Today's stock market was completely different from the stock market of 2003 to 2005. In those times, whenever a new company came out with its IPO, there used to be long queues of people depositing checks outside the broker offices. Behind this simple looking crowd, there were some minds who were taking advantage of the laxity of rules and were misappropriating crores of rupees. In the year 2003, a game came to light in the stock market which created a stir in the entire stock market. The center of this entire game became the brokers of Mumbai, mainly the names of Rupan Shah and his associates came to the fore. After this scam came to light, SEBI changed many rules so that it could be stopped.
To acquire maximum shares in the IPO, Rupal Panchal and his associates opened thousands of fake bank and demat accounts using fake names, addresses and photographs. Whenever a new IPO came, a large number of bids were placed from these fake accounts. After the shares were allotted, they were transferred to the main accounts and sold at higher prices. Due to this, common retail investors had to remain empty handed.
How was the game played in IPO?
There were two major flaws in the system of that time. First, the money was not deducted immediately while applying for IPO. Also, it took time for the check to be cleared. Second, PAN card was not necessary for demat account or IPO application. Taking advantage of this relaxation, the same person used to apply in dozens of different names.
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This scam perpetrated by a woman named Rupal Shah was actually an organized network of share operators. By resorting to fake identities, this network had illegally taken over the retail quota of common investors.
Three big decisions of SEBI after the scam came to light
When this irregularity was investigated and the truth came out, SEBI took two strict steps to make the system secure and transparent. First, the scammers used to open accounts in different names on the same identity. To stop this, SEBI made PAN card completely mandatory for demat and trading accounts. Since a person has only one PAN card, the possibility of opening multiple accounts in fake names is closed. Secondly, earlier bids were placed on the basis of check even without sufficient funds in the account. To stop this, ASBA (Application Supported by Blocked Amount) system was implemented. Now bids are registered in IPO only when that amount is present in the bank account of the applicant and that amount is blocked.
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It becomes very easy to remove a non-serious investor through the ASBA system. For example, if someone has an amount of up to Rs 1 lakh in his bank account and he has purchased shares of a company worth Rs 10000, then Rs 10000 will be blocked in his account and he can spend the remaining Rs 90000 on his daily needs. If he gets the shares, the locked amount will be deducted from his account and if he does not get them, they will be unlocked and become useful to him again.
The 'IPO Demat Scam' that took place between 2003 and 2005 was one of the most vicious frauds in the history of the Indian stock market. After this, the strict steps taken by SEBI strengthened the Indian stock market. In today's time, due to digital technology, mandatory PAN and systems like ASBA, any common investor can participate in the IPO process with complete transparency without any fear of fraud.