IPO grey mkt now acquires ‘legal’ shade

The stock market may be booming once again, but that is little relief to Manish Babu (name changed) and other brokers like him who operate predominantly in the grey market for initial public offerings. “Not a single deal has been struck for nearly months now,” Babu bemoans. Not that the capital market regulator has finally managed to chuck manipulators out; but most investors today don’t need Babu to get IPO allocations as the demand has fallen.

True, after Sebi blew the lid off the IPO share allotment scam in 2005, manipulation in the retail investor quota had reduced significantly. But the saying that challenges bring the best in you goes well with manipulators as well. Babu and his ilk were quick to spot new loopholes and had perfected a new modus operandi to thrive in the grey market. According to Babu, their business was thriving some two months ago, when the demand for IPO allocations was still high.

Earlier, manipulators used to apply for the retail quota under fictitious names and corner the shares. But with the two depositories—NSDL and CDSL—tightening the know-your-client norms enforced by depository participants like banks and brokerages, and also with permanent account number (PAN) now a must for any capital market transaction, it looks like cornering shares entitled to retail investors won’t be easy.

But ask Babu, and he will tell you that shares in the retail investor quota are still being diverted, though not on the scale that was previously witnessed. Also, this time around, it is being done in a perfectly legal manner. Wonder how? Here we go...

A grey market exists whenever there is a strong response for a public issue. Investors who want a certain number of shares, but know that they are unlikely to be allotted that quantity because of the strong demand, turn to grey market brokers like Manish Babu. These investors are mostly high net worth individuals, market operators, reputed brokers and often merchant bankers to the issue who are trying to curry favour with a client.

Now, there are two types of investors who offer their shares in the grey market. There are those who have applied for the issue and want to lock in their profits as soon as possible. But Manish Babu and co are not betting big on these investors for supply can never match demand. They are more interested in a new breed of investors they themselves have created for this purpose alone. These “investors” know nothing about stock or market, but possess three things essential to participate in the capital market—PAN number, demat account and bank account


These dummy investors could be anywhere, in one of the metro cities or in a hamlet in Gujarat.So what’s the modus operandi? Manish Babu gets in touch with an agent who knows many such “investors”. And, of course, there are many agents who specialise in providing an investor base of dummy applicants. This could be a sarpanch of a village or the leader of a trade union.

The “investors” are paid per application. A retail investor can apply for maximum Rs 1 lakh worth of shares. So he is usually paid around Rs 2,500 to Rs 3,000 in cash for his application. Often, the Rs 1 lakh of application money may have been provided by financiers who are part of the grey market network. These “investors” are only bothered with the cash they get per application; in fact, they have no control on the shares once it enters their demat account.

If there are three or four eligible applicants in a household, it means an income of Rs 10,000 for the family just renting out the demat and bank accounts. And remember, there are months when more than two IPOs hit the market. The delivery instruction slip book of the demat account has already been signed by the investors and handed over to the agent broker, again a part of the grey market network. Once the IPO allotment is done and soon after the shares get listed, the broker collects the shares from the accounts of these “investors” and transfers it into his account.

Once trading in the shares commences, he transfers the shares into Manish Babu’s account through a block deal on the trading screen. The shares are transferred on the pretext that these would be sold in the open market, just as most IPO investors do to earn the listing premium. In reality Manish Babu simply gets the shares and again transfer these, almost instantaneously to real investors who wanted to corner the IPO. The broker too gets a cut for his efforts and the premium over the issue price plus other costs is settled in cash between Manish Babu and the broker. The question is whether there is anything illegal with the whole process? But that again is a grey area.