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PRICING of an IPO and possible economic offences:

WHAT IS AN IPO?An IPO is the first sale of an entity's common shares to public investors. Whenan entity wants to enter the market, it makes its share available to common investors in form of an auction sale.Each application for an IPO has to be within a cut-off figure, which is eligible

for allotment in the retail investors category. But in this case, financiers andmarket players illegally cornered these retail investors' shares.

An Initial Public Offering (IPO) referred to simply as an "offering" or "flotation," is when a company (called the issuer) issues common stock or shares to thepublic for the first time. They are often issued by smaller, younger companies seeking capital to expand, but can also be done by large privately-owned companies looking to become publicly traded.In an IPO the issuer may obtain the assistance of an underwriting firm, which helps it determine what type of security to issue (common or preferred), best offering price and time to bring it to market.An IPO can be a risky investment. For the individual investor it is tough to predict what the stock or shares will do on its initial day of trading and in the n

ear future since there is often little historical data with which to analyze thecompany. Also, most IPOs are of companies going through a transitory growth period, and they are therefore subject to additional uncertainty regarding their future value.

REASONS FOR LISTING:

When a company lists its shares on a public exchange, it will almost invariablylook to issue additional new shares in order at the same time.

The money paid by investors for the newly-issued shares goes directly to the company (in contrast to a later trade of shares on the exchange, where the money pa

sses between investors). An IPO, therefore, allows a company to tap a wide pool of stock market investorsto provide it with large volumes of capital for future growth.

The company is never required to repay the capital, but instead the new shareholders have a right to future profits distributed by the company and the right toa capital distribution in case of dissolution. The existing shareholders will see their shareholdings diluted as a proportion of the company's shares. However, they hope that the capital investment will make their shareholdings more valuable in absolute terms. In addition, once a company is listed, it will be able to issue further shares via a rights issue, thereby again providing itself with capital for expansion wit

hout incurring any debt. This regular ability to raise large amounts of capital from the general market,rather than having to seek and negotiate with individual investors, is a key incentive for many companies seeking to list.There are several benefits to being a public company, namely:

? Bolstering and diversifying equity base? Enabling cheaper access to capital? Exposure and prestige? Attracting and retaining the best management and employees? Facilitating acquisitions? Creating multiple financing opportunities: equity, convertible debt, cheaper bank

? loans, etc.

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STEP BY STEP PROCESS:

The process for conducting an IPO generally involves a firm taking the followingsteps:

1. It registers with the Securities and Exchange Commission (SEC),

2. It seeks the help of one or more investment banks as underwriters to pursue a coterie of institutional investors and the general public to purchase the firms stock,3. It presents the IPO fact file and prospects to the investor community,4. It determines the number and price of shares to be offered in the IPO, and5. It works out the aftermarket position, after observing the quiet period.

When the Securities Exchange Board of India (Sebi) started scanning an entire spectrum of IPOs launched over 2003, 2004 and 2005, it ended digging up more dirtand probably prevented a larger conspiracy to hijack the market.Here is a lowdown on the IPO scam:

What is the scam?It involved manipulation of the primary marketread initial public offers (IPOs)byfinanciers and market players by using fictitious or benaami demat accounts.While investigating the Yes Bank scam, Sebi found that certain entities had illegally obtained IPO shares reserved for retail applicants through thousands of benaami demat accounts.They then transferred the shares to financiers, who sold on the first day of listing, making windfall gains from the price difference between the IPO price andthe listing price.

When was the scam detected?The IPO scam came to light in 2005 when the private 'Yes Bank' launched its init

ial public offering. Roopalben Panchal, a resident of Ahmedabad, had allegedly opened several fake demat accounts and subsequently raised finances on the sharesallotted to her through Bharat Overseas Bank branches.

The Sebi started a broad investigation into IPO allotments after it detected irregularities in the buying of shares of YES Banks IPO in 2005.

What triggered the Sebi probe?On October 10, 2005 an Income Tax raid on businessman Purushottam Budhwani accidentally found he was controlling over 5,000 demat accounts. Sebi finds this suspicious.On December 15, Sebi declared results of its probe, how a few people cornered alarge chunk of YES Bank IPO shares.On January 11 this year, Sebi discovered huge rigging in the IDFC IPO.Roopalben Panchal was found to be controlling nearly 15,000 demat accounts.It was found that once they obtained these shares, the fictitious investors transferred them to financiers.The financiers then sold these shares on the first day of listing, reaping hugeprofits between the IPO price and the listing price. The Sebi report covered 105IPOs from 2003-2005.

The Sebi probe covered several IPOs dating back to 2005, 2004 and 2003 to detectmisuse. These included the offerings of Jet Airways, Sasken Communications, Suz

lon Energy, Punj Lloyds, JP Hydro Power, NTPC, PVR Cinema, Shringar Cinema and others. A lot more dubious accounts across several IPOs are expected to tumble ou

t in the next few days.It also detected similar irregularities in the IDFC IPO, in which over 8 per cent of the allotment in the retail segment was cornered by fictitious applicants t

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hrough multiple demat accounts.

Who is Roopalben Panchal?Roopalben Panchal of IndiaBulls Securities is allegedly the mastermind of the scam. Finance Ministry officials are expected to act against her soon.

How is this different from Harshad Mehtas scam?

The securities scam involved price manipulation in the secondary market, read stocks. Whereas in this case, the manipulation happened in the primary marketeven before the shares (IPOs) entered the stocks market.This time, fraudsters targeted the primary market to make a quick buck at the expense of the gullible small investors.Direct Participants (DPs) used retail applicants shares for reaping benefits in the stock market.