Sebi is looking into “mule accounts,” and three IPO applications are being watched

According to its chairperson Madhabi Puri Buch, the Securities and Exchange Board of India (Sebi) is looking into incidents of mule accounts and inflated initial public offering (IPO) applications that are intended to increase the number of people who subscribe for share sales.

Without providing any further information, Buch said that the capital markets regulator has been made aware of three occurrences. Sebi is also keeping an eye on a few of the merchant bankers who are engaged in these kinds of unapproved operations.

“Mule accounts—we all understand how they operate. Buch said, “We are now receiving data and evidence about it,” during a speech at an Association of Investment Bankers of India (AIBI) event.

The second involves manipulating the IPO application figures to create the appearance of substantial subscribers. Therefore, applicants may withdraw their (IPO) applications at a later date, or worse, they may apply in a way that results in their applications being denied. Thus, you know that your hundreds of crores of applications with several PANs (permanent account numbers) would be turned down, Buch said.

She said that the agency has data on the kind of practices that are being monitored.

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A trading account kept with a stock broker, a dematerialized account, or a bank account connected to a trading account under a person’s name, where the account is essentially managed by someone else, are all considered mule accounts.

According to the chairwoman, Sebi is upset about these wrongdoings and will shortly provide guidelines to take strict action against them. The kind of merchant bankers who regularly engage in these kinds of operations has shown patterns that the regulator has been able to identify.

We have three cases in front of us. To determine what would be the best course of action in this, we would need a lot more information, the speaker said.

According to Buch, data on initial public offerings (IPOs) indicates a high number of flippers—investors who leave a firm soon after the listing date—within a week.

Through main board IPOs, 57 domestic corporates raised a total of Rs 49,434 crore in 2023. According to Buch, 68% of investors in the NII (non-institutional investor) category—which is the high net worth (HNI) category—and 43% of investors in the retail category—which is less than Rs 2 lakh—flip in the first week of any IPO.

76% of NII and 52% of retail investors leave a firm after one month of the IPO date, according to her.

Speaking on IPO pricing, Buch said that the existing IPO price discovery process is flawed. She advised a retail investor to hang onto their shares for a fair amount of time, potentially waiting until the first set of quarterly reports, or until the share price of the firm stabilizes following listing.