As the equity market scaled record highs last year, the primary market segment also witnessed heightened interest. But it is widely believed that many investors who subscribe to initial public offers do so with the intention to benefit from the short-term gain from the spurt in stock prices, immediately after listing. This suspicion was confirmed by the Securities and Exchange Board of India (SEBI) chief Madhabi Puri Buch recently when she stated that 43 per cent of retail investors and 68 per cent of high networth individuals who receive allotment in an initial public offer, sell the stock within a week of listing. Of greater concern was the SEBI chief’s statement that some companies have been found using ‘mule’ accounts to apply to their own IPOs, in order to show a large oversubscription. The regulator should make haste in completing its investigation into the three companies which are suspected to have inflated their subscription numbers with fake accounts, and take stiff penal action where necessary.

The action in the primary market in 2023 was heartening with a large number of smaller companies raising funds. There were 196 public offers in the first nine months of FY24, raising ₹53,023 crore, of which 141 were from SMEs. The sum of ₹4,154 crore raised through primary offers of SME companies in the first nine months of FY24 is 78 per cent higher than the sum raised on this platform in the whole of FY23. The surge in smaller companies approaching the capital market for their funding must be encouraged. But to make capital markets an effective source for fund raising, it needs to be free of unsavoury practices such as stock price manipulations, inflated IPO subscription numbers, insider trading and so on.

Using ‘mule’ accounts or accounts of related entities to subscribe to the primary offer is another such practice. With the listing day premium of the issue linked to the extent of oversubscription, there is an incentive for promoters to inflate subscription numbers through such ‘mule’ accounts. This is not the first time that such malpractices have been detected in the primary market. In the IPO scam of 2003-05, Roopalben Panchal and her family members were found guilty of using 18 fictitious demat accounts to subscribe in the retail category of IPOs. Investigation by SEBI into several IPOs made in 2010 revealed a nexus between promoters and brokers with circular trading done after listing to provide listing gains to investors.

SEBI has done well to highlight this illegal practice but with such misconduct being rampant in both secondary and primary markets, it is up to the regulator and the exchanges to make the most of the surveillance tools at their disposal. Stiff penalties should be slapped on the guilty. As for investors flipping their IPO allotment, there is little that the regulator can do . An awareness campaign on the risks in speculating and the benefits of long-term investing, will be beneficial.

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