The capital market regulator?s investigations into irregularities in initial public offerings (IPO) have revealed some unsavoury dealings between institutional investors, private investment firms, promoters and merchant bankers. The order has brought to the fore the fact that some investors in IPOs are not genuine but simply short-term players looking to make a quick buck.
According to persons familiar with the development, such investors charge a fixed rate of commission for subscribing to IPOs and sell the shares within a couple of days of listing. They are not really concerned about the profit or loss or even the sale price because they have been compensated for their ?participation? in the IPO.
?The modus operandi is simple, with the merchant banker, promoter, investor and at times an operator also involved,? says a broker involved in IPO marketing. ?The money is deposited in an account that is used to apply for shares. The day and price at which the applicant will sell the shares after the listing is fixed in advance and the commission is in the range of 1-5% based on the reputation of the issuer company and the merchant banker,? he explains.
On Wednesday, the Securities and Exchange Board of India (Sebi) barred seven companies, six merchant bankers and around 100 other entities (individuals and private investment firms) for alleged malpractices in IPOs.
Sebi is reviewing the process for IPOs, including shortening the timeline, chairman UK Sinha said on Thursday.
Sebi has also prohibited directors of these firms from buying, selling or dealing in the securities market till further notice. These firms have also been ordered to call back some funds from the IPO proceeds and deposit them in a commercial bank till further notice.
The orders come after investigation into the public issues of these firms revealed misuse or diversion of IPO proceeds, inadequate documentation and due diligence and possible violation in trading in shares of these companies on the day of listing.
Among merchant bankers that the regulator has barred are Almondz Global and PNB Investments, the investment banking arm of state-run Punjab National Bank, from taking any new assignments.
D&A Financial, Artherstone Capital, Chartered Capital and Onelife Capital Advisors have also been barred, Sebi said.
The fact that the companies and merchant bankers are working hand-in-glove with such investors is also highlighted by the Sebi order that says that the issuer company has funded some investors to trade in the shares.
?On further analysis, it is observed that TSL (Taksheel Solutions) has funded these entities out of the IPO proceeds in a circuitous route to trade in TSL,? notes the Sebi order issued on Wednesday.
This, according to market players, is also the reason why a common set of investors is often found during such probes. Incidentally, some private investment firms (Parklight Securities, Grishma Securities and Pandoo Naig, among others) who were barred from the market, after the recent probe, have been named in earlier orders too.
Further, Afrasia Bank Leman Diversified Fund is a foreign institutional investor (FII) that applied for shares in both Onelife Capital Advisors and PG Electroplast ? issues with either poor or average fundamentals.
?Many companies manipulate the subscription numbers so that the post-listing price can be managed,? says Prithvi Haldea, CMD, Prime Database. ?The hype created after listing will attract many gullible small investors to the counter,? he adds.
Many of the applicants in the non-institutional segment probed by Sebi were found to have sold their shares immediately on listing, thereby strengthening the possibility of not all transactions being above board. However, it is possible that some of these persons are genuine investors looking for listing gains.
?It is noted that 21 out of 28 NIIs (non-institutional investors) had sold their allotted shares on the day of listing, out of which 20 had sold their entire allotted quantities on the first day of listing,? says the Sebi order pertaining to PG Electroplast in which around nearly 90 entities have been barred from the market.