The initial public offering (IPO) of Life Insurance Corporation of India (LIC) that was dubbed as the ‘Mother of all IPOs’ and the ‘Aramco moment of India’ also seems to be topping the charts in terms of bogus IPO subscriptions. A whopping 20 lakh applications made towards the LIC IPO either defaulted on payment or were incorrectly filed.

The overwhelming number of applications received by LIC for IPO subscription may not be the true reflection of the common man’s enthusiasm to own a piece of the crown jewel of Government of India, the LIC. As is the case, around 28% of the total applications received were rejected, which may be a record high for any IPO, so far. Also, 34.5% of applications received from LIC policyholders have been rejected.

In the background of the hype created around the number of applications LIC IPO received, many market participants question the reason for the high percentage of bogus applications. “It almost looks like a ploy that digital marketers use to make a social media post popular. Only, instead of fake ‘likes’ and ‘shares’, an IPO appears to be popular on the basis of spurious applications,” says a market veteran on condition of anonymity.

Mystery of ‘not banked’ applications and technicalities of rejection:

In an email response by LIC to the queries by Fortune India, the company mentioned that out of 73,37,841 total applications for its IPO,12,46,484 applications were rejected as these were ‘not banked’. Another lot of 8,03,828 applications were rejected on technical grounds. Overall, a total of 20,50,312 applications were unfit for allotment of shares in the IPO.

Though LIC’s email did not explain the meaning of ‘not banked’ applications, market veterans explained to Fortune India how applications are categorised as ‘not banked’. When a broker receives an application for IPO, he is supposed to upload it in the exchanges’ systems and submit the same to the respective bank of the applicant for blocking the amount mentioned in the IPO application. If the money fails to get blocked against the IPO application, the application becomes ‘not banked’.

An application can get rejected on technical grounds as well. These include mismatch of name on application form and bank account, or different names written in the same form, mismatched signature of applicant, etc.

‘Not banked’ applications happen in two cases. In the first instance, the broker uploads an application on the exchange system but does not submit the same to the bank. Or, the broker submits the application to the bank but the money does not get blocked for the IPO because of either paucity of funds or instructions from the account holder.

This can imply two things for over 12 lakh applications for LIC IPO - either the brokers knowingly uploaded bogus applications on the exchanges’ systems and never intimated any bank, or more than 12 lakh people, who had applied to the LIC IPO, lost interest in the IPO subsequently. Both the scenarios indicate grave discrepancies in the Indian stock market.

Why over 12 lakh ‘not banked’ applications is a serious issue?

It seems to be too big a coincidence that over 12 lakh applicants ‘lost interest’ in the LIC IPO after applying for it and thus stopped their banking transaction. As against that, the possibility of brokers filing a huge lot of bogus applications seems more plausible.

The question is, why there were so many bogus applications filed in the first place? The primary reason, as per many seasoned participants of the stock-market, is that such kind of huge subscription numbers make great media headlines. Quoting a humongous number of applications and deeming an IPO ‘oversubscribed’ may be used as a marketing gimmick to attract gullible investors.

On the other hand, it is also possible that a huge number of applicants were made to subscribe to the LIC IPO without their consent. And when these applicants realised that they can stop the transaction towards the IPO, they did so.

As a matter of fact, LIC IPO was opened for a record six days and even on weekend the issue was open for subscription. So it is difficult to fathom why brokers could not manage to send the applicants’ forms to banks within the prescribed time limit. IPO applications can be either filled through an online process by an applicant or he can apply through his broker. In both the formats, the applicant needs to park the required money with the broker.

Market participants believe that many applicants may have changed their mind after filling the IPO forms. However, the brokers may have gone ahead with the application forms and uploaded those forms in the exchanges’ IPO systems despite their inability to provide money for the application. Another possibility is that the brokers knowingly uploaded fake applications to jack-up the number of applications. “This is a deliberate attempt to mislead investors and create a mirage of euphoria amongst retail participants about the LIC IPO,” says a market veteran who does not wish to be named.

Why LIC policyholders seem uninterested in becoming LIC shareholders?

The policyholders category was a special category of applicant, created especially for LIC. The percentage of bogus applications is even higher in this special category. As per LIC’s response to Fortune India’s query, out of 29,70,559 policyholder applications, a massive 5,78,665 applications were rejected on technical grounds and 4,47,349 applications were rejected as ‘not banked’. Thus 34.5%, or 10,26,014, applications in the policyholders category were rejected.

Ironically, media coverage is rife with official quotes from both the LIC management and the government officials who had proudly declared, on the first day of the IPO’s opening, that LIC IPO is getting a huge response from the policyholder category.

Brand LIC that stands for trustworthiness and sincerity in the insurance sector seems to have misplaced its core values while striding on the Dalal Street.

“Such instances of rejected applications also push back genuine investors from IPO market as the trust on the current system erodes with such marketing gimmicks, and manipulation, that creates a mirage of demand to mislead market participants,” says a market veteran who closely observed the LIC IPO.

What are the regulators and exchanges doing about such massive cases of rejected applications in a single IPO?

Fortune India had sent a questionnaire to SEBI, National Stock Exchange and Bombay Stock Exchange to understand the reasons behind ‘not banked’ applications. The questionnaire also raised a query about brokers that have sent the highest number of ‘not banked’ or technically inadequate applications. Till the time of writing this report, Fortune India did not get any response from these institutions.

Both regulator and exchanges need to take cognizance of more than 20 lakh rejected applications because such a huge number of unfit applications for a single IPO seems far from being a mere coincidence. Either, the current system has allowed brokers to play mischief with the IPO systems or complications in the system have prevented the common man from availing the opportunity to own LIC shares. Both the scenarios call for a systemic overhaul of the IPO procedure.

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