Due to several malpractices, SEBI is investigating cases of mule accounts and inflated IPO applications that aim to boost share sale numbers. 

The major suspects are bankers and wealth managers who are using them to boost numbers for IPOs and debt issuances. 

SEBI Chairperson, Madhabi Puri Buch mentioned three cases involving mule accounts at an event organised by the Association of Investment Bankers of India (AIBI) recently. She also said that SEBI is gaining data on it and has started taking action.

But, what are these mule accounts and how do they work? Let’s find out!

What are Mule Accounts?

A mule account is made by one person but used by someone else. These accounts are commonly used for illegal activities like money laundering and avoiding taxes. They could be bank accounts or demat accounts for holding shares. 

As per the rules, accounts should only be controlled and used by the person who originally opened them and submitted their KYC documents.

Why is SEBI after Mule Accounts?

Recently, the regulator has noticed many people submitting a large number of IPO applications with multiple PAN details, expecting them to be rejected. 

But why would they do so?

See, this creates a false impression of high demand. Normally, if not enough people apply on the first day, they would use these mule accounts to make it seem like there’s more interest, tricking regular investors into bidding. 

Besides making it seem like there’s more demand, the people behind these fake accounts gain if the shares are listed at a higher price. 

If the shares are listed at a lower price, the mule account gets taken care of.

Also Read: Stress in Small Cap and Mid Cap Mutual Funds: What should SIP investors do?

Popularity and Legality

Why are they so popular? 

Well, the major reason is that it seems like a win-win situation to those involved. Usually, an investor can only make one bid for an IPO. However, with mule accounts, various investors are making multiple bids. 

The original investor gives money to other accounts. If those accounts get shares, the original investor sells them on the first day and keeps the profit. The account owner gets about 30% share of the profit for letting their account be used.

While this sounds enticing, it is illegal. Not only would you be charged for money laundering but also this is completely against tax laws. Moreover, SEBI and RBI are completely against it so there will be regulatory action against you as well.

Industry experts understand that it’s tough to catch hold of all the mule accounts since there are so many of them. Hence, the best way to catch them is to identify their modus operandi and accordingly block these account numbers from taking part in IPOs.