The Hindu Business Line : Govt promises to reallocate shares to IPO scam victims

The Finance Minister, Mr P. Chidambaram, on Friday assured the Lok Sabha that steps would be taken to "reallocate" shares to persons who had lost out on due allocation of shares on account of the IPO scam of 2005.

Stating that the SEBI had taken action in the IPO scam and passed an unprecedented disgorgement order, Mr Chidambaram said that the persons involved in the IPO scam have been "caught" and "punished."

The persons behind the IPO scam had taken advantage of lack of systems in depositories to detect multiple applications.

The depositories have now been advised to put in place a system, including the necessary software, to identify multiple accounts suspected to be benami/fictitious.

On the Finance Minister's statement on reallocation of shares, Mr Harish Salve, senior Supreme Court advocate, told Business Line that it looked like "quantum leaping. I have my own misgivings."

Mr U.K. Chaudhury, another senior Supreme Court advocate, said that the SEBI has powers only to cancel allotment and refund the money and does not have the powers to take away the illegal gains and reallocate them as shares.

"Once capital is paid up, it cannot be reallocated unless there is a transfer, which requires consent."

However, he said that the capital market regulator could impose heavy penalties on those involved in the scam, recover the money and compensate using that money.

"This will be a valid exercise. It will discourage dishonest investors and render justice to those who have suffered because of the scam," said Mr Chaudhury, who specialises in corporate and public issues.

Capital market experts like Mr Prithvi Haldea of Prime Database contend that it is possible to identify the list of persons who lost out on account of the scam and did not get the shares they deserved.

"The SEBI order does not say that shares would be disgorged. It says that money would be disgorged," he said.

He also said that the closing price on the listing date would be used to arrive at the amount of unjust enrichment.

This amount could be recovered and redistributed among investors who lost out or it could be used to buy shares from the market and credit them to those who did not get allocation.

"So, technically it is possible to reallocate shares. I can't comment on the legal aspect."

According to Mr Haldea, the SEBI order was a path-breaking one as it has brought the concept of disgorgement to India.

"Investors can now hope that in case of a fraud, they have a chance to be compensated."