After halting Vaswani Industries' listing earlier this month on suspicion of irregularities in its IPO bidding, the market watchdog last week ordered a detailed probe into the matter, which would be completed by the next month.

However, Sebi has now received complaints of many IPOs in past 2-3 years, alleging that promoters roped in some 'operators' to inflate the IPO subscription level with fake bids, which they withdrew at a later stage or cashed in on the first day of listing.

Concerned over the possible scale of the alleged manipulation, Sebi has decided to conduct a detailed probe on a number of IPOs and would soon seek relevant data and information about them from stock exchanges, merchant bankers and other entities, sources said.

The probe would focus particularly on those IPOs where bids were withdrawn during the time the offers had remained open or those cases where shares had plummeted sharply on the first day of the listing, they added.

Typically in such cases, the IPO-bound companies' promoters, or at times merchant bankers with or without the knowledge of the company, approach certain 'IPO operators' to put in fake bids in investor categories like retail, HNIs (High Net Worth Individual) and body-corporates.

These fake bids help inflate the overall bid levels and thus attract the innocent investors
for the public offer.

If the desired levels of subscription are achieved during the bidding time, the fake bids are withdrawn, while in some cases the shares alloted for these fake bids are sold off within minutes of the listing.

In some cases, means like stop-payment and wrong cheques are also used to withdraw the bids at a later stage.

Merchant bankers

The funding for these fake bids is provided by company promoters or merchant bankers to the operators, sources said.

According to them, more than promoters, it is merchant bankers and other advisors who are responsible for such kind of manipulations as they first suggest high valuations to push their fees higher and then resort to such practices for the IPOs to sail through.
The fees of bankers and advisors are generally linked to the size of the public offers, which in turn are linked to the valuation of the shares being sold.

Sources said that the practice is similar to circular trading in secondary market, where demand is artificially pushed up through dummy sale and purchase of shares. 

The IPO operators, similarly, inflate investor demand through fake bids in the public offers and move out when genuine investors are trapped into this artificial demand net.
In the case of Vaswani Industries, the IPO for one crore shares in a price band of Rs 45-49 opened on April 29 and closed on May 3.

Later, the price was fixed at Rs 49 and shares were allotted to investors on May 10. However, Sebi received about 100 complaints on May 13 from investors pointing at large scale withdrawal of bids in the IPO.

It was alleged that fake bids were submitted to inflate subscription levels in QIB (Qualified Institutional Buyers) and HNI categories to attract and mislead the investors.

After the issue closed, these fake bids were allegedly withdrawn or rejected through
means like stop payment and wrong cheques.

A nexus was allegedly formed by the company promoters, merchant bankers and other operators for these fake bids.

After immediately halting the listing of the company, Sebi is now conducting a detailed probe into the matter and has also asked the bankers to keep the investors' money in an interest-earning account pending the investigation.