REPORT OF THE WORKING GROUP ON MULTIPLE APPLICATIONS

1. INTRODUCTION

1.1. Fair and transparent practices and procedures are extremely important for building investor confidence in the capital market. With the active performance of technology issues in the Primary Market in the last few years, the phenomenon of multiple applications has reportedly re-emerged. Certain other issues have also arisen recently regarding allotment process, financing of Initial Public offerings etc.  
  1.2 To address these issues, a working group was set up by SEBI with representatives from Merchant Bankers, Banks, Registrars to the issue, Depositories and Stock Exchanges to:
    1. recommend methods to tackle the menace of multiple applications and make recommendations for modifications in market practices and
    2. procedures relating to public issues for improving the transparency and fairness in the capital market.
1.3 The Group was headed by Prof. J R Verma, Full Time Member of Securities and Exchange Board of India. It consisted of the following members:
1. Prof. J R Varma Full Time Member, SEBI, Chairman of the Group.
2. Shri O P Gahrotra  Senior Executive Director, SEBI
3. Shri Uday S. Kotak  Chairman, Kotak Mahindra Capital Company Limited
4. Shri Nimesh Kampani  Chairman and Managing Director, J M Morgan Stanley 
5.  Shri B Narasimhan  Executive Director, MCS Ltd.
6. Shri J V Murthy Vice President and Advisor, Stock Holding Corporation Ltd.
7. Shri Gagan Rai Executive Director, National Securities Depository Ltd.
8. Shri Anand Rathi President, The Stock Exchange, Mumbai
9. Shri Hitendra Patil Vice President, Central Depository Services (India) Ltd
10 Shri G. Subramanian

 

 Country Head- Audit and 
Compliance, HDFC Bank Ltd

2. ISSUES CONSIDERED AND THE VIEWS OF THE GROUP

2.1. Multiple Applications 2.1.1. Multiple applications in an issue would mean two or more applications made in single and/or joint names wherein the first name of the applicant is one and the same. The group discussed the problem of multiple applications. It was pointed out that applicants have the tendency to apply in multiple applications due to various reasons such as chances for better allotment, to avoid making a single application for bulk quantity of shares involving high value, to avoid furnishing PAN number etc. Due to these multiple applications, the proportion of allotment to the other common investors are affected. Also, the workload relating to collection of applications, processing, refund of money, issue of certificates etc increases leading to increase in overall cost as well as time.
      2.1.2. Notwithstanding the above, it was pointed out that in the past few years, since the introduction of the system of proportionate allotment, there has been a noticeable reduction in the number of multiple applications in primary issues. Thus, although the problem persists, its magnitude has reduced. Further, it was pointed out that while majority of the investors put in multiple applications in issues to better their chances for allotment, there may be genuine investors who submit multiple applications. For instance, a person having 3 children may wish to hold shares jointly with each of his children and thus might submit 3 applications with him being the first applicant in each application. As per the existing provision, these multiple applications are liable for rejection. However, the group felt that there was a case for genuine applications such as the ones described above, to be accepted in an issue and felt that there should be a provision enabling such genuine multiple applications to be considered.

      2.1.3 Accordingly, the group suggests that henceforth, in case applicants have made multiple applications, they would be required to disclose this upfront in the application forms. Applicants would be required to make a declaration in the application form that they have made multiple applications and they have to identify all such applications made by them. These applications would be considered for allotment by clubbing them and considering them in the higher category i.e more than 10 market lots at the time of finalising the basis of allotment.

      2.1.4. Thus, while these declared multiple applications will not be rejected, by clubbing them and considering them in the higher category as against the small investors' category, there will be a reduction in the number of shares allocated to them. The actual allocation of shares to each applicant would be made on a pro-rata basis i.e. in proportion to the shares applied for by him. Thus, multiple applications in an issue would be permitted subject to the following:

    1. The applicant has to declare so in all his application forms except the first form, that he is making multiple applications and identify all such applications.
    2. All these applications (in single name as well as joint names) would be clubbed and will be considered in the higher category (>10 market lots) and therefore be subject to smaller proportion of allotment while finalising the basis of allotment.
In case of wrong/false declaration by the applicant to this effect, all his applications would be compulsorily rejected and the applications monies would be refunded. Actual allocation of shares to each applicant would be made on a pro-rata basis.   2.1.5 The committee also recommends that this prohibition be clearly mentioned in the application forms and in the offer document. Further, this condition shall be displayed in bold letters in the application forms for new issues.   2.1.6 The investors making multiple application often use different combinations of their first, middle and last names with one or more of these names given as initials in order to avoid their detection.
With a view to curb this practice the Group decides that disclosure of the full names in the application forms should be made compulsory to investors to facilitate easy detection of multiple applications.   2.1.7 In this regard, the group decided about the minimum standard procedures which should be followed by all Registrars to the issue to detect multiple applications. The procedure followed by some Registrars currently is given below:
    1. All applications with the same name and age are accumulated and taken to a separate process file as probable multiple master.
    2. In this master, a check is carried out for the same PAN/GIR numbers. In cases where the PAN/GIR numbers are different, the same are deleted from this master.
    3. Then the addresses of all these applications from the address master are strung. This involves putting the addresses in a single line after deleting non-alpha and non-numeric characters i.e. commas, full stops, hash etc. Sometimes, the name, the first line of address and pin code is converted into a string for each application received and a photo match is carried out amongst all the applications processed. Then a print-out of the addresses is taken to check for common names.
    4. In case the applicant has submitted 2 or more applications along with stock invests, the signature of the applicant of the stock invest is verified.
    5. The applications are then scanned for similar DP ID and Client ID numbers. In case applications bear same numbers, these are treated as multiple applications.
    6. After consolidation of all the masters as described above, a print out of the same is taken and the applications are physically verified to tally signatures as also fathers/husbands names. On completion of this, the applications are identified as multiple applications.
It was decided that the above minimum standard procedure should be uniformly used by all registrars to an issue for the purpose of detection of multiple applications.
 
    2.2. Fictitious applications:
     
      2.2.1 The group then discussed the problem of fictitious applications in primary issues. It was felt that fictitious applications pose a greater menace in primary issues as compared to multiple applications. The group noted that the powers to initiate penal action under the provisions of the Companies Act pertaining to fictitious applications, have now been delegated to SEBI w.e.f December 2000 and as a consequence thereof, SEBI should take stringent action against applicants putting in fictitious applications.

      2.2.2 It was suggested that henceforth, all suspicious fictitious applications should be detected. The allotments on these applications would be completed in the same manner as that for normal applications but the despatch of share certificates/ credit to demat account in respect of these 'fictitious' applications would be frozen until such time that the identity and genuineness of the applicant is established. Only after satisfactory verification on the genuineness of the applicant, the shares would be credited/ released to the allottees.

      2.2.3 However, in the ensuing period, in order to provide an exit route to genuine investors, the investors would be given an option to sell the shares kept in abeyance if they so desire. However, the proceeds of such sale would remain frozen and would be released only after the completion of verification and identification of the applicants. In case the applicants are not genuine, the proceeds of the sale of shares would go to the Investor Protection Fund.

      2.2.4 The onus would be on the issuer/ merchant banker/ registrars to the issue to ensure compliance with the above process irrespective of the level of their subscription. The group recommends that prosecutions under Section 68A of the Companies Act shall also be initiated against the fictitious applicants wherever found appropriate.
        2.2.5 Additionally, the group recommends that as the powers under Section 68A of the Companies Act have now been delegated to SEBI, the instances of fictitious applications noticed shall be scrutinised and prosecution proceedings shall be initiated by SEBI. This is with a view to prevent further occurrence of fictitious applications and also to enforce actions against the fictitious applicants.
2.3 Market lots in public issue allotment
  2.3.1 In the present system of proportionate allotment in over subscribed issues, minimum 50% of the net offer of securities to the public is to be made available for allotment to individual applicants who have applied for upto 10 marketable lots. If the proportionate allotment works out to a number which is more or less than the market lot, the allotments are to be rounded off to the nearest market lot. As a result of rounding off to the market lots, successful allottees are determined by drawal of lots, which gives more scope for making multiple applications. Further, as the weightage to the lower category of applications is more i.e. 50% allocation to the applicants upto 10 times of the market lot, the applicants of higher category tend to apply in small lots into many applications instead of applying in a single application for a big quantity.   2.3.2 As per the present SEBI guidelines, the shares of the companies making the primary issues are to be traded in demat form only. For shares in demat segment, there are no market lots and so any number of shares can be traded.   2.3.3 Since the trading of securities in all new issues is compulsorily in electronic mode and also requirement of issue of shares in demat mode for issue size of more than Rs. 10 crores and with a view to simplify the allotment process and to discourage the multiple applications the group recommends for doing away with the requirement of allotment in the market lots. Thus, the group proposes a simple proportionate allotment to the applicants in the respective categories. This would ensure that more investors get allotment of securities. In fact this will result in successful allotment to majority of the applicants in the issues.   2.3.4 However, to prevent fractional allotments and allotments of miniscule value, it was decided that the minimum allotment should be higher of the following :  
(i) one share or
(ii) smallest integral number of shares that have a value of Rs. 1000/- calculated on the basis of issue price.
  2.3.5 As the proposed change in the system would entail allotment of shares in odd lots to majority of applicants, the companies would be required to issue more number of share certificates if the applicants prefer physical share certificates. However, for demat shares this will not make any difference.   2.3.6 In case of issues, where the issue size is less than Rs. 10 crores, the investor shall have the option of receiving share certificates in dematerialised or physical form, as permitted under Section 68B of the Companies (Amendment) Act, 2000. If the investor chooses to be issued physical certificates, he has the option of receiving the same in market lots or as one jumbo certificate.   2.4 Alternate sources of application forms
        2.4.1 There are general complaints from the public that in recent over-subscribed issues, application forms were not made available to the public in sufficient quantity. It was felt that in addition to pre-printed application forms, there should be other sources of supply of application forms. In view of the reach and ever-increasing usage of the internet, across the length and breadth of the country, this medium could be utilised to circulate the application forms of issues. Thus, the group recommended that applications for new issues can be made available through alternative sources of supply of application forms such as through internet, newspaper, photocopies in addition to the present system of pre-printed applications.
2.4.2 The requirement of pre-numbering of applications forms issued through other sources (i.e. other than the present system of pre-printed application forms) would not be necessary and application numbers would be assigned by the collecting banker and/ or registrar at the time of acceptance of applications.
        2.4.3 The group suggests that in order to adhere to the requirement that every application form to be accompanied by an abridged prospectus, all advertisements in newspapers featuring application forms of issues should also feature the abridged prospectus. In case of application forms on the net, the lead manager may be advised to furnish a sample issue application form to SEBI, alongwith the final prospectus (in soft copy) so as to enable the same to be posted on the website featuring the final prospectus of the issuer company. Also, the intermediaries connected with the issuer companies, who are providing the application forms in the website may be required to display the contents of the abridged prospectus along with the application so as to enable prospective investors to read the prospectus and the application form before making an investment decision. Further, it was suggested that the application forms could be downloaded only after the user has downloaded the abridged offer document and clicked on a button signifying that he has done so and that he accepts the obligation not to distribute the form without the accompanying abridged offer document. The downloaded application form should also bear a legend that it is illegal to distribute the form without the abridged offer document.
2.5 IPO Financing   2.5.1 The Group considered the issue relating to financing of issues (IPOs) by banks, NBFCs and financiers. In this regard, the Group noted about the establishment of a committee by the Reserve Bank of India which is examining this issue. In view of this, the group is not making any recommendations on this issue.   2.6. Withdrawal of applications  
2.6.1 The Group discussed the problem of withdrawal of huge applications after the closure of issue which may lead to subscription level falling below 90% and will result in refund of the issue.   2.6.2 Big applicants can thus hold the promoters to ransom by threatening withdrawal of their applications, more so in case of non-underwritten issues. Such a scenario is not healthy for primary market. However, in view of the existing provision under the Companies Act, which permits withdrawal of applications after expiry of five days from opening of subscription list till allotment, no modifications are considered necessary. 3. RECOMMENDATIONS

    The Working Group recommendations are summarised below:

    1. Multiple applications in an issue would mean two or more applications made in single names and/or joint names with the first applicant being one and the same.
    2. Multiple applications in an issue would be permitted subject to the following:
    In case of wrong/false declaration by the applicant to this effect, all his applications would be compulsorily rejected and the applications monies would be refunded. Actual allocation of shares to each applicant would be made on a pro-rata basis.
       
  1. The above provision should be clearly mentioned in the application forms and in the offer document. Further, this condition shall be displayed in bold letters in the application forms for new issues.
  1. In this regard, the group decided about the minimum standard procedures which should be followed by all Registrars to the issue to detect multiple applications. The procedure followed by some Registrars currently is given below:
    1. All applications with the same name and age are accumulated and taken to a separate process file as probable multiple master.
    2. In this master, a check is carried out for the same PAN/GIR numbers. In cases where the PAN/GIR numbers are different, the same are deleted from this master.
    3. Then the addresses of all these applications from the address master are strung. This involves putting the addresses in a single line after deleting non-alpha and non-numeric characters i.e. commas, full stops, hash etc. Sometimes, the name, the first line of address and pin code is converted into a string for each application received and a photo match is carried out amongst all the applications processed. Then a print-out of the addresses is taken to check for common names.
    4. In case the applicant has submitted 2 or more applications along with stock invests, the signature of the applicant of the stock invest is verified.
    5. The applications are then scanned for similar DP ID and Client ID numbers. In case applications bear same numbers, these are treated as multiple applications.
    6. After consolidation of all the masters as described above, a print out of the same is taken and the applications are physically verified to tally signatures as also fathers/husbands names. On completion of this, the applications are identified as multiple applications.
It was decided that the above minimum standard procedure should be uniformly used by all registrars to an issue for the purpose of detection of multiple applications.
    1. It is suggested that henceforth, all suspicious fictitious applications should be detected. The allotments on these applications would be completed in the same manner as that for normal applications but the despatch of share certificates/ credit to demat account in respect of these 'fictitious' applications would be frozen until such time that the identity and genuineness of the applicant is established. Only after satisfactory verification on the genuineness of the applicant, the shares would be credited/ released to the allottees.
    1. In the period that the shares are 'frozen', the investors would be given an option to sell the shares kept in abeyance if they so desire. However, the proceeds of such sale would remain frozen and would be released only after the completion of verification and identification of the applicants. In case the applicants are not genuine, the proceeds of the sale of shares would go to the Investor Protection Fund.
    1. Compliance with the above process is to be ensured by the issuer/ merchant banker/registrars to the issue irrespective of the level of subscription of the issue. The group recommends that prosecutions under Section 68A of the Companies Act shall also be initiated against the fictitious applicants wherever found appropriate.
    1. Additionally, the group recommends that as the powers under Section 68A of the Companies Act have now been delegated to SEBI, the instances of fictitious applications noticed shall be scrutinised and prosecution proceedings shall be initiated by SEBI. This is with a view to prevent further occurrence of fictitious applications and also to enforce actions against the fictitious applicants.
    1. Disclosure of the full names in the application forms should be made compulsory to investors to facilitate easy detection of multiple applications.
    1. The group proposes a simple proportionate allotment to the applicants in the respective categories. However, to prevent fractional allotments and allotments of miniscule value, it was decided that the minimum allotment should be higher of the following :
    1. one share or
    2. smallest integral number of shares that have a value of Rs. 1000/- calculated on the basis of issue price.
    1. In case of issues, where the issue size is less than Rs. 10 crores, the investor shall have the option of receiving share certificates in dematerialised or physical form, as permitted under Section 68B of the Companies (Amendment) Act, 2000. If the investor chooses to be issued physical certificates, he has the option of receiving the same in market lots or as one jumbo certificate.
    1. The group recommends that applications for new issues can be made available through alternative sources of supply of applications such as through internet, newspaper, photocopies in addition to the present system of pre-printed applications.
    1. The requirement of pre-numbering of applications forms issued through other sources (i.e. other than the present system of pre-printed application forms) would not be necessary and application numbers would be assigned by the collecting banker and/ or registrar at the time of acceptance of applications.
    1. All advertisements in newspapers featuring application forms of issues shall contain the abridged prospectus in order to enable prospective investors to read the prospectus and the application form before making an investment decision. On the website also the application forms shall be posted along with the contents of the abridged prospectus Further, it was suggested that the application forms may be downloaded only after the user has downloaded the abridged offer document and clicked on a button signifying that he has done so and that he accepts the obligation not to distribute the form without the accompanying abridged offer document. The downloaded application form shall also bear a legend that it is illegal to distribute the form without the abridged offer document.
4. ACKNOWLEDGMENTS The working group would like to place on record its appreciation to the officers and the secretariat of SEBI who helped it in its discussions and in the preparation of this report. The group also thanks Shri R. Mohan- Division Chief, Smt. Aarti Kelshikar, Shri Sanjay Purao, officers of the Primary Market Department for the valuable inputs and insights provided by them.  
 

                                                (Prof. J.R. Varma)




(Shri O.P. Gahrotra)
 

(Shri Uday Kotak)                   (Shri Nimesh Kampani)
 

(Shri B.Narsimhan)                 (Shri J.V. Murthy)
 

(Shri Gagan Rai)                     (Shri Anand Rathi)
 

(Shri Hitendra Patil)                (Shri G.Subramaniam)