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Rediff.com  » Business » Brokers rent demat accounts

Brokers rent demat accounts

October 16, 2010 03:32 IST

In the run-up to the Coal India initial public offering (IPO), brokers are offering Rs 500-700 to 'rent' the demat accounts of retail investors not subscribing to the issue. The rent is for the duration of the issue, which opens on Monday and closes four days later.

Sources familiar with the developments said large broking houses, some of which are subsidiaries of investment banks, have asked each sub-broker or agent to hire demat accounts in lots of 25-30. This is in addition to another scheme whereby brokers are guaranteeing a 4 per cent return to retail investors that subscribe to Rs 1-lakh worth of shares on their behalf.

There are over 80,000 sub-brokers across the country and over 10.05 million demat accounts. The scheme is somewhat similar to now infamous Gujarati investor Rupalben Panchal's cornering of a large number of shares of various IPOs in 2005 by opening multiple demat accounts.

The modus operandi is as follows: Brokers give an investor whose account they hire the maximum subscription amount of Rs 1 lakh to apply for the IPO, along with the rental. When the shares are listed, the retailer will have to transfer the shares.

The deal is based on trust, and is mostly being played out in small towns. Over the past several weeks, stockbrokers have been helping investors and their family members open demat accounts.

The Coal India IPO roadshows were conducted in small towns and cities long before they were held n Mumbai.

A little over 190 million shares of Coal India are reserved for the retail category and roughly 1-1.5 million investors would be required to fill this quota.

"Allotment of shares will be high in the retail category. In the maximum permissible subscription limit in this category, a retail investor can apply for a little over 400 shares at the upper end of the price band. Considering the large size, even if this category is subscribed two times, each investor will get at least 200 shares," said a sub-broker.

Brokers said that apart from high net worth individuals, a few large institutions are also hoping to corner shares by backing brokers to promote the scheme. "There is huge interest among large foreign institutions and everybody wants a larger slice of the issue," said another Mumbai-based broker.

Institutions are keen on Coal India shares, as the company will become a benchmark stock soon after listing. At the upper end of the Rs 225-245 price band, Coal India's market capitalisation would be over Rs 1.5 lakh crore. This would make it one of the top 10 listed companies in India.

The stock will immediately be included in the Sensex and the Nifty — key equity indices of the Bombay Stock Exchange and National Stock Exchange, respectively.

Palak Shah in Mumbai
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