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Story of Demat Scam 1,00,000 Bogus Demat A/c, Bank A/c, Cornering Small Investors Portion Covering 53 IPOs – 5 Crore Shares Presentation by Dr. KIRIT SOMAIYA.

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Presentation on theme: "Story of Demat Scam 1,00,000 Bogus Demat A/c, Bank A/c, Cornering Small Investors Portion Covering 53 IPOs – 5 Crore Shares Presentation by Dr. KIRIT SOMAIYA."— Presentation transcript:

1 Story of Demat Scam 1,00,000 Bogus Demat A/c, Bank A/c, Cornering Small Investors Portion Covering 53 IPOs – 5 Crore Shares Presentation by Dr. KIRIT SOMAIYA Investors Grievances Forum

2 IPO-DEMAT SCAM – STORY OF SCAM – SHAME 21st Century India is moving in the direction of becoming a Developed Country. Importance on the growth, Government investment in infrastructure from the year 2000 has changed the picture of Indian economy. Rs 1,00,000 crore Government spending on the core and infrastructure industries during , has created a boom in the Indian Economy. Indian industries have gained self-confidence to compete with the world. The boom in the economy resulted in the boom in finance industry and that of Capital Market. It is unique in India that every bull run in the Capital Market has got supplemented by a scam. Harshad Mehta Scam – 1992, the scam of CRB- NBFC, the plantation companies and the Ketan Parekh Scam. Industries and finance sector always tried to tap the primary market during a boom. Mobilize the financial resources through Public Issues and IPOs. In , more than Rs.24,000 crores have been mobilized from the primary market through Public Issues and IPOs. It is the sad part of the Indian Capital Market that every IPO boom has a scam. It was during , the primary market momentum had a mini-scam of mini-steel plants and mini-cement plant public issues. These companies tapped the market, fooled the Small Investors, collected hundreds of crores of Rupees, diverted the funds. Small Investor was the loser. After the Harshad Mehta pick, once again the primary market got a momentum during 1995 to 1997 which resulted into the vanishing companies scam. Almost 1000 companies raised funds through Public Issues and got vanished. During the Ketan Parekh Scam, several companies changed their names from NBFC, finance companies to Infotech companies. Tapped the market. Several companies also created the hype and got benefited by higher premium.Small Investors the looser.

3 The IPO-Demat Scam of 2005 is in a way repetition of history. It is economic growth, booming economy, momentum to Capital Market and once again scamsters. Same mentality has destroyed the whole of the Indian finance/capital market regulatory network. It is just like a virus. Which has demolished, corrupted the banking system, depository system, Stock Exchanges,SRO,s Rregulatory network. The failure of surveillance and vigilance at every level from the Finance Ministry, RBI, SEBI, NSDL, CDSL, NSE, BSE, Banks, Depositories. In a single day, 10,000 bank accounts were being opened, nobody questioned. Same day 10,000s Demat accounts were opened, nobody gets suspicious. Is it possible? It is connivance. The scamsters, the syndicate corrupted the whole system. The Demat scam is the connivance of so-called Panchals, the broker, the investor, the banker and the DP. All came together to master-mind the scam, corrupted 53 Public Issues, siphoned off more than 5 crores shares of Small Investors. It is a tragedy on the part of the Indian regulators that the scam is going on since August Banks finance so-called Public Issue applications without even asking them to open a bank account. It is Bharat Overseas Bank, Citibank…… gave IPO finance of hundreds of crores of Rupees to a single person such as Roopalben-Syndicate in the name of tens of thousands of fictitious applicants/names. Karvy, the Depository, processed tens of thousands of applications, allotted them shares without even receiving applications.Investors Grievances Forum is committed to protect the interest of Small Investors. The Small Investors demands justice. Losses incurred by the Small Investors due to the siphoning off of their shares by these scamsters be recovered from them. Be returned to those Small Investors/applicants. Five times penalties be levied. This may be deposited into the Investors Education and Protection Fund. We want criminal action against the scamsters. Section 68A of the Companies Act is very clear and specific. To apply in Public Issues in a fictitious name is a crime, punishable with imprisonment up to 5 years. SEBI and the Government has to initiate criminal action. Here is a presentation on the Demat Scam. We appeal to all to teach a lesson to the scamster. Let us show the International Regulators, India, Indian Government, Indian Regulators also act like the Regulators of the Developed Countries. Take the issue to the logical end and get justice to Small Investors. - KIRIT SOMAIYA

4 Story of Greed, Failure of System Started in August 2004 Loot & Cornering Small Investors Quota by Syndicate of Broker, Investor, Bank, DP Failure of Surveilance & Vigilance of Regulators 53 Ipos 5 crore Shares, 1 Lac Bogus Demat a/c The Roopalben, Sungandh Investments, Zaveris, Budhwanis & Sakserias, along with the Broker- Investors, with support of Banker & DP run the Show-Scam for 18 months.

5 Story of Panchals Story of Roopalben, Sugandh Investments, Zaveri, Budhwanis, Sakserias Story of Bharat Overseas Bank, City Bank, Indian Overseas Banks……. Story of Karvy Registrar, DP, Stock Broker Failure of SEBI, NSDL, CDSL, RBI,BSE Connivance of all of te above made 43,982 applications in fictitious names in IDFC Public Issue. Got alloted 1,17,05,872 shares. Roopalben & Budhwani were allowed to open 5,000 Bogus Demat A/c on the last day of IDFC issue by Karvy & Bharat Overseas Bank.

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11 Mastermind to corner Small Investors Share The entire gameplan, craftily designed, masterminded and executed by a coterie of operators acting in concert tout ensemble through the mechanism of front entities of name-lenders clear abuse of the very process of IPO, meant to shore up the participation of small investors. The syndicate shared the Share Allotment Benefit Investor to get 50% of Bogus Allotment – Panchals & Broker, the Shell Investment Cos remaining 50%. Karvy put – added further thousands application.

12 SEBI Order on IDFC Thousands of applications in fictitious / benami names. IPO applicants merely name-lenders or non-existent These Bogus allottees transferred shares to Panchals, Budhwanis the Syndicate Transfer of shares before listing Sold shares on the first day of listing Windfall gain Elbowing out the genuine retail investors Bank in depositories allowed syndicate to open benami/ fictitious demat and bank accounts

13 IPO of IDFC IPO of IDFC opened on July 15, 2005 and closed on July 22, Basis of allotment finalized on Aug 04, Shares credited to IPO allottees on August 05/06, Shares got listed on the Stock Exchanges on August 12, Yes, before listing the Scamsters use to transfer shares to the Beneficiaries accounts. Mutual understanding. Unsigned Moll.

14 Small Investors Portion/ Quota IDFC came out with public issue of 403,600,000 equity shares of Rs. 10 each for cash at a price of Rs. 34 per equity share. 141,260,000 equity shares were to be offered to Small Individual Investors (defined as Individual Bidders who bid for equity shares for an amount less than or equal to Rs. 1,00,000 as per prospectus).

15 Transactions in IDFC Shares by Roopalben Panchal & Associates Roopalben have their demat a/c with Karvy Stock Broking Ltd. Panchals also have thousands of Fictitious- Bogus-Benami Demat Accounts & Banks A/C at the same address –34 Ketan Tower, Camp Road, Shahibaugh, Ahmedabad – , Shashwat, Opp. Gujarat College, Ellisbridge, Ahmedabad, –bank accounts with Bharat Overseas Bank, C G Road, Ahmedabad.

16 Roopalben Panchal & Others Roopalben received 39,43,184 shares from 14,807 demat a/cs on August 11 Purshottam Budhwani received 2,98,412 shares from 1122 demat a/cs on 8 August Roopalben also received 32,61,426 shares from 12,257 dematerialized a/c on 8 Aug Sugandh Investment Pvt. Ltd. received 27,08,944 share demat a/c on 8 Aug

17 Bogus Demat a/c of Panchals & Others in IDFC Ms. Roopalben Panchal Sugandh Estates and Investments Pvt. Ltd Shri Purshottam Ghanshyam Budhwani 4748 Shri Manojdev Seksaria 1989 TOTAL Source: SEBI Order on IDFC – Demat Scam

18 Roopalben 12,257demat a/c-NSDL opened in 21 various batches on 21 diff. dates Sr.No.Demat A/c OpeningNo. of Accounts 1Upto Total12257

19 Sugandh Invest Demat A/C opening

20 Budhwani demat a/c opening Sr.N o. Demat A/c OpeningNo. of Accounts 1Upto Total12257

21 Budhwanis Banks A/Cs How a person is allowed to open so many accounts in the same Branch. For a Small Investor, Bank asks so many documents and for Budhwanis, Khulja Sim Sim, Red carpet for Budhwanis & Panchals.

22 Modus Operandi Yes, this is the Syndicate. How they share to Benefit - Shares

23 Office of Dummy – Fictitious Investment Co. 25/A 68 Gate No 6, Malwani, Malad (W), Mumbai 95

24 Kirit Somaiya visited the Benami Co. at Malawni Slum Area with the slum dwellers

25 Modus Opurendy-2 The Syndicate of Panchals, Broker – Bogus – Shell Co. & Investors

26 Modus Opurendi for Firm Allotment 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 applicants of Roopalben, Sugandh, Budhwani and Seksaria appear to be fictitious Every applicant got allotment 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 They apply for such a lot so every application will have allotment

27 Dealing by 5 entity received share from Roopalben

28 Benami Applicant -The Bogus address – 39, Kailash Niwas 2, Mehta Road, Ghatkopar (E), Mumbai 77

29 Roopalben-Fairy Tale How an individual can open 27,064 A/C Can persuade all 27,064 to make off- market transfers to her demat account Immediately prior to the scheduled listing on the stock exchanges It is simply fairy-tallish.

30 Syndicate Panchals, Budhawani, Zaveri,Sakseria Broker Investors- Shell Cos Karvy DP, Karvy-Registrar Bank Branch Managers & Management

31 Karvy the Culprit Milibhagat with Syndicate-Panchals No details of Bank a/c & Refund mentioned in the Application forms Cheques issued with contineous serial numbers for thousands of aplicants Opened fictitious demat a/c Forms, details not available now Issued single refund cheque for thousands Of applicants Karvy the Registrar, DP, Stock Broker, thousands of forms incomplete, applicants not traceable. Applications processed – allotted without receiving forms.

32 Order of SEBI – Action on IDFC Panchals,Investors,Syndicate & Others directed not to buy, sell in the securities market, directly or indirectly NSDL and CDSL to ensure that the demate a/c which served as conduit for Roopalben, Sugandh, Budhwani and Seksaria are not utilized for manipulation of IPO allotment in future. SEBI is directed to conduct immediately inspection of Karvy-RTI

33 SEBI Directives The following entities are directed not to buy, sell or deal in the securities market, directly or indirectly, till further directions: i. Ms. Roopalben Nareshbhai Panchal ii. Sugandh Estates & Investments P Ltd. iii. Shri Purshottam Ghanshyam Budhwani iv. 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: Zenet Software Ltd. Tauras Infosys Ltd. Rajan Vasudev Dapki Bhargav Ranchhodlal Panchal Jayantilal Jitmal Seer Finlease Pvt. Ltd. Excell Multitech Ltd. Devangi Dipakbhai Panchal Hasmukhlal N. Vora Welvet Financial Advisors Pvt. Ltd. Jayesh P Khandwala HUF Guatam N Jhaveri Shilpa Rajan Dapki Dipak Jashvantlal Panchal Hina Bhargav Panchal Bhanuprasad Dipakkumar Trivedi Sujal Leasing Pvt. Ltd. Dushyant Natwarlal Dalal Puloma Dushyant Dalal Amadhi Investments Ltd. Ritaben R Thakkar Monal Y Thakkar Page 46 of 49 Vinod Modha Kelan Atulbhai Doshi Jitendra Lalwani Lok Prakashan Ltd. Bahubali Shantilal Shah Smruti Shreyans Shah Shreyans Shantilal Shah Datamatics Telecom Ltd. Dharmesh Bhupendra M Biren Kantilal Shah Suresh Bhikha Vasava Javeri Gautambhai Jay Shah

34 Bharat Overseas Bank Connivance or Negligence ? Extending IPO finance to fictitious/benami individuals Providing intra day funding of margin money to brokers Extended huge amounts to the group through these fictitious/benami individuals The internal control system has failed to arrest the above irregularities Collection of account payee cheques of various individuals who are not the customers Crediting the proceeds of the refund orders to accounts other than the accounts of the payees

35 RBI Findings Imposed monetary penalties for violation of RBI regulations on Know Your Customer (KYC) norms Breach of prudent banking practices facilitating misuse of IPO finance to ineligible borrowers. Issued show cause notices RBI conclusion that violations were substantiated Accordingly the monetary penalties are imposed.

36 Reserve Bank of India Order Penalty levied on Following Banks –Bharat Overseas Bank Ltd. –Indian Overseas Bank –Vijaya Bank –City Bank –HDFC Bank Ltd. –ICICI Bank Ltd. –Standard Chartered Bank

37 Scam-Yes Bank IPO Issue opened on June 15, 2005 Listed at BSE & NSE July 12 Roopalben Panchal transferred 9,31,600 shares to seven entities on July 11, i.e. prior to the listing In order to get an allotment of 9,31,600 shares Roopalben had to apply for crores of shares Involving many crores of rupees in application money Observed that Roopalben Panchals name in the list of applicants/ allotees only once

38 Yes Bank Issue Public Rs Crores Shares Reserved for Small Investors Rupalben cornered & sold 8,39,500 Rs Rupalben & Syndicate earned profit of Rs 1,37,67,8000

39 Gimmick of Roopalben in Yes Bank IPO 6,315 Bogus-fictitious applications, Demat A/cs, Bank A/cs Similar Addresses of Ahmedabad for Demat A/c On all applications similar address of Bharat Overseas Bank, Worli, Mumbai 9,47,250 shares allotment to these fictitious accounts

40 Syndicate of Panchal-Investors Roopalben made off market transfers on to the following entities: 1. Seer Finlease P.Ltd. -3,32,875 shares 2. Excell Multitech Ltd.-1,61,180 shares 3. Devangi Dipakbhai Panchal-2,20,000 shares 4. Zenet Software Ltd.-92,855 shares 5. Tauras Infosys Ltd. -80,590 shares 6. Rajan Vasudev Dapki-44,100 shares

41 Roopalben & Investors Roopalben received funds from 8 entities Prior to the IPO of Yes Bank Ltd. Devangi Dipak Panchal, Rajan Dapki, Zenet Software Ltd., Excell Multitech Ltd., Taurus Infosys Ltd., Seer Finlease P Ltd., Barghav Panchal (HUF) and Jayantilal Jitmal She in turn transferred these funds to 6315 entities who had utilized these funds for making applications in the IPO of YBL.

42 Sugandh Investment – Yes Bank 1315 Bogus applications Allotment of 1,97,250 shares Profit of Rs 32,26,492 Modus-operandi similar to Rupalben

43 Order of SEBI – Action on Yes Bank Panchals & Others directed not to buy, sell or deal in Yes Bank and other Companies Shares, ensuing IPOs, directly or indirectly NSDL is directed to ensure that the 6315 demate a/c of Roopalben and 1315 demate a/c of Sugandh not utilized for manipulation of IPO in future. NSDL is directed to undertake a comprehensive inspection of Karvy-DP NSDL and CDSL are advised to enhance their surveillance

44 10,669 Bogus demat a/c opened on 16 Aug Ms. Roopalben Panchal6483 Sugandh Estates and Investments Pvt. Ltd TOTAL10,669

45 Major Public issues

46 Major IPO Bogus Applications

47 Criminal Action Demanded Criminal action against Panchals and others for opening bogus Demat and Bank Accounts. Companies Act is clear on this under Sub-section (1) of Section 68A : Any person who : a) Makes in a fictitious name an application to a Company for acquiring or subscribing for any shares therein, or b) Otherwise induces a Company to allot, or register any transfer of, shares therein to him, or any other person in a fictitious name, shall be punishable with imprisonment for a term which may extend to five years. As per Sec. 55A of Companies Act, provision of 68A is to be administered by SEBI. In case of listed companies, Sec. 621 authorizes SEBI to file complaints for offences under the Companies Act.

48 Karvy the Culprit All the major scamsters along with Karvy have looted the Small Investors. More than 95% bogus fictitious Demat accounts have been opened by Karvy DP. Karvy has accepted payment and also refunded the amount to the scamsters It is unearthed that Karvy was issuing single cheque to Panchals, Sugandh Investment for these benami, forged applications. The Syndicate of Karvy, Bharat Overseas Bank, investors, Panchals was transferring refunds belonging to thousands of bogus applicants with help of Electronic Clearing System directly in the bank accounts of Panchals & Others

49 Action on Karvy 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.

50 Issue Raised by Parliamentarians Members of Parliament have taken this issue with Finance Minister : –Shri Dharmendra Pradhan, MP -Shri Yeshawant Sinha -Shri Vedprakash Goyal –Shri Vallabhbhai Kathuria, MP –Shri Suresh Waghmare, MP –Shri Sanjay Talathi, MP –Shri Satish T. Gao, MP Demanded protection of Small Investors & Criminal Action

51 IGF Demands IGF demanded full-fledged investigation the role played by Karvy - Karvy Registrar, Karvy Stock Broker, Karvy DP. IGF has also come to the conclusion that thousands of applications have been made without completing the formalities. In many cases, addresses are not available or application forms are also not available. IGF demands that till all the investigation is completed, all the activities of Karvy be suspended immediately.

52 Action Demanded by IGF Action under Sec. 68A of Companies Act against the scamster. Anybody applies in an IPO in fictitious, bogus names is punishable for 5 years imprisonment. As per Sec. 55A of Companies Act, provision of Sec.68A is to be administered by SEBI in case of listed companies. As IGF has already demanded action by SEBI and NSDL, we would request you to ask Karvy to initiate criminal action. We once again insist that such action must be initiated by SEBI, NSDL for Karvy.

53 IGF Representations to Hon. P.C. Gupta, Company Affairs Minister SEBI, Finance Ministry, RBI, NSDL & CDSL, Stock Exchanges (BSE/NSE) Bharat Overseas Bank, Karvy, Home Minister, Gujarat Govt. Economic Offence Wing, Gujarat Police, Palton Road Police Station, Mumbai

54 IGF Action : Police Complaint at Palton Road Police Station,Mumbai

55 IGF Action : Police Complaint at Police Headquarters- Gandhinagar, Gujarat

56 RBI Findings & Directives Bank a/c opened without Forms etc IPO financing given for Fictitious Applicants Broker-Investor a/c debited & credited for fictitious applicants Partner in the Scam Complete audit & Investigation of last 3 years IPO financing

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63 Reserve Bank of India action on Banks January 13, 2006 Bharat Overseas Bank, Vijaya Bank and certain other banks. The detailed scrutiny by the Reserve Bank revealed that the funding of IPOs through multiple accounts was being followed by Bharat Overseas Bank and this covered funding of several other IPOs, Infrastructure Development Finance Company (IDFC) being one of them. Misuse of IPO finance- Penal action taken The Reserve Bank of India in exercise of powers vested in it under the provisions of Section 47 A (1)(b) of the Banking Regulation Act, 1949 imposed monetary penalties on seven scheduled commercial banks for violation of RBI regulations on Know Your Customer (KYC) norms, for breach of prudent banking practices and facilitating misuse of IPO finance to ineligible borrowers. The RBI had issued show cause notices to all these banks. In response thereto banks had submitted their written responses and the CEOs had also sought personal hearing with the RBI, which was granted. On careful examination of banks' submission, the RBI has come to a conclusive decision that the aforesaid violations were substantiated and accordingly the monetary penalties are imposed. Bharat Overseas Bank Ltd., the bank had committed the following irregularities (i) Extending IPO finance to fictitious/benami individuals without appropriate due diligence to establish their identity or existence. (ii) Apart from providing intra day funding of margin money to brokers, the bank had extended huge amounts to a group of accounts through these fictitious/benami individuals in violation of RBI directive on limits on funding of IPOs, (which specified, inter-alia, a limit of Rs.10 lakh per individual). (iii) The internal control system has failed to arrest the above irregularities. It also did not act upon the alerts emanated from the internal audit. (iv) Collection of account payee cheques of various individuals who are not the customers of the bank, besides crediting the proceeds of the refund orders to accounts other than the accounts of the payees.

64 3. In view of the above, the Reserve Bank of India has imposed a penalty of Rs lakh (Rupees twenty lakh only) on the bank. Citi Bank After examining the bank's reply and your oral submission on January 21, 2006, The Reserve Bank of India held, inter-alia, that the bank had violated RBI guidelines/directives/instructions 1.relating to monitoring of suspicious transactions, adherence to KYC norms 2. Issue of large number of cheque leaves not in consonance with the status of the account holder. In view of the above, the Reserve Bank of India has imposed a penalty of Rs.5.00 lakh HDFC Bank Ltd. guidelines/directives/instructions 1.relating to opening of deposit accounts 2. failure of monitoring of transactions for adherence to KYC norms and failure of internal controls. In view of the above, the Reserve Bank of India has imposed a penalty of Rs.5.00 lakh (Rupees five lakh only) on the bank. ICICI Bank Ltd. the bank had violated RBI guidelines/directives/instructions relating to opening of accounts monitoring of transactions for adherence to KYC norms, there was failure of internal control and acceptance of account payee cheques across the counter without proper authorization. In view of the above, the Reserve Bank of India has imposed a penalty of Rs.5.00 lakh (Rupees five lakh only) on the bank.

65 Indian Overseas Bank, the bank had violated RBI guidelines / directives/instructions in regard to the following aspects. a) Opening multiple accounts without adhering to KYC norms. b) Facilitating manipulation of IPO process by certain group of individuals by extending IPO finance to various fictitious individuals. c) Failing to monitor the unusual and suspicious transactions in the account the failure of internal controls in monitoring the non-compliance with KYC policies/ procedures In view of the above, the Reserve Bank of India has imposed a penalty of Rs lakh (Rupees fifteen lakh only) on the bank. Standard Chartered Bank, the bank had violated the RBI guidelines/directives/instructions relating to KYC norms, failed to verify the end use of funds in respect of loans granted against shares to a number of individuals. In view of the above, the Reserve Bank of India has imposed a penalty of Rs.5.00 lakh (Rupees five lakh only) on the bank. Vijaya Bank, the bank had violated following RBI guidelines /directives/instructions. a) Opening multiple accounts without adherence to KYC norms b) Failing to monitor large value transactions c) Failure of internal control to check the irregularities in KYC compliance and monitoring of transactions in the deposit accounts. a ).In view of the above, the Reserve Bank of India has imposed a penalty of Rs lakh (Rupees ten lakh only) on the bank.

66 IGF Sources Small Applicants- investors SEBI, RBI, Fin Ministry, NSDL, CDSL, Income Tax Dept, Exchanges Media Reports Market Experts & Source Banks, Brokers & others


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