IPO Scams - OverviewIPO Scams are well structured game played by the absolute opportunists consisting of intermediaries, financiers and bank employees, who make a lot of money by controlling shares meant for retail investors in Initial Public Offer (IPO), as the per the statement of the Securities Exchange Board of India.
Exposed: IPO Scam: An Investor Trap -- Part 1
In the last few years, the capital market in India went through a rapid transformation. The increased use of information technology and the integration of financial markets have stepped up the risk profile of the capital market.
The two major IPO scams in the Indian Capital market were the Harshad Mehta scam in the year 1992 and the Ketan Parekh scam in the year 2001. The IPO Scams opened up the latent loopholes in the Indian capital market.
IPO Scams - Causes
- Two of the most common factors of the major IPO scams in India were the tacit consent of the banks and the poor surveillance techniques.
- The Depository Participants must be provided the proof of identity and proof of address as a routine check for the opening demat accounts.
This was not followed.
- Numerous dematerialized accounts and bank accounts had been opened under false names and the IPO applications were made in non existing names.
IPO Scams - How it was done?
- At first bank accounts were opened up in fictitious or "benami" names, which allowed these fictitious account holders to open demat accounts.
- The master account holders, the person who had executed the planning acts as an intermediary on behalf of the financiers.
- The shares acquired at the IPOs were disposed on the date of listing at a premium to get more than the amount of money invested.
- The banks played an important part by means of opening bank accounts and giving loans to the fictitious entities for the purpose of earning fee incomes.