SEBI panel suggests compensation for retail investors

MUMBAI: This could well signal a new beginning in the country’s financial sector in terms of compensating investors who have been defrauded.

Thousands of retail investors in the primary market could be in line to be compensated monetarily for potential losses suffered by them due to manipulation in the initial public offering (IPO) allotment process of 21 companies two years ago.

A SEBI-mandated committee has recommended that individual investors who were short-changed in IPOs between 2003 and 2005 be compensated in monetary terms. The Justice Wadhwa committee has worked out a compensation of Rs 92 crore for investors who had applied for shares in the retail category in 21 IPOs in 2005-06.

This is based on the closing price on the listing day for all these IPOs, which include IDFC, Jet Airways and Suzlon.
In essence, investors who lost out in these IPOs should be paid the difference between the offer price and the closing price on the listing day, the committee has said in its report, according to sources. This is reckoned to be the unjust gain made by scamsters who cornered shares meant for individual investors.

Sources said the report has recommended that the first to be compensated should be retail investors who failed to get any allotment, followed by those who were allotted fewer shares than they had applied for. Orders to disgorge ill-gotten gains are common in the US, the world’s largest financial market.

Finance Minister P Chidambaram had said last year that he wanted to send out a strong signal to those attempting to defraud investors by compensating them for the losses they had incurred. He had told SEBI to work out a mechanism to ensure this.

The SEBI board will now have to consider the Wadhwa committee’s recommendations and then take suitable action. This would mean going back to old records with market intermediaries and identifying thousands of investors, which can be a cumbersome exercise.

In almost all 21 IPOs, the shares were listed at a premium to the offer price. The compensation can be paid out by selling securities worth over Rs 140 crore of those operators involved in the IPO scam which have been frozen in their depository accounts based on an order issued by SEBI.

The 2005-06 scam featured a clutch of operators who put in thousands of fictitious applications in several IPOs in the retail category of a small value. After allotment, these operators transferred the shares to another set of players, who in turn transferred them to financiers who had provided the funds for investing in the IPOs.

These shares were then sold on the first day of listing, landing them a windfall, the price difference between the IPO price and the listing price. Thousands of bank accounts and demat accounts were opened in the names of fictitious entities, which SEBI investigators unearthed in 2006 after checking over 100 IPOs.

During the probe, it came to light that key operators had cornered shares representing 0.52% of the total number of shares allotted to the retail investors in the Jet Airways IPO. In the Suzlon offering, 3.74% of shares were allotted to operators using over 21,000 different accounts while in the NTPC issue, the operators used 12,853 accounts to corner 1.30 % of the total number of shares allotted to investors.