January 12, 2006
PR No. 22/2006

ORDER IN THE MATTER OF IDFC Ltd.

Shri G Anantharaman, Whole-Time Member, SEBI vide order dated January 12, 2006 has issued ex-parte ad interim order containing the following directions in the matter of Infrastructure Development Finance Company Ltd. (IDFC):
  
"The following entities are directed not to buy, sell or deal in the securities market, directly or indirectly, till further directions:

1. Ms. Roopalben Nareshbhai Panchal
    

2. Sugandh Estates & Investments P Ltd.
    

3. Shri Purshottam Ghanshyam Budhwani

Shri Manojdev Seksaria 

The following entities are directed not to buy, sell or deal in the shares of IDFC Ltd. and in other ensuing future IPOs, directly or indirectly, till further directions:

1. Zenet Software Ltd.
    

2. Tauras Infosys Ltd.
    

3. Rajan Vasudev Dapki
    

4. Bhargav Ranchhodlal Panchal
    

5. Jayantilal Jitmal
    

6. Seer Finlease Pvt. Ltd.
    

7. Excell Multitech Ltd.
    

8. Devangi Dipakbhai Panchal
    

9. Hasmukhlal N. Vora
    

10. Welvet Financial Advisors Pvt. Ltd.
     

11. Jayesh P Khandwala HUF
     

12. Guatam N Jhaveri
     

13. Shilpa Rajan Dapki
     

14. Dipak Jashvantlal Panchal
     

15. Hina Bhargav Panchal
     

16. Bhanuprasad Dipakkumar Trivedi
     

17. Sujal Leasing Pvt. Ltd.
     

18. Dushyant Natwarlal Dalal
     

19. Puloma Dushyant Dalal
     

20. Amadhi Investments Ltd.
     

21. Ritaben R Thakkar
     

22. Monal Y Thakkar
     

23. Vinod Modha
     

24. Kelan Atulbhai Doshi
     

25. Jitendra Lalwani
     

26. Lok Prakashan Ltd.
     

27. Bahubali Shantilal Shah
     

28. Smruti Shreyans Shah
     

29. Shreyans Shantilal Shah
     

30. Datamatics Telecom Ltd.
     

31. Dharmesh Bhupendra M
     

32. Biren Kantilal Shah
     

33. Suresh Bhikha Vasava
     

34. Javeri Gautambhai
     

35. Jay Shah 

NSDL and CDSL are directed to ensure that the dematerialized accounts which served as conduit for Roopalben Panchal, Sugandh, Purshottam Budhwani and Manojdev Seksaria are not utilized for manipulation of IPO allotment in future.
 
Thousands of dematerialized accounts being opened on the same day with the same branch and being introduced by the same bank should have alerted the DPs at the time of opening of the dematerialized accounts. However the fact that DPs failed to exercise even this basic due diligence gives rise to a suspicion that they have actively colluded with the perpetrators. It is a matter of serious concern that Karvy-DP has opened such apparently benami / fictitious accounts working out to over 95% (42,056 nos) of the multiple dematerialized accounts in relation to IDFC IPO. I note that Karvy-DP has already been directed by the depositories to verify the genuineness of the dematerialized account-holders and to close those dematerialized accounts where it is unable to verify the genuineness of identity and address of the dematerialized account-holders. The depositories have prohibited Karvy-DP from opening new dematerialized accounts till the above process has been completed. I hereby direct Karvy-DP and Pratik-DP to complete the process of verifying the identity and address of dematerialized account-holders and to close / freeze the dematerialized accounts where they are unable to do the verification not later than January 31, 2006. Further, Karvy-DP and Pratik-DP shall put in place systems and procedures to ensure that in future no non-genuine dematerialized accounts are opened by them. Karvy-DP and Pratik-DP shall submit a detailed report to SEBI narrating the actions taken by them in this regard and also give an undertaking that the SEBI�s above directions have been fully complied with. I further direct that Karvy-DP and Pratik-DP shall not open new dematerialized accounts till the submission of above report and undertaking to SEBI and obtaining a no-objection from SEBI for accepting fresh business as a DP. 
 
Depositories and DPs have an agent-principal relationship in terms of the Depositories Act, 1996 entailing liability on them for the conduct of DPs. Also, Depositories being SEBI registered intermediaries under Section 2(e) of the Depositories Act, 1996 read with sub-section (1A) of Section 12 of SEBI Act, 1992 are charged with the responsibility of protecting the interests of investors. 
 
This is the second time in the recent past when the opening of several thousands of dematerialized accounts in the name of fictitious persons with common address, without adhering to the KYC norms have come to my notice. Therefore there is an imperative need to constantly monitor securities flow in dematerialized accounts. The recurring disconcerting developments as above underscore the need that both NSDL and CDSL should assume greater responsibility in the interest of the investors and integrity of the market by getting real about such distortions with celerity of action. Further any system that is unable to identify and alert SEBI about multiple dematerialized accounts based on common addresses cannot be accepted. Accordingly, NSDL and CDSL are advised to set up a surveillance cell to detect abnormal and unusual flow of securities in the depository accounts maintained with them and submit periodical reports to SEBI. 
 
In view of the suspected complicity of Karvy in various aspects of the modus operandi as detailed above, SEBI is directed to conduct immediately inspection of Karvy-RTI as well as the merchant bankers associated with IDFC IPO namely Kotak Mahindra Capital Company Ltd, DSP Merrill Lynch Ltd and SBI Capital Markets Ltd. to ascertain the reasons for the systemic failure and also to determine the qualification of Karvy-RTI as a fit and proper person. 
 
In the IPOs as examined by SEBI the rampant misuse of multiple bank accounts by name-lenders / non-genuine persons sharing common addresses have come to notice and the same needs to be taken note of for protecting the integrity of the market. Therefore, reference is being made to the Reserve Bank of India to examine the role of Bharat Overseas Bank, HDFC Bank, Indian Overseas Bank, ING Vysya Bank and Vijaya Bank in opening the bank accounts of these benami entities and apparently funding their IPO applications in the case of IDFC.
 
It appears that many of the DPs named in this order are also acting as brokers. The stock exchanges are advised to examine the role and involvement of brokers / sub-brokers by way of participation in IPOs either directly or indirectly and their dealings in the shares subsequent to listing.
 
The major stock exchanges viz. BSE and NSE and the depositories viz. NSDL and CDSL are directed to ensure that all the above directions are strictly enforced."
 
 
The issue of alleged manipulations in Initial Public Offerings ("IPOs") of various companies has been engaging the attention of SEBI for some time. SEBI has also been receiving information regarding alleged abuse of IPO allotment process.
 
In the recent past, while examining the IPO dealings of Yes Bank Ltd., SEBI had noticed that certain entities had cornered IPO shares reserved for retail applicants by making applications in the retail category through the medium of thousands of fictitious / benami IPO applicants with each of the application being for small value so as to be eligible for allotment under the retail category. Subsequent to the receipt of IPO allotment these fictitious / benami allottees had transferred shares to their principals who in turn transferred the shares to the financiers that had originally made available the funds for executing the game-plan. The financiers in turn sold most of these shares on the first day of listing thereby realising the windfall gain of the price difference between IPO price and the listing price. In the process a chosen few virtually monopolises the retail segment, by elbowing out the genuine retail investors.
 
The entire modus operandi as detailed above, led to the suspicion that the thousands of entities in each of whose name separate dematerialized accounts and bank accounts had been opened and IPO applications made were merely name-lenders or non-existent. SEBI had earlier made reference to Reserve Bank of India (RBI) in this regard and had also directed the depositories to conduct inspection of the concerned depository participant (DP). 
 
The preliminary findings of RBI and the inspection findings of the depositories also confirm the preliminary findings of SEBI that these thousands of name-lenders are fictitious. Even the key persons who had executed the game plan were merely intermediaries acting on behalf of financiers. These key persons and their financiers are not investors but mere rank opportunists who seek to make a killing by disposing the IPO shares cornered by them on the date of listing. The banks have also played their part by opening bank accounts and providing a pro-tempore loan to these fictitious entities with the objective of earning interest and other charges. While all the participants in the above scheme of arrangement may have gained in some way or the other, the only loser was the genuine retail investor who failed to get allotment or who got allotment for a fewer number of shares than he would have otherwise got.
 
Thus, the entire problem is not with the allotment process, which has by and long come to stay as stable and secure, but the way in which banks and DPs in some cases, which have come to the notice of SEBI and which are being investigated, have connived with the key operators in derailing the tried and tested process of fair and transparent allotment of shares in IPO. 
 
But for the opening of benami depository and bank accounts in gross disregard of KYC norms, the IPO issue would have stayed on course without such underbelly of glaring distortions.
 
Infrastructure Development Finance Company Ltd. (IDFC) was one such company that had come out with an IPO in the recent past.
 
The Initial Public Offer (IPO) of IDFC opened on July 15, 2005 and closed on July 22, 2005. The shares of IDFC were listed on the Stock Exchanges, namely Bombay Stock Exchange ("BSE") and National Stock Exchange ("NSE") on August 12, 2005.
 
Central Depository Services Limited ("CDSL") and National Securities Depository Limited ("NSDL") were advised by the surveillance department of SEBI to furnish the details of large off-market transactions in IDFC shares during the period from July 22, 2005 to August 15, 2005 ("the relevant period").
 
Based on information furnished by CDSL, it was observed that Ms. Roopalben Nareshbhai Panchal had received 39,43,184 shares from 14,807 dematerialized accounts through off-market transactions on August 11, 2005 and one Mr. Purshottam Ghanshyam Budhwani had received 2,98,412 shares from 1122 dematerialized accounts through off-market transactions on August 08, 2005 i.e. prior to the listing and commencement of trading on the Stock Exchanges. Similarly, upon examining the data furnished by NSDL it was seen that the same Ms Roopalben Panchal had received 32,61,426 shares from 12,257 dematerialized accounts through off-market transactions on August 08, 2005 and one Sugandh Estates and Investments Pvt. Ltd. had received 27,08,944 shares from 10181 dematerialized accounts through off market transactions on August 08,2005.
 
In view of the above significant off-market transactions prior to the date of listing on the stock exchanges, the matter was taken up for further examination. The significant findings of the preliminary enquiry are as below:
 
IDFC came out with an IPO during July 2005. The retail portion of the issue was oversubscribed by 5.27 times and the non-institutional portion was oversubscribed by 56.53 times. The shares were credited to the allottees on August 5-6, 2005. The shares of IDFC were listed on stock exchanges on August 12, 2005. 
 
On August 8, 2005 i.e prior to the date of listing on stock exchanges, Roopalben Panchal received in her dematerialized account (DP: Karvy-DP BO ID: 1301440000307503) held with CDSL 266 shares each from 14790 dematerialized accounts and 532 shares each from 17 dematerialized accounts aggregating to a total of 39,43,184 shares in off market transactions from 14,807 dematerialized account-holders.
 
Curiously, as per the dematerialized account data furnished by CDSL, out of the above 14807 dematerialized account-holders as many as 4946 have their address as 307, Shashwat Opp. Gujarat College Ellisbridge, Ahmedabad -380006, 4990 entities have their address as 406, Shashwat Opp. Gujarat College Ellisbridge, Ahmedabad-380006 and 4871 have their address as Office No.403, Shashwat Bldg. Nr. Hotel Kanak Ellisbridge, Ahmedabad -38006. It may be noted that the address of Roopalben Panchal as provided by CDSL is 402-403 Shashwat Opp Guj College Ellisbridge,-380006. 
 
Strangely, all the 14,807 dematerialized account-holders have their bank accounts with Bharat Overseas Bank Ltd., Ahmedabad and demat accounts with Karvy-DP. Also, all the 14,807 dematerialized accounts have been opened with Karvy-DP on July 15-16, 2005. Further, the bank account details of all the above dematerialized account-holders show that almost all these dematerialized account-holders have their bank accounts with BhOB and the bank account numbers apparently bear continuous serial numbers running from 9550-1 to 9550-15000 (with minor breaks in between).
 
A similar pattern as above was observed in respect of Roopalben Panchal�s dematerialized account held with NSDL (DP: Karvy-DP Client Id 11920868). On August 08, 2005, she had received 266 shares each from 12253 dematerialized accounts aggregating to 32,59,298 shares and 532 shares each from 04 dematerialized accounts aggregating to 2,128 shares. Thus she had received a total of 32,61,426 shares from 12,257 dematerialized accounts in off market transactions. 
 
All the above 12,257 dematerialized account-holders that had made off-market transfers to Roopalben Panchal have their dematerialized accounts with Karvy Stock Broking Ltd. and as many as 75 have their address as 34 Ketan Tower, Camp Road, Shahibaugh, Ahmedabad- 380004, which the same as that of Jayantilal Jitmal and the balance 12182 demat account holders have their address as 402-403, Shashwat, Opp. Gujarat College, Ellisbrodge, Ahmedabad . Almost all the dematerialized account-holders (for a few data is not available) have their bank accounts with BhOB. Also, all the 12,257 dematerialized accounts have been opened in various batches on 21 different dates
 
Copies of the application forms of 49 IPO applicants (out of above 14,807 CDSL dematerialized account transferors and 12,257 NSDL dematerialized account transferors to Roopalben Panchal) were randomly selected (25 nos. each were sought from Karvy-RTI in respect of NSDL and CDSL however, Karvy-RTI furnished copies of only 49 application forms) was examined. It was seen that all the 24 IPO applicants (holding their dematerialized accounts with CDSL) have mentioned their address as 402, Shahshwat, Opp Guj College, Ellisbrodge, Ahmedabad, which is the address of Roopalben Panchal as per her CDSL account details. The application forms apparently bear continuous serial nos. in different batches (e.g. running from 3016215-3016218, 2990772-2990776, 3016058 to 3016071 etc.). No details have been provided in respect of Bank Account or payment mode in all the above application forms. 
 
Similarly, all the 25 IPO applicants who had made off-market transfers to Roopalben Panchal (and holding their dematerialized accounts with NSDL) have furnished "Indian Overseas Bank, Stadium Road, Ahmedabad" as their address. Further 24 out of the above 25 IPO applicants have issued cheques drawn on Indian Overseas Bank, Stadium branch, Ahmedabad and apparently bearing continuous serial numbers (775886 to 775910), towards payment for the application. 
 
It is also seen that all the above 49 applicants have applied for 1400 shares each making payment of Rs.47,600/-.
 
Subsequent to the receipt of shares in her dematerialized account from thousands of entities as above, Roopalben Panchal has in turn transferred it to various entities with most of the transfers taking place prior to August 12, 2005 i.e. the date of listing on stock exchanges. It is seen that many of these entities have in turn either made further off-market transfers or sold the shares in the market.
 
A similar pattern of dealing in IDFC shares were observed in the case of Sugandh having its dematerialized account with NSDL ((DP: Karvy-DP Client Id 14405199). Sugandh had received 27,08,944 shares from 10,181 dematerialized account-holders on August 8, 2005 and in turn transferred most of these shares (i.e. 26,77,870 shares) to various entities who in turn have made further off-market transfers or sold the shares in the market. 
 
Purshottam Budhwani having his dematerialized accounts with CDSL ((DP: Pratik �DP Client Id: 1202020000006413 and DP: Karvy-DP Client ID: 1301440000247208) and NSDL (DP Anagram Client Id: 10093022) was seen to have indulged in similar pattern of dealing in IDFC shares. Purshottam Budhwani had received 12,63,194 shares from 4748 dematerialized account-holders on August 8, 2005 and August 12, 2005.
 
Purshottam Budhwani has sold 6,59,600 shares on August 12, 2005 on BSE and NSE at rates ranging about Rs.61.05 � Rs. 64.60 and has also made some inter-depository transfers to certain NSDL dematerialized accounts.
 
SEBI obtained from Karvy-RTI copies of application forms in respect of 25 randomly selected IPO applicants that had made off-market transfers to Sugandh. It is seen that all these IPO applicants have mentioned their address as c/o SEIPL, 804, Abhijeet-I, Mithakhali Circle, Ellisbridge, Ahmedabad which is the same as the address of Sugandh as per the details provided by NSDL. All these addresses are stamped and stampings appear to have similar layout and design. Also, all the above 25 IPO applicants have applied for 1400 shares each making payments of Rs.47,600/- each and have issued cheques apparently bearing continuous serial numbers (from 291941 to 291965) drawn on Vijaya Bank, Ambavadi, towards payment for the IPO applications.
 
Similarly, SEBI examined 25 randomly selected IPO applications selected out of the 4116 dematerialized account-holders who made pre-listing off-market transfers to Purshottam Budhwani. It is seen that all these IPO applicants have mentioned their address as B/2 Himalata Society, Milind Nagar Asalfa, Ghatkopar (W), Mumbai which is the same as that of Purshottam Budhwani. Also, all these IPO applicants have issued cheques bearing various sets of continuous serial numbers (e.g. 378131 to 378141, 379157 to 379166, 378587 to 378590) drawn on HDFC Bank, Ghatkopar (E), Mumbai, towards payment for the applications.
 
Further the reports of inspection of Karvy-DP submitted to SEBI by NSDL and CDSL shows that �Know your client� norms have not been adhered at all while opening the dematerialized accounts. 
 
Further, Karvy�s internal e-mail correspondences given as Annexure to the NSDL inspection report show that even during November 2005 the top management of Karvy-DP were aware of the issue of multiple dematerialized accounts opened with the same address. It appears that the management of Karvy-DP, on coming to know of the same in the wake of a query from SEBI in some other case had, as early as November 2005, internally decided to process these multiple dematerialized accounts bearing the same address for closure. The above goes to confirm that Karvy-DP had knowledge about the fictitious nature of such multiple accounts.
 
Also, some of the documents collected by CDSL during the course of inspection show that Karvy-DP has obtained letters purported issued by the concerned banks such as Bharat Overseas Bank as proof of identity and proof of address of the person for the purpose of opening dematerialized accounts. It is seen that one branch manager has on the same date signed as authorized signatory of different branches of the bank. This raises a doubt as to the authenticity of the bank documents obtained by Karvy-DP for opening dematerialized accounts. SEBI is making reference to RBI regarding such apparent irregularities in the bank documents submitted to Karvy-DP for the purpose of opening the dematerialized accounts.
 
It is also noted that in view of significant irregularities noticed during the course of inspection of Karvy-DP, both NSDL and CDSL have directed Karvy-DP not to open new dematerialized accounts till the issue of verifying the genuineness of multiple dematerialized account-holders having the same address is addressed to the satisfaction of the depositories.
 
The above facts cast grave doubts as to the genuineness of the thousands of IPO applicants who have apparently furnished the address of Roopalben Panchal or Sugandh or Purshottam Budhwani as their address. The findings of the investigation/Inspection of the concerned banks by RBI has fortified the initial findings of SEBI that Karvy-DP has actively colluded with the above entities in opening multiple/benami bank accounts and dematerialized accounts in the names of fictitious persons. 
 
Even presuming for the sake of argument that these dematerialized account-holders do exist, the chain of events as adumbrated above, involving a huge population of putative investors who prima facie appear to be mere name-lenders, mostly sharing a common address, having bank accounts with the same Bank and dematerialized accounts with the same Depository Participant and acting in unison demonstrates unity of control by Roopalben Panchal, Sugandh, Purshottam Budhwani and Manojdev Seksaria. Since Roopalben Panchal and Sugandh have in turn transferred the shares to various other entities, it is suspected that Roopalben Panchal and Sugandh were themselves merely a front for financiers. 
 
The number of shares allotted to applicants in a particular category is determined by the total number of shares applied for in that category. For instance, the IPO of IDFC received the highest number of share applications in the category of 1400 shares. 2,54,828 applicants had applied for 35,67,59,200 shares accounting for 47.93% of the IPO applications received. Hence, the highest proportion of allotment in the retail portion was made in the category of 1400 shares. Accordingly, 2,54,828 applicants in this category got allotment of 6,77,84,248 shares representing 47.99% of the 14,12,60,000 shares allotted in the retail portion of the issue. 
 
Out of the above 2,54,828 applicants that had applied in the 1400 shares category and had received allotment in the IPO of IDFC, as many as 43,982 applicants representing 17.26% of the number of applicants that had made off-market transfers to Roopalben Panchal, Sugandh, Purshottam Budhwani and Manojdev Seksaria appear to be fictitious. Also, the above suspected fictitious applicants had received IPO allotment of about 1,17,05,872 shares representing about 8.29% of the retail portion of 14,12,60,000 shares of the IDFC IPO.
 
In order to maximize the possibility of getting allotment, all these 41,361 applicants acting together would necessarily need to apply in the same category. It is seen from the random sample of 99 applications that this was indeed the case. All these applicants had applied for 1400 shares each paying application money of 47,600/- each.
 
The fact that all the IPO allottees made off-market transfer of these shares immediately after receiving allotment and prior the listing of shares on the stock exchanges to the dematerialized account of Roopalben Panchal, Sugandh, Purshottam Budhwani and Manojdev Seksaria gives rise to the prima facie view that these entities were either fictitious or were just lending names for Roopalben Panchal, Sugandh, Purshottam Budhwani and Manojdev Seksaria and their associates.
 
Though the various parties involved in the different stages of the entire chain of events might claim their part as genuine, the same cannot be countenanced at this juncture of the proceedings, where the materiality of circumstances and the manner in which the entire modus operandi was executed have the ingredients of a manipulative assemblage to scupper the process of IPO allotment. 
 
It appears that unfair gain has been made by abusing the IPO allotment process and cornering the shares meant for the retail applicants. It appears that Roopalben Panchal, Sugandh, Purshottam Budhwani, Manojdev Seksaria and their respective associates have adopted the modus operandi of making applications in fictitious / benami names for cornering the retail of portion of IPO shares. The shares allotted in IPO to the benamis of Roopalben Panchal and Purshottam Budhwani would have otherwise gone to genuine retail applicants. The entire gameplan, craftily designed, masterminded and executed by a coterie of operators acting in concert, in a tout ensemble through the mechanism of front entities of name-lenders seeking to impart a veneer of acceptability to a deal which is otherwise sham in an agonistic aggression in the market through predatory cornering is a clear abuse of the very process of IPO, meant to shore up the participation of retail investors. 
 
What is equally reprehensible is the unjust enrichment by a few masquerading in the retail category at the cost of genuine retail investors, who have been crowded out by the "hyperplasia" engineered and induced by the machinations of a few to monopolise the retail segment through colorable devices and make-believe arrangements. The entire gamut of elaborate game-plan of queering the pitch in the market is driven by base cupidity to wangle a patently unfair gain.
 
Further probe is required for examining the systemic fault, if any, of the registrar Karvy-RTI i.e. Karvy Computer Shares P Ltd. and the lead managers Kotak Mahindra Capital Company Ltd., DSP Merrill Lynch Ltd. and SBI Capital Markets Ltd. in identifying and weeding out the benami applications. 
 
It appears that Karvy-DP relied on a sub-broker namely Deepak Panchal for the purpose of opening the above dematerialized accounts without conducting any due diligence of its own to verify the identity and address of thousands of dematerialized account-holders. The role of Karvy-DP and Pratik-DP in acting as facilitators for Roopalben Panchal, Sugandh, Purshottam Budhwani and Manojdev Seksaria needs further examination to ascertain whether it was gross negligence or blatant complicity that caused these SEBI registered intermediaries to fail in discharging their obligations.
 
It appears that Roopalben Panchal, Sugandh, Purshottam Budhwani and Manojdev Seksaria have perfected the �art� of IPO manipulation as evidenced by their apparent indulging in similar malfeasances in numerous other IPOs in the recent past. These are being examined by SEBI and appropriate action will be taken based on the findings.
 
The findings of preliminary enquiry as detailed above bring out a prima facie case of violation of Regulation 3 of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Markets) Regulations, 2003. SEBI is initiating formal investigations into the matter. 
 
In view of these findings, SEBI has issued directions as above.
 
SEBI is initiating investigations into the matter and in the meanwhile, in view of the grave emergency arising out of the conduct of parties with the added risk of recrudescence of such devious practice in future and, with a view to protect the interest of investors and securities market from further such acts SEBI has, under Sections 11B and 11(4)(b) of SEBI Act, 1992, issued the directions, by way of ad interim, ex-parte order with immediate effect as above.
  
  
Mumbai

January 12, 2006