amiret Posted April 14, 2015 Posted April 14, 2015 Last week as part of their disinvestment process Govt of India announced a 5% stake sale in REC (Rural Electrification Corporation ) to raise 1,550 Crores. 20% of the open offer was reserved for retail investors ( those who invest less than 2 Lakhs or less ) The REC offer closed on April 8th . Here are a couple of interesting news reports regarding this stake sale. Business Standard : Most retail investors failed to get any allotment in the Rural Electrification Corp (REC) offer for sale (OFS) conducted last week. Most retail bids were made around the floor price of Rs 315, while the allotment price was nearly Rs 330. The retail segment for the first time saw aggressive bidding and was subscribed nine times. "Most investors bid low and were not able to revise their bid prices later. Also, a lot of HNIs made applications in the retail category and pocketed a neat 5 per cent arbitrage," said a broker. How were HNI's (High Networth Investors ) bidding in the retail category and availing of 5% discount since limit in the retail category is limited to Rs.2 Lakhs ? It is not possible unless HNI's had access to multiple Demat accounts Since 20% of the Shares were reserved for retail category , Were Retail Investors being crowded out by HNI's ? Here is the ET news report : "Several savvy investors made a killing in the offer for sale (OFS) of Rural Electrification Corp (REC) on Wednesday. Instead of investing a lump-sum in the REC OFS, they spread their subscription money across demat accounts to make themselves eligible for the retail investor category, which received shares at a 5% discount" they also borrowed demat accounts from their brokers to put in more bids in the REC OFS. "Due to the 5% discount on offer, and retail limit of Rs 2 lakh, savvy investors used multiple demat accounts of family members to up their returns," says Vinay Agarwal, chief executive officer, Angel Broking. The retail category in the REC OFS was subscribed 9.02 times. Brokers were more than happy to arrange the dormant demat accounts for these investors as they borrowed money to place bids in the OFS. How were High Networth Investor's able to borrow demat accounts from their brokers and able to utiltize "dormant demat accounts" ? That seems to suggest they were using Demat accounts that did not even belong to them .
amiret Posted April 14, 2015 Author Posted April 14, 2015 It is strange that MSM business publications are praising these tactics . Indian Retail investors will not have more than a few demat accounts . If most of them failed to get allotment despite the REC share issue being subscribed by over 9 times , it means they were being crowded out by High Networth Investors with access to dozens of demat accounts. As per news reports these accounts may not even belong to them . Surely , using dormant demat accounts belonging to somebody else may be a dubious practice if not illegal ? What is the use of reserving 20% of the Govt Stake Offer for retail investors at a discount when HNI's pretending to be retail investors are going to avail their benefit ?
amiret Posted April 14, 2015 Author Posted April 14, 2015 In the last decade , SEBI uncovered a few SCAMS relating to IPO's and operators misusing multiple DEMAT accounts. MUMBAI: The Securities and Exchange Board of India has discovered yet another multiple demat account scam in 2005's IPO of Infrastructure Development Finance Company (IDFC), raising alarming questions about the oversight of demat accounts used by millions of investors. A Sebi probe, whose findings were released on Thursday, showed that about 8.29per cent of the retail portion of the IDFC IPO amounting to 1.17 crore shares were received by fictitious applicants who operated multiple demat accounts. The modus operandi was the same : The players, who were also involved in the Yes Bank IPO demat scam, were found to have used the same modus operandi to corner large number of shares in highly successful IDFC issue. Roopalben Panchal, along with associates and other entities, cornered large chunks of IDFC shares by opening about 47,000 fictitious accounts.
randomGuy Posted April 14, 2015 Posted April 14, 2015 For 99% of the time in last 5 years, REC has been trading well below 330/-. Retail folks can still buy if they want to, from the open market.
Kalia_Test Posted April 14, 2015 Posted April 14, 2015 The only thing that is illegal/scam is if the brokers used Client Demat Accounts without their knowledge. Again there would be many cases where Clients would have given General Power of Attorney to Brokers in which case they are themselves to blame. Applying in multiple accounts of friends/relatives is not illegal neither it is illegal to 'borrow' demat accounts through financing mechanism. Banks have stopped IPO financing recently but they used to finance IPOs earlier. This HNI financing is a very clever and savvy way with a win-win for all IMO.
amiret Posted April 14, 2015 Author Posted April 14, 2015 ^^ that point is stating the obvious and irrelevant . the OP is about the 5% discount that was reserved for retail category but was usurped by HNI's operating multiple demat accounts (Even DORMANT demat accounts not belonging to them ) Most retail investors failed to get allotment even though 20% was reserved for them. Why is the Govt offering a 5% discount to retail investors in the first place ? To incentivize and increase the level of participation amongst retail investors. If HNI' are cornering shares meant for retail then obviously Govt needs to rethink it's strategy and execution.
Kalia_Test Posted April 14, 2015 Posted April 14, 2015 ^^ that point is stating the obvious and irrelevant . the OP is about the 5% discount that was reserved for retail category but was usurped by HNI's operating multiple demat accounts (Even DORMANT demat accounts not belonging to them ) Most retail investors failed to get allotment even though 20% was reserved for them. Why is the Govt offering a 5% discount to retail investors in the first place ? To incentivize and increase the level of participation amongst retail investors. If HNI' are cornering shares meant for retail then obviously Govt needs to rethink it's strategy and execution. Who is a retail investor? Anyone who applies less than 2 lakh rupees. Has that been violated? NO Lets say I know someone who has demat account but does not have 2 lakhs. He is a retail investor. I lend him 2 lakh rupees and take the shares as lien. Assume the entire transaction results in profit of 10000 I pay him 2000 INR for lending me the demat account. The other 8000 INR is my fees/interest for financing 2 lakhs in a risky stock market operation. In summary, the people that got shares are retail investors not HNIs. Through this innovative financing, some poor retail investors who did not have 2 lkhs atleast got 2000 INR from the Govt. Pretty nice I would say.
randomGuy Posted April 18, 2015 Posted April 18, 2015 What amiret mentions(about multiple dmats) in the OP is very much valid for an IPO that closed yesterday (VRL logistics) - http://www.moneycontrol.com/news/ipo-issues-open/vrl-logistics-ipo-oversubscribed-74-times_1360839.html it was oversubscribed 74 times overall, and 6.61 times in the retail category. It will list at 20-40% premium to the IPO's upper band price. (I applied for 7 lots of 65 shares each @205/- per share , totaling ~94,000/- and will be lucky to be allotted 1 or 2 lots max)
amiret Posted April 18, 2015 Author Posted April 18, 2015 ^ very strange . VRL was oversubscribed by only 2 times after 2 days of bidding. On the last day the NII category (application more than Rs. 2 Lakhs ) has been oversubscribed by 250 times ! So to even have a chance of getting allotment of Rs.200,000 worth of shares one would have had to bid in excess of Rs.5 crores ? :confused_smile: Don't know if extraordinary number of multiple demat accounts are responsible for this ( we need to keep in mind the demat IPO scams of 2005-06 ) In the OP i was pointing out that multiple demat accounts may have been used to corner 5% discount meant for retail investors. from the year 2006 The government is planning to begin criminal cases against those accused in the IPO scam. CBI, which has been given the job of investigating the case has decided to book those who had set up multiple demat accounts and cornered shares in public offers like Yes Bank and IDFC , under Section 68A (1) of the Companies Act, reports The Economic Times. If i am not mistaken multiple applications with the same PAN card are rejected. Though it is possible to have multiple demat accounts with different brokers.
amiret Posted April 18, 2015 Author Posted April 18, 2015 A link of a presentation made by Dr. Kirit Somaiya http://www.kiritsomaiya.com/Demat%20Scam/1%20Presentation%20on%20Story%20of%20Demat%20Scam/Story_of_Demat_Scam.ppt very interesting read. 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 2004. 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. I bet nobody went to prison for the 2005 scam. :sad_smile:
randomGuy Posted April 18, 2015 Posted April 18, 2015 ^ very strange . VRL was oversubscribed by only 2 times after 2 days of bidding. On the last day the NII category (application more than Rs. 2 Lakhs ) has been oversubscribed by 250 times ! Ya, I was also keeping track . Seems there was a mad rush on the last day (even though market was severely down on that day) If i am not mistaken multiple applications with the same PAN card are rejected. Though it is possible to have multiple demat accounts with different brokers. Right Can I apply in an IPO through multiple applications on same name? No, one person cannot apply multiple times through multiple applications for an IPO. It’s a rule and if you apply in an IPO though multiple applications with same name or same demat account or same PAN Number, all of your application will be rejected. If you would like to place order for multiple application, it works if you apply one each of your family member’s name. But again all eligible family members should have a demat account and a PAN number.http://theequitymarkets.com/ipo-frequently-asked-question-s/
amiret Posted April 18, 2015 Author Posted April 18, 2015 though i don't have reason to believe there was anything untoward in VRL (since there was no discount for retail investors ), i have doubts regarding REC . The news reports mention that HNI's "made a Killing" by cornering shares @ 5% discount in the retail category . So if an HNI had to make a 5% arbitrage killing of say Rs.20 Lakhs , He would have needed access to not just multiple demat accounts but access to 200 unique PAN Cards. Since multiple applications with same pan card would be rejected. The HNI would have had to bid Rs.4 Crores via 200 retail applications with 200 Pan cards to make Rs.20 Lakhs ( 5% retail discount arbitrage.). Maybe i am missing something . :confused_smile: I think the Govt should avoid a retail discount altogether and allow normal bidding for proper price discovery.
randomGuy Posted April 18, 2015 Posted April 18, 2015 though i don't have reason to believe there was anything untoward in VRL (since there was no discount for retail investors ), i have doubts regarding REC . The news reports mention that HNI's "made a Killing" by cornering shares @ 5% discount in the retail category . So if an HNI had to make a 5% arbitrage killing of say Rs.20 Lakhs , He would have needed access to not just multiple demat accounts but access to 200 unique PAN Cards. Since multiple applications with same pan card would be rejected. The HNI would have had to bid Rs.4 Crores via 200 retail applications with 200 Pan cards to make Rs.20 Lakhs ( 5% retail discount arbitrage.). Maybe i am missing something . :confused_smile: I think the Govt should avoid a retail discount altogether and allow normal bidding for proper price discovery. No because 1. He would not have been allotted 4 Crore worth of shares since the IPO was oversubscribed 9 times as per the OP. Much like 4 crore divided by 9 = ~40 lacs or thereabouts depending on the number of dormant demat accounts used and the lots applied through each account. 2. Arbitrage is not 5% all the time. Many(infact most) OFSs, QIPs, Rights issues slide down to trade at the discounted price as soon as the discounted price for OFS, QIP etc is announced. Also, REC is a PSU, so not much fancied stock anyways and it would have likely come down to 330/- anyways .
amiret Posted April 18, 2015 Author Posted April 18, 2015 You are right the HNI would have had to bid much more to make the "Killing " the news reports are talking about. The REC OFS final price was 325 . And the 5% discount offered to retail investors is on the allotment price. i think HNI's must have begun short-selling once they had an idea of the over-subscription levels. Volumes 2 days after the OFS shot up to 5-6 times higher than the average 3 month volume. I wish i had access to 200 Pan cards.:((
amiret Posted April 18, 2015 Author Posted April 18, 2015 So next time there is divesment in a PSU like PFC (Power Finance Corporation ) , perhaps shorting in the futures market on day of OFS closure would be better idea ? :hmmm:
randomGuy Posted April 18, 2015 Posted April 18, 2015 You are right the HNI would have had to bid much more to make the "Killing " the news reports are talking about. Usually the company will like to allot at least 1 'lot' to each of the applicants afaik in case of IPO (for ex. 1 lot of VRL was of 65 shares) . one can strategize accordingly. So, ideal case scenario for an HNI would be to open as many demats as possible and then apply for 1 lot only from each demat.
randomGuy Posted April 18, 2015 Posted April 18, 2015 So next time there is divesment in a PSU like PFC (Power Finance Corporation ) , perhaps shorting in the futures market on day of OFS closure would be better idea ? :hmmm: I guess (but the reason is not oversubscription which you mentioned in last post), its possibly the fact that people holding the share in secondary market think that someone else is getting the share at 5% discount (thru OFS) , so the share itself should be worth 5% less. Yaar 5% is a very modest arbitrage which can vanish quickly or remain the same. Its not worth analyzing much imo. Large money can be made on illegal use of dormant demats on lucrative IPOs(such as vrl) which open upto 40% high on the 1st day itself.
velu Posted April 18, 2015 Posted April 18, 2015 Most brokerages gives HNI tag if we maintain more than 10L in the demat account. And there few players who do trade only in IPO/Stake sales , like they have demat accounts for all their family members and apply from all , this is perfectly legal. But it is very well possible for the brokerages to misuse their clients account for applying thru IPOs , this is illegal. And usually most of the guys will apply for IPOs only on the last day of the subscription.
randomGuy Posted May 4, 2015 Posted May 4, 2015 Most brokerages gives HNI tag if we maintain more than 10L in the demat account. And there few players who do trade only in IPO/Stake sales , like they have demat accounts for all their family members and apply from all , this is perfectly legal. But it is very well possible for the brokerages to misuse their clients account for applying thru IPOs , this is illegal. And usually most of the guys will apply for IPOs only on the last day of the subscription. Vrl started day 1 with 50%+ highs, ended the day with 43% up - http://m.moneycontrol.com/india/stockpricequote/transport-logistics/vrllogistics/VL03 (I was allotted a total of zero shares, which discourages me to apply for ipos in future)
Malcolm Merlyn Posted May 4, 2015 Posted May 4, 2015 Random Guy bhai please report to See group take over of cricket thread and help answer my question.
Recommended Posts