Finance Minister P Chidambaram wants capital markets watchdog Sebi to disgorge illegal gains made by a clutch of operators, who manipulated allotment of shares in scores of initial public offerings, IPO, reports The Economic Times.

• Disgorging illegal gains would mean forcing offenders to either sell back securities or make them pay investors
• Market regulator has powers under Section 11 B of the Sebi Act to disgorge profits
• Legal circles feel that calculating the quantum of compensation and identifying the investors are issues, which can land the regulator in trouble 

Last week he told the Sebi board that investors, who lost out owing to the manipulation of the allotment process in several IPOs between ’03 and ’05, need to be compensated. According to officials, the finance minister made it clear that the regulator had enough powers in its own statute to direct those who had manipulated the allotment process to make good the potential losses of investors at whose cost it was done.

Disgorging illegal gains would mean forcing offenders in the capital market to either sell back their securities to compensate investors for violating rules or by making them pay investors for an offence like insider trading. In the western markets, especially the US, this is a common practice.

However, ensuring a fair deal for investors who were conned in IPOs by disgorging profits of the operators is certain to be an extremely complex exercise.

Legal circles feel that calculating the quantum of compensation and identifying the investors are issues, which can land the regulator in trouble, including the possible risk of litigation.

Besides, it has to have access to the funds parked in banks of those charged of having manipulated the IPO allotment process, which is no easy task, they say.

But officials said that by embarking on such a move, Mr Chidambaram believes a strong signal could be sent out to those attempting to violate the integrity of the market.

The regulator and other market participants perhaps may be sceptical of this, but it appears that the government is determined to make an example of this case.

Earlier this year, a Sebi probe indicated that a few operators had managed to corner shares earmarked for retail investors in over 100 IPOs between ’03 and ’05. This was done by putting in applications in the retail category through thousands of fictitious applicants for whom benami demat and bank accounts were also opened.

Once the shares were allotted to them, they were transferred to the financiers of this racket who sold the shares on the initial day of listing, thus making windfall gains.

The principal operators in this scam were identified by Sebi as Roopalben Panchal, and several master account holders and financiers.

Subsequent to the probe, the securities held by some of them have been frozen.