IPO scam:Apellate tribunal sets aside SEBI's order on Karvy

The Securities Appellate Tribunal has set aside SEBI’s disgorgement order on Karvy Stock Broking Ltd in the IPO allotment case.

This is in line with SAT’s November 2007 order setting aside the same disgorgement order on nine other entities, including National Securities Depositories Ltd.

SAT said that SEBI, in its ex-parte order of November 2006, has violated the principles of natural justice in not calling upon the appellant to show cause why it should not be ordered to disgorge the amount determined in the order. “The impugned order deserves to be set aside on this ground alone.”

The scam related to certain entities cornering IPO shares (in 2003-05) reserved for the retail category by using fictitious demat accounts. These demat accounts were ultimately transferred to the financiers through key operators. The financiers made their gains on the first day of listing of these shares.

SEBI’s disgorgement order of November 2006 had directed 10 entities including Karvy to jointly and severally pay up Rs 115.82 crore towards disgorgement (paying up money made through illegal or unethical gains).

However, SEBI refused to spell out how much each entity would have to pay, saying that it was a matter to be settled between the accused entities. It was against this order that the appeals to SAT were made.

SAT said that the SEBI enquiry officer has not recorded any finding to the effect that the Karvy had made any illegal gains, but had only gone into the alleged misdeeds of the appellant in the case.

“The action for disgorgement should have been initiated only after the appropriate proceedings against the entities had concluded and their guilt established,” said SAT.

SAT also expressed its anguish at the manner in which SEBI has proceeded in this case. It pointed out that SEBI itself had found that the financiers of the key operators were the ultimate beneficiaries, and had gone on to identify 82 financiers and computed the gains made by some of them, said SAT. Yet it issued no directions to them to disgorge their illegal gains, instead the depositories and their participants, against whom enquiries are still pending, were asked to pay up, said SAT, reports The Hindu Business Line.