearing companies numbered only 229 closer home, as per May 2004 data from the Ministry of Company Affairs. Wonder if they have an Officer (Vanishing) to track the gone-missing companies.

Equity mania

About a decade ago, equity mania that swept through the streets had touts selling share application forms at a premium, and self-declared analysts making wild forecasts about scrips, with an invariable axe to grind. IPOs were a cat-and-mouse game. For, when everybody rushed in, allotments became uncertain; and, as a result, when equity enthusiasm ebbed, wile operators were whipping up sentiments and created the image of the elusive pot of gold at the end of an implausibly reachable rainbow.

There used to be the Controller of Capital Issues till the early 1990s with ironclad rules about new issues. SEBI became operational around the same time, yet the transition from an era of strict controls to one of liberalisation was traumatic. A 44-page paper titled `

How the financial sector in India was reformed

,' by Susan Thomas, on

www.igidr.ac.in

may not have any reference to Harshad Mehta, but there are old-time investors to whom the `Big Bull' was an unforgettable watershed in the evolution of capital market in the country.

Perhaps, the saga lives on. Somen Mishra's report on

www.ibnlive.com

, dated May 24, is about Sameer Hanchate's debut film

Ghafla

, which is based on the dealings of the stock market, "loosely inspired from Harshad Mehta and Ketan Parekh's cases." Return to reality, to SEBI's recent order. It speaks of how a DP (depository participant) "had opened thousands of demat accounts without proper verification of client identity."

These `front' accounts were of fictitious entities/name-lenders and key operators. Thousands of accounts were opened on the same day with a common address, notes the order.

"Though there may not be a legal bar for opening multiple demat accounts with common address, the same cannot be an excuse for opening of demat accounts for making IPO applications in

benami

/fictitious names," ruled SEBI. "Absence of a legal bar cannot become a ruse for mischief and abusive practices." One beneficial fallout of SEBI action will be a greater insistence by capital market institutions on due diligence.

Dos and don'ts

As part of investor education,

http://investor.sebi.gov.in

lists dos and don'ts. Thus, so as not to become part of IPO scams, you should read the prospectus carefully and note risk factors, outstanding litigations and defaults, financials of the issuer, object of the issue, company history, and background of promoters.

Don'ts read as follows: "Do not fall prey to market rumours. Do not go by any implicit/explicit promise made by the issuer or any one else. Do not invest based on bull run of the market index/scrips of other companies in same industry/issuer company. Do not bank upon the price of the shares of the issuer company to go up in the short run." And, do not forget to read all this, one may add.

Well, are IPO scams a thing of the past? On this, Mr S. Santanakrishnan, Chairman, Corporate Laws Committee of the Institute of Chartered Accountants of India (ICAI), opines in the negative.

"As long as you have greed in human mind, scams will come in one form or the other. It is only a continuing review and reform of the systems and procedures by the regulators that can, at best, reduce, if not eliminate, scams."

He cautions that with the increasing use of information technology (IT) in financial markets, frauds can surface in newer forms. "Such mutations may be tough for the regulator to identify and trace," alerts Mr Santanakrishnan. Foolproof regulations can allow IPO takers to breathe easy, stripping the equity route of unpleasant surprises.

In the process, will the compliance overhead become heavier, making IPOs onerous?

ZeroBase@TheHindu.co.in

(This article was published in the Business Line print edition dated May 31, 2006)
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