A day after capital market watchdog Securities and Exchange Board of India unearthed another multiple demat account scam, banking regulator Reserve Bank of India swung into action.
The RBI has called for explanation from all the banks involved in the misuse of the banking channel for initial public offer allotment irregularities.
In New Delhi, Finance Minister P Chidambaram said the demat scam took place because of a systemic deficiency and warned of severest action against those found guilty of distorting the Infrastructure Development and Finance Company and Yes Bank initial public offers.
"We know who the culprits are. They are the same bank managers, the same depository participants, the same lead managers and identified individuals (as in the case of Yes Bank). I think all agencies acting together will take the severest action against them," Chidambaram said.
The high-level coordination committee on financial and capital markets also met at the RBI headquarters in Mumbai today to review the developments. It discussed the irregularities and the prompt action that had been taken in regard to the initial public offers.
However, the details of the discussion are not yet known.
The meeting was chaired by RBI Governor YV Reddy, and attended by Sebi Chairman M Damdoaran, Insurance Regulatory and Development Authority Chairman CS Rao, Economic Affairs Secretary AK Jha and officials of the finance ministry and the regulators. The committee is a high-level forum for interface among the financial sector regulators.
Sebi had on Thursday revealed that fictitious applications had cornered 8.19 per cent of the retail share allotment in the IDFC public issue.
Sebi Chairman M Damodaran said, "It has taken quite some time and effort on Sebi's part to bring his malpractice to the fore and this is just a part of the regulator's effort to clean up the system."
The RBI named Bharat Overseas Bank as the one which followed the practice of 'funding initial public offers through multiple accounts and this covered the funding of several initial public offers -- Infrastructure Development Finance Company being one of them'.
A statement by the banking regulator said after Sebi's letter dated December 16, it took up detailed investigation at Bharat Overseas Bank, Vijaya Bank and 'certain other banks'. The detailed scrutiny established Bharat Overseas Bank's complicity in the manipulation of initial public offers.
The central bank did not name the other banks it had investigated but said 'based on investigation reports, the RBI has already called for explanation from all the banks involved in irregularities. The Reserve Bank will take action on the basis of their explanations'.
The finance minister said, "I am told that four or five individuals, a couple of banks and the depository participants are the same in both initial public offers. Therefore, the culprits are pretty much identified."
He said there was nothing to worry about the new initial public offers that would follow as everybody had been cautioned that henceforth there should be no misuse of the system.
National Securities Depository Ltd Chairman CB Bhave said NSDL had asked its depository participants to report instances where over 20 demat accounts belong to the same person or addresses by January 15.
Sebi has blamed the depositories for their failure to detect multiple accounts carrying the same names and addresses.
NSDL has suggested to the regulator that additional documents over and above bank accounts should be made mandatory for opening of demat accounts. This is to ensure that any fraud in the banking system does not seep into the securities market.
It has suggested that all new demat accounts should be authenticated by the staff of depository participants, leaving behind a proper audit trail. Sub-brokers should not be the only verification point for opening demat accounts, NSDL said.
