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IPO – Initial Public Offering

By: Pratik Shah [ I have completed my Bachelor of management studies and I am

working with I am proud to be a part of its Success.
Contact me at : - ]
on September 10, 2009 1 Comment


As we all know IPO – INITIAL PUBLIC OFFERING is the hottest topic in the
current industry, mainly because of India being a developing country and lot of growth in
various sectors which leads a country to ultimate success. And when we talk about
country’s growth which is dependent on the kind of work and how much importance
to which sector is given. And when we say or talk about industries growth which leads
the economy of country has to be balanced and given proper finance so as to reach the
levels to fulfill the needs of the society. And industries which have massive outflow of
work and a big portfolio then its very difficult for any company to work with limited
finance and this is where IPO plays an important role.

This report talks about how IPO helps in raising fund for the companies going public,
what are its pros and cons, and also it gives us detailed idea why companies go public.
How and what are the steps taken by the companies before going for any IPO and also
the role of (SEBI) Securities and Exchange Board of India the BSE and NSE , what
are primary and secondary markets and also the important terms related to IPO. It gives
us idea of how IPO is driven in the market and what are various factors taken into
consideration before going for an IPO. And it also tells us how we can more or less judge
a good IPO. Then we all know that scams have always been a part of any sector you go in
for which are covered in it and also few recommendations are given for the same. It also
gives us some idea about what are the expenses that a company undertakes during an

IPO has been one of the most important generators of funds for the small companies
making them big and given a new vision in past and it is still continuing its work and also
for many coming years.

Public issues can be classified into Initial Public offerings and further public offerings. In
a public offering, the issuer makes an offer for new investors to enter its shareholding
family. The issuer company makes detailed disclosures as per the DIP guidelines in its
offer document and offers it for subscription. Initial Public Offering is when an
unlisted company makes either a fresh issue of securities or an offer for sale of its
existing securities or both for the first time to the public. This paves way for listing and
trading of the issuer’s securities.  IPO is new shares Offered to the public in the
Primary Market .The first time the company is traded on the stock exchange. A
prospectus is issued to read about its risk before investing. IPO is a company’s first sale
of stock to the public. Securities offered in an IPO are often, but not always, those of
young, small companies seeking outside equity capital and a public market for their
stock. Investors investing in an IPO must be ready to bear high risk in their investment..


IPO stands for Initial Public Offering and means the new offer of shares from a
company which was previously unlisted. This is done by offering those shares to the
public, which were held by the promoters or the private investors prior to the IPO. In the
case when other investors or Promoter held the shares the stake holding comes down to
the extent their shares are offered to the public. In other cases new shares are issued to the
public and the shares, which are with the promoters stay with them. In both cases the
share of the promoters in the total capital comes down.

For example say there are 100 shares in a company and 50 of these are offered to the
public in an IPO then in such a case the promoter’s stake in the company comes
down from 100% to 50%. In another case the company issues 50 additional shares to the
public and the stake of the promoter comes down from 100% to 67%.

Normally in an IPO the shares are issued at a discount to what is considered their intrinsic
value and that’s why investors keenly await IPOs and make money on most of them.
IPO are generally priced at a discount, which means that if the intrinsic value of a share is
perceived to be Rs.100 the shares will be offered at a price, which is lesser than Rs.100
say Rs.80 during the IPO. When the stock actually lists in the market it will list closer to
Rs.100. The difference between the two prices is known as Listing Gains, which an
investor makes when investing in IPO and making money at the listing of the IPO. A
Bullish Market gives IPO investors a clear opportunity to achieve long term targets in a
short term phase.

An IPOÂ is the first sale of stock by a company to the public. A company can raise
money by issuing either debt or equity. If the company has never issued equity to the
public, it’s known as an IPO.

Companies fall into two broad categories:Â private and public: – A privately held
company has fewer shareholders and its owners don’t have to disclose much information
about the company. Anybody can go out and incorporate a company: just put in some
money, file the right legal documents and follow the reporting rules of your jurisdiction.
Most small businesses are privately held. But large companies can be private too. Do you
know that IKEA, Domino’s Pizza and Hallmark Cards are all privately held?

It usually isn’t possible to buy shares in a private company. You can approach the owners
about investing, but they’re not obligated to sell you anything. Public companies, on the
other hand, have sold at least a portion of themselves to the public and trade on a stock
exchange. This is why doing an IPO is also referred to as “going public’
Public companies have thousands of shareholders and are subject to strict rules and
regulations. They must have a board of directors and they must report financial
information every quarter. In the United States, public companies report to
the Securities and Exchange Commission (SEC). In other countries, public
companies are overseen by governing bodies similar to the SEC. From an investor’s
standpoint, the most exciting thing about a public company is that the stock is traded in
the open market, like any other commodity. If you have the cash, you can invest. The
CEO could hate your guts, but there’s nothing he or she could do to stop you from
buying stock.

The first sale of stock by a private company to the public, IPO’s are often issued by
smaller, younger companies seeking capital to expand, but can also be done by large
privately-owned companies looking to become publicly traded. In an IPO, the issuer
obtains the assistance of an underwriting firm, which helps it determine what type of
security to issue (common or preferred), best offering price and time to bring it to market.
IPO’s can be a risky investment. For the individual investor, it is tough to predict
what the stock will do on its initial day of trading and in the near future since there is
often little historical data with which to analyze the company. Also, most IPO’s are
of companies going through a transitory growth period, and they are therefore subject to
additional uncertainty regarding their future value.

An IPO is the first sale of an entity’s common shares to public investors. When an entity
wants to enter the market, it makes its share available to common investors in form of an
auction sale.

Each application for an IPO has to be within a cut-off figure, which is eligible for
allotment in the retail investors’ category. But in this case, financiers and market
players illegally cornered these retail investors’ shares.


Basically, going public (or participating in an “initial public offering” or (IPO) is the
process in which a business owned by one or several individuals is converted into a
business owned by many. It involves the offering of part ownership of the company to the
public through the sale of debt or more commonly, equity securities (stock).

Going public raises cash and usually a lot of it. Being publicly traded also opens many
financial doors:

• Because of the increased scrutiny, public companies can usually get better rates
when they issue debt.
• As long as there is market demand, a public company can always issue more
stock. Thus, mergers and acquisitions are easier to do because stock can be
issued as part of the deal.
• Trading in the open markets means liquidity. This makes it possible to implement
things like employee stock ownership plans, which help to attract top talent.
Being on a major stock exchange carries a considerable amount of prestige. In the past,
only private companies with strong fundamentals could qualify for an IPO and it wasn’t
easy to get listed.

The internet boom changed all this. Firms no longer needed strong financials and a solid
history to go public. Instead, IPOs were done by smaller startups seeking to expand their
businesses. There’s nothing wrong with wanting to expand, but most of these firms had
never made a profit and didn’t plan on being profitable any time soon. Founded on
venture capital funding, they spent like Texans trying to generate enough excitement to
make it to the market before burning through all their cash. In cases like this, companies
might be suspected of doing an IPO just to make the founders rich. This is known as an
exit strategy, implying that there’s no desire to stick around and create value for
shareholders. The IPO then becomes the end of the road rather than the beginning.

How can this happen? Remember: an IPO is just selling stock. It’s all about the sales job.
If you can convince people to buy stock in your company, you can raise a lot of money.


The Underwriting Process

Getting a piece of a hot IPO is very difficult, if not impossible. To understand why, we
need to know how an IPO is done, a process known as underwriting.

When a company wants to go public, the first thing it does is hire an investment bank. A
company could theoretically sell its shares on its own, but realistically, an investment
bank is required – it’s just the way Wall Street works. Underwriting is the process of
raising money by either debt or equity (in this case we are referring to equity). You can
think of underwriters as middlemen between companies and the investing public. The
biggest underwriters are Goldman Sachs, Merrill Lynch, Credit Suisse First Boston,
Lehman Brothers and Morgan Stanley.

The company and the investment bank will first meet to negotiate the deal. Items usually
discussed include the amount of money a company will raise, the type of securities to be
issued and all the details in the underwriting agreement. The deal can be structured in a
variety of ways. For example, in a firm commitment, the underwriter guarantees that a
certain amount will be raised by buying the entire offer and then reselling to the public.
In a best efforts agreement, however, the underwriter sells securities for the company but
doesn’t guarantee the amount raised. Also, investment banks are hesitant to shoulder all
the risk of an offering. Instead, they form a syndicate of underwriters. One underwriter
leads the syndicate and the others sell a part of the issue.

Once all sides agree to a deal, the investment bank puts together a registration statement
to be filed with the SEC. This document contains information about the offering as well
as company info such as financial statements, management background, any legal
problems, where the money is to be used and insider holdings. The SEC then requires a
cooling off period, in which they investigate and make sure all material information has
been disclosed. Once the SEC approves the offering, a date (the effective date) is set
when the stock will be offered to the public.

During the cooling off period the underwriter puts together what is known as the red
herring. This is an initial prospectus containing all the information about the company
except for the offer price and the effective date, which aren’t known at that time. With the
red herring in hand, the underwriter and company attempt to hype and build up interest
for the issue. They go on a road show – also known as the “dog and pony show” – where
the big institutional investors are courted.

As the effective date approaches, the underwriter and company sit down and decide on
the price. This isn’t an easy decision: it depends on the company, the success of the road
show and, most importantly, current market conditions. Of course, it’s in both parties’
interest to get as much as possible.

Finally, the securities are sold on the stock market and the money is collected from

As you can see, the road to an IPO is a long and complicated one. You may have noticed
that individual investors aren’t involved until the very end. This is because small
investors aren’t the target market. They don’t have the cash and, therefore, hold little
interest for the underwriters. If underwriters think an IPO will be successful, they’ll
usually pad the pockets of their favorite institutional client with shares at the IPO price.
The only way for you to get shares (known as an IPO allocation) is to have an account
with one of the investment banks that is part of the underwriting syndicate. But don’t
expect to open an account with $1,000 and be showered with an allocation. You need to
be a frequently trading client with a large account to get in on a hot IPO.

Bottom line, your chances of getting early shares in an IPO are slim to none unless you’re
on the inside. If you do get shares, it’s probably because nobody else wants them.
Granted, there are exceptions to every rule and it would be incorrect for us to say that it’s
impossible. Just keep in mind that the probability isn’t high if you are a small investor.

What is the Registration Process?

Going public requires a Registration Statement which is a carefully crafted document that
is prepared by your attorneys and accountants. It requires detailed discussions on
information pertaining to:

• Business product/service/markets
• Company Information
• Risk Factors
• Proceeds Use (How are you going to use the money)
• Officers and Directors
• Related party transactions
• Identification of your principal shareholders
• Audited financials

After your registration statement is prepared, it is submitted to the Securities and

Exchange Commission and various other regulatory bodies for their detailed review.
When this process is completed, you and your management team will do a “road show”
to present your company to the stock brokers who will then sell your stock to the public
investors. Assuming they can successfully sell your issue, you’ll receive your money.
Then it’s simple, all you have to do is make a lot more money with the proceeds so as to
increase the value of your, your teams and public investors stock.


When a company floats a public issue or IPO, it prints forms for application to be filled
by the investors. Public issues are open for a few days only. As per law, any public issue
should be kept open for a minimum of 3days and a maximum of 21 days. For issues,
which are underwritten by financial institutions, the offer should be kept open for a
minimum of 3 days and a maximum of 21 days. For issues, which are underwritten by all
India financial institutions, the offer should be kept open for a maximum of 10 days.
Generally, issues are kept open for only 3 to 4 days. The duly complete application from,
accompanied by cash, cheque, DD or stock invest should be deposited before the closing
date as per the instruction on the form. IPO’s by investment companies (closed end
funds) usually contain underwriting fees which represent a load to buyers.

Before applying for any IPO, analyze the following factors:

1. Who are the Promoters? What is their credibility and track record?

2. What is the company manufacturing or providing services – Product, its potential.

3. Does the Company have any Technology tie-up? If yes, what is the reputation of the

4. What has been the past performance of the Company offering the IPO?

5. What is the Project cost, what are the means of financing and profitability

6. What are the Risk factors involved?

7. Who has appraised the Project? In India Projects apprised by IDBI and ICICI have
more credibility than small Merchant Bankers?

How to make payments for IPO’s:

The payment terms of any IPO or Public issue is fixed by the company keeping in view
its fund requirements and the statutory regulations. In general, companies stipulate that
either the entire money should be paid along with the application or 50 percent of the
entire amount be paid along with the application and rest on allotment. However, if the
funds requirements are staggered, the company may ask for the money in calls, that is,
the company demands for the money after allotment as and when the cash flow demands.
As per the statutory requirements, for public issue large than Rs. 250 crore, the money is
to be collected as under:

• 25 per cent on application

• 25 per cent on allotment
• 50 per cent in two or more calls

Understanding IPO Grading:

IPO grading is a unique concept involving an independent agency that is free from bias
and with the available tools for assessing the investment attractiveness of an equity
security. IPO grading is a service aimed at facilitating the assessment of equity issues
offered to the public, says SEBI. IPO grading can act as an additional decision-making
tool for them. The idea is that IPO grading will help the investor better appreciate the
meaning of the disclosures in the issue documents, collapsing all of the above
information into a single digit. Thus, IPO grading could be seen as an added
investment guidance tool seeking to hide the ignorance of the above factors and still help
the investors make an informed decision. Grading of IPO’s in terms of their
fundamental quality will enable investors steer clear of unsound offers. IPO grading in
general would be a relative assessment of the fundamentals of the equity security by
credit rating agencies registered with SEBI.

But IPO grading is totally unheard of anywhere else and is a First-From-India

initiative. The grading, to be done by the SEBI-registered credit rating agencies, would
be applicable to all IPO’s for which offer documents are filed after April 30, SEBI
said in a circular. SEBI does not play any role in the assessment made by the
grading agency. The grading is intended to be an independent and unbiased opinion of
that agency. The company needs to first contact one of the grading agencies and
mandate it for the grading exercise. Though this process will ideally require 2-3 weeks
for completion, it may be a good idea for companies to initiate the grading process about
6-8 weeks before the targeted IPO date to provide sufficient time for any
contingencies. IPO grading is a service aimed at facilitating the assessment of equity
issues offered to the public, says SEBI.
“IPO grading is the grade assigned by a Credit Rating Agency registered with SEBI,
to the initial public offering (IPO) of equity shares or any other security which may be
converted into or exchanged with equity shares at a later date”.

The grade represents a relative assessment of the fundamentals of that issue in relation to
the other listed equity securities in India. Such grading is generally assigned on a five-
point point scale with a higher score indicating stronger fundamentals and vice versa as

IPO Grade 1: Poor fundamentals

IPO Grade 2: Below-average fundamentals
IPO Grade 3: Average fundamentals
IPO Grade 4: Above-average fundamentals
IPO Grade 5: Strong fundamentals
IPO Grading is not a recommendation to invest:
Even if a Company is Graded 5 (i.e. with strong fundamentals), IPO grading is not a
recommendation to invest in the graded instrument. It does not a comment on the price of
the graded security or its suitability for a particular investor. It does not comment on issue
price, likely price on listing or movement in price post listing.


The decision to take a company public in the form of an initial public offering (IPO)
should not be considered lightly. There are several advantages and disadvantages to being
a public company, which should thoroughly be considered. This memorandum will
discuss the advantages and disadvantages of conducting an IPO and will briefly discuss
the steps to be taken to register an offering for sale to the public. The purpose of this
memorandum is to provide a thumbnail sketch of the process. The reader should
understand that the process is very time consuming and complicated and companies
should undertake this process only after serious consideration of the advantages and
disadvantages and discussions with qualified advisors.

Advantages of going public:

• Increased Capital

A public offering will allow a company to raise capital to use for various corporate
purposes such as working capital, acquisitions, research and development, marketing, and
expanding plant and equipment.

• Liquidity

Once shares of a company are traded on a public exchange, those shares have a market
value and can be resold. This allows a company to attract and retain employees by
offering stock incentive packages to those employees. Moreover, it also provides
investors in the company the option to trade their shares thus enhancing investor

• Increased Prestige
Public companies often are better known and more visible than private companies, this
enables them to obtain a larger market for their goods or services. Public companies are
able to have access to larger pools of capital as well as different types of capital.

• Valuation

Public trading of a company’s shares sets a value for the company that is set by the public
market and not through more subjective standards set by a private valuator. This is
helpful for a company that is looking for a merger or acquisition. It also allows the
shareholders to know the value of the shares.

• Increased wealth

The founders of the company often have the sense of increased wealth as a result of the
IPO. Prior to the IPO these shares were illiquid and had a more subjective price. These
shares now have an ascertainable price and after any lockup period these shares may be
sold to the public, subject to limitations.

Disadvantages of going Public:

• Time and Expense

Conducting an IPO is time consuming and expensive. A successful IPO can take up to a
year or more to complete and a company can expect to spend several hundreds of
thousands of dollars on attorneys, accountants, and printers. In addition, the underwriter’s
fees can range from 3% to 10% of the value of the offering. Due to the time and expense
of preparation of the IPO, many companies simply cannot afford the time or spare the
expense of preparing IPO.

• Disclosure

The SEC disclosure rules are very extensive. Once a company is a reporting company it
must provide information regarding compensation of senior management, transactions
with parties related to the company, conflicts of interest, competitive positions, how the
company intends to develop future products, material contracts, and lawsuits. In addition,
once the offering statement is effective, a company will be required to make financial
disclosures required by the Securities and Exchange Act of 1934. The 1934 Act requires
public companies to file quarterly statements containing unaudited financial statements
and audited financial statements annually. These statements must also contain updated
information regarding nonfinancial matters similar to information provided in the initial
registration statement. This usually entails retaining lawyers and auditors to prepare these
quarterly and annual statements. In addition, a company must report certain material
events as they arise. This information is available to investors, employees, and

• Falling Stock Price

If the shares of the company’s stock fall, the company may lose market confidence,
decreased valuation of the company may effect lines of credits, secondary offering
pricing, the company’s ability to maintain employees, and the personal wealth of insiders
and investors.

• Vulnerability

If a large portion of the company’s shares are sold to the public, the company may
become a target for a takeover, causing insiders to lose control. A takeover bid may be
the result of shareholders being upset with management or corporate raiders looking for
an opportunity. Defending a hostile bid can be both expensive and time consuming. Once
a company has weighed the advantages and disadvantages of being a public company, if
it decides that it would like to conduct an IPO it will have to retain a lead

• Regulatory Review

The Company will be open to review by the SEC to ensure that the company is making
the appropriate filings with all relevant disclosures.


Good investing principles demand that you study the minutes of details prior to investing
in an IPO. Here are some parameters you should evaluate:-

• Promoters

Is the company a family run business or is it professionally owned? Even with a family
run business what are the credibility and professional qualifications of those managing
the company? Do the top level managers have enough experience (of at least 5 years) in
the specific type of business?

• Industry Outlook

The products or services of the company should have a good demand and scope for

• Business Plans

Check the progress made in terms of land acquisition, clearances from various
departments, purchase of machinery, letter of credits etc. A higher initial investment from
the promoters will lead to a higher faith in the organization.

• Financials

Why does the company require the money? Is the company floating more equity than
required? What is the debt component? Keep a track on the profits, growth and margins
of the previous years. A steady growth rate is the quality of a fundamentally sound
company. Check the assumptions the promoters are making and whether these
assumptions or expectations sound feasible.

• Risk Factors

The offer documents will list our specific risk factors such as the company’s
liabilities, court cases or other litigations. Examine how these factors will affect the
operations of the company.

• Key Names

Every IPO will have lead managers and merchant bankers. You can figure out the track
record of the merchant banker through the SEBI website.

• Pricing

Compare the company’s PER with that of similar companies. With this you can find
out the P/E Growth ratio and examine whether its earning projections seem viable.

• Listing

You should have access to the brokers of the stock exchanges where the company will be
listing itself.


In the primary market securities are issued to the public and the proceeds go to the
issuing company. Secondary market is term used for stock exchanges, where stocks are
bought and sold after they are issued to the public.

Primary Market:

The first time that a company’s shares are issued to the public, it is by a process
called the initial public offering (IPO). In an IPO the company offloads a certain
percentage of its total shares to the public at a certain price.

Most IPO’S these days do not have a fixed offer price. Instead they follow a method
called BOOK BUILDING PROCESS, where the offer price is placed in a band or a
range with the highest and the lowest value (refer to the newspaper clipping on the page).
The public can bid for the shares at any price in the band specified. Once the bids come
in, the company evaluates all the bids and decides on an offer price in that range. After
the offer price is fixed, the company allots its shares to the people who had applied for its
shares or returns them their money.
Market for new issues of securities, as distinguished from the Secondary Market, where
previously issued securities are bought and sold. A market is primary if the proceeds of
sales go to the issuer of the securities sold.

This is part of the financial market where enterprises issue their new shares and bonds. It
is characterized by being the only moment when the enterprise receives money in
exchange for selling its financial assets.

Secondary Market:

Once the offer price is fixed and the shares are issued to the people, stock exchanges
facilitate the trading of shares for the general public. Once a stock is listed on an
exchange, people can start trading in its shares. In a stock exchange the existing
shareholders sell their shares to anyone who is willing to buy them at a price agreeable to
both parties. Individuals cannot buy or sell shares in a stock exchange directly; they have
to execute their transaction through authorized members of the stock exchange who are
also called STOCK BROKERS.

The market where securities are traded after they are initially offered in the primary
market. Most trading is done in the secondary market.

To explain further, it is trading in previously issued financial instruments. An organized

market for used securities. Examples are the New York Stock Exchange (NYSE),
Bombay Stock Exchange (BSE), National Stock Exchange NSE, bond markets, over-the-
counter markets, residential mortgage loans, governmental guaranteed loans etc.


• Who are the intermediaries in an issue?

Merchant Bankers to the issue or Book Running Lead Managers (BRLM), syndicate
members, Registrars to the issue, Bankers to the issue, Auditors of the company,
Underwriters to the issue, Solicitors, etc. are the intermediaries to an issue. The issuer
discloses the addresses, telephone/fax numbers and email addresses of these
intermediaries. In addition to this, the issuer also discloses the details of the compliance
officer appointed by the company for the purpose of the issue.

• Who is eligible to be a BRLM?

A Merchant banker possessing a valid SEBI registration in accordance with the SEBI
(Merchant Bankers) Regulations, 1992 is eligible to act as a Book Running Lead
Manager to an issue.

• What is the role of a Lead Manager? (pre and post issue)

In the pre-issue process, the Lead Manager (LM) takes up the due diligence of
company’s operations/ management/ business plans/ legal etc. Other activities of the
LM include drafting and design of Offer documents, Prospectus, statutory advertisements
and memorandum containing salient features of the Prospectus. The BRLMs shall ensure
compliance with stipulated requirements and completion of prescribed formalities with
the Stock Exchanges, RoC and SEBI including finalization of Prospectus and RoC filing.
Appointment of other intermediaries viz., Registrar(s), Printers, Advertising Agency and
Bankers to the Offer is also included in the pre-issue processes. The LM also draws up
the various marketing strategies for the issue.

The post issue activities including management of escrow accounts, co-ordinate non-
institutional allocation, intimation of allocation and dispatch of refunds to bidders etc are
performed by the LM. The post Offer activities for the Offer will involve essential
follow-up steps, which include the finalization of trading and dealing of instruments
and dispatch of certificates and demat of delivery of shares, with the various agencies
connected with the work such as the Registrar(s) to the Offer and Bankers to the Offer
and the bank handling refund business. The merchant banker shall be responsible for
ensuring that these agencies fulfill their functions and enable it to discharge this
responsibility through suitable agreements with the Company.

• What is the role of a registrar?

The Registrar finalizes the list of eligible allottees after deleting the invalid applications
and ensures that the corporate action for crediting of shares to the demat accounts of the
applicants is done and the dispatch of refund orders to those applicable are sent. The Lead
manager co-ordinates with the Registrar to ensure follow up so that that the flow of
applications from collecting bank branches, processing of the applications and other
matters till the basis of allotment is finalized, dispatch security certificates and refund
orders completed and securities listed.

• What is the role of bankers to the issue?

Bankers to the issue, as the name suggests, carries out all the activities of ensuring that
the funds are collected and transferred to the Escrow accounts. The Lead Merchant
Banker shall ensure that Bankers to the Issue are appointed in all the mandatory
collection centers as specified in DIP Guidelines. The LM also ensures follow-up with
bankers to the issue to get quick estimates of collection and advising the issuer about
closure of the issue, based on the correct figures.

• Question on Due diligence

The Lead Managers state that they have examined various documents including those
relating to litigation like commercial disputes, patent disputes, disputes with collaborators
etc. and other materials in connection with the finalization of the offer document
pertaining to the said issue; and on the basis of such examination and the discussions with
the Company, its Directors and other officers, other agencies, independent verification of
the statements concerning the objects of the issue, projected profitability, price
justification, etc., they state that they have ensured that they are in compliance with SEBI,
the Government and any other competent authority in this behalf.


YES Bank Ltd. Case:

New Delhi: When the Securities Exchange Board of India (SEBI) started scanning an
entire spectrum of IPO’s launched over 2003, 2004 and 2005, it ended digging up
more dirt and probably prevented a larger conspiracy to hijack the market.

Here is a lowdown on the IPO scam:

• What was the scam?

It involved manipulation of the primary market—read initial public offers (IPOs)—by

financiers and market players by using fictitious or benaami demat accounts.

While investigating the Yes Bank scam, SEBI found that certain entities had illegally
obtained IPO shares reserved for retail applicants through thousands of benaami demat

They then transferred the shares to financiers, who sold on the first day of listing, making
windfall gains from the price difference between the IPO price and the listing price.

The modus operandi adopted in manipulating the YES Bank Ltd (YBL)’s initial public
offering (IPO) allotment involved opening of over 7,500 benami dematerialized accounts.

These accounts were with the National Securities Depository Ltd (NSDL) through Karvy
Stock broking Ltd (Karvy-DP).

• When was the scam detected?

The IPO scam came to light in 2005 when the private ‘Yes Bank’ launched its initial
public offering. Roopalben Panchal, a resident of Ahmedabad, had allegedly opened
several fake demat accounts and subsequently raised finances on the shares allotted to her
through Bharat Overseas Bank branches.

The SEBIi started a broad investigation into IPO allotments after it detected irregularities
in the buying of shares of YES Bank’s IPO in 2005.

• What triggered the SEBI probe?

On October 10 last year, an Income Tax raid on businessman Purushottam Budhwani
accidentally found he was controlling over 5,000 demat accounts. SEBI finds this

On December 15, SEBI declared results of its probe, how a few people cornered a large
chunk of YES Bank IPO shares.

Roopalben Panchal was found to be controlling nearly 15,000 demat accounts.

It was found that once they obtained these shares, the fictitious investors transferred them
to financiers.

The financiers then sold these shares on the first day of listing, reaping huge profits
between the IPO price and the listing price. The SEBI report covered 105 IPO’s from

The SEBI probe covered several IPO’s dating back to 2005, 2004 and 2003 to detect
misuse. These included the offerings of Jet Airways, Sasken Communications, Suzlon
Energy, Punj Lloyds, JP Hydro Power, NTPC, PVR Cinema, Shringar Cinema and
others. A lot more dubious accounts across several IPO’s are expected to tumble out
in the next few days.

It also detected similar irregularities in the IDFC IPO, in which over 8 per cent of the
allotment in the retail segment was cornered by fictitious applicants through multiple
demat accounts.

• Who is Roopalben Panchal?

. Of the 13 erring entities, the chief culprits identified by SEBI were Ms Roopalben
Panchal and Sugandh Estates and Investments Pvt Ltd.

Roopalben Panchal of IndiaBulls Securities is allegedly the mastermind of the scam.

Finance Ministry officials are expected to act against her soon.

• How is this different from Harshad Mehta’s scam?

The securities scam involved price manipulation in the secondary market, read stocks.
Whereas in this case, the manipulation happened in the primary market—even before
the shares (IPO’s) entered the stocks market.

This time, fraudsters targeted the primary market to make a quick buck at the expense of
the gullible small investors.Direct Participants (DPs) used retail applicants’ shares for
reaping benefits in the stock market.

• How big is the scam?

Apart from the YES Bank fraud, SEBI reportedly has definite data about two IPO’s
where retail allotments were rigged, but market observers believe the scam is far bigger.
The SEBI probe has identified more operators and some market intermediaries involved
in the misuse of the initial allotment process in public offerings dating back to ’04-05.

The Income-Tax Department in Ahmedabad has found that two major accused, Panchal
and Sugandh Investments, have together made Rs 60.62 crore in 18 months.

• A Glance on the Scam:

YES Bank Ltd shares were listed on the BSE and the NSE on July 12, 2005. The modus
operandi adopted in manipulating the YES Bank Ltd (YBL)’s initial public offering
(IPO) allotment involved opening of over 7,500 benami dematerialised accounts.

These accounts were with the National Securities Depository Ltd (NSDL) through Karvy
Stockbroking Ltd (Karvy-DP). Of the 13 erring entities, the chief culprits identified by
SEBI were Ms Roopalben Panchal and Sugandh Estates and Investments Pvt Ltd.

While Ms Panchal opened 6,315 benami DP accounts, another entity Sugandh opened
1,315 benami accounts. Each of these accounts applications were made for 1,050 shares,
paying application money of Rs 47,250 each. By applying for small lots (1,050 shares
through each accounts), they misused the retail allotment quota stipulated for IPOs. The
shares allotted in IPO to the benamis of Ms Panchal and Sugandh would have otherwise
gone to genuine retail applicants.

The IPO of YBL opened on June 15, 2005 and It was observed that Ms Panchal had
transferred 9,31,600 shares to various entities in seven off-market transactions on July 11
– a day prior to the listing and commencement of trading on the stock exchanges. In order
to get an allotment of 9,31,600 shares, Ms Panchal would have had to apply for crores of
shares involving many crores of rupees in application money.

However, Ms Panchal’s name did not appear in the list of top 100 public issue allottees.
Thus, it was suspected that Ms Panchal must have made multiple applications or that
other applicants were acting as a front for her.

Ms Panchal had applied for only 1,050 shares in the YES Bank IPO, paying the
application money of Rs 47,250. And she did not receive any allotment in the IPO. On
July 6, Ms Panchal received 150 shares each from 6,315 allottees through off-market
transactions aggregating 9,47,250 YBL shares.

Curiously, as per the dematerialized account data furnished by NSDL, of the above 6,315
entities as many as 6,221 entities have a same address in Ahmedabad. There are three
more addresses of locations in Ahmedabad, which have been linked to Ms Panchal. All
the 6,315 entities have their bank accounts with Bharat Overseas Bank and demat
accounts with Karvy-DP.
By applying for the maximum possible number of shares per applicant while being
categorised as retail applicant and by putting in large number of applications in the lot of
1,050 shares, Ms Panchal and her associates (real or fictitious) have attempted to corner
the maximum possible number of shares in the IPO allotment.

This tantamount to an abuse of IPO allotment process, the SEBI order said. A similar
modus operandi was adopted by Sugandh, which received 150 shares each from 1,315
dematerialised accounts aggregating 1, 97,250 shares in off market transactions.

According to SEBI findings, Ms Panchal and others booked profits to the tune of about
Rs 1.70 crore on the day of the listing of YES Bank shares.

• Role of Depository Participants

• Suzlon Energy IPO: Rs 1,496.34 cr (September 23-29, 2005)

Key operators used 21,692 fictitious accounts to corner 3,23,023 shares which is equal to
3.74 per cent of the total number of shares allotted to retail individual investors.

• Jet Airways IPO: Rs 1899.3 crore (Feb 18-24, 2005)

Key operators used 1,186 fake accounts for cornering 20,901 shares which is equal to
0.52 per cent of the total number of shares allotted to retail investors.

• National Thermal Power Corporation IPO Rs 5,368.14 crore (Oct 7-14, 2004).

12,853 afferent accounts were used for cornering 27,50,730 shares representing 1.3 per
cent of the total number of shares allotted to retail investors.

• Tata Consultancy Services IPO: Rs 4,713.47 crore

14,619 ‘benami’ accounts were used to corner 2, 61,294 shares representing 2.09 per cent
of the total shares allotted to retail individual investors