Tuesday, 15 January, 2008

How to invest in an IPO without a demat account?

"To invest in an IPO, you need a demat account. Right?...Wrong! Here’s why. Even investors who don’t have a demat account are finding ways to bet on the Reliance Power mega issue. And there are brokers who are willing to show the way. As the deadline for the largest IPO draws near, several first-time retail investors who have missed the boom are desperate to get a slice of the cake.

According to market sources, the number of applications pending at various depositories have crossed 2 lakh since January. Though it normally takes two to seven days to open a demat account (provided the application forms are in place), the waiting period is getting longer due to a huge number of new applications in brokerages and a shortage of stamp papers.

Under these circumstances, street smart brokerages have devised a plan wherein fresh investors will be able to apply for an IPO without having a demat account at the time of sending the application money. The process is simple. An investor approaches a broker (who is also a depository participant) to open a demat account.

The broker, after collecting necessary documents like PAN, address-proof, photographs and a cheque (in the range of Rs 500 to Rs 850) as fee for opening a demat account, gives the person the DP ID instantly.
With the DP ID, the investor applies for the issue. However, the investor puts no ‘beneficiary account number’ on the form, or simply puts a random number. At the time of allotment, when the registrar spots a mismatch (or blank beneficiary account number column), the registrar is mandated to communicate the error (or omission) to the investor. By that time the investor would have received his real beneficiary account number; it then takes a simple correspondence between registrar and share applicant to insert the correct beneficiary account number, following which the shares will be transferred to the investor’s account.

“The arrangement allows investors to apply for the IPO, even though they are not in possession of a demat account. However, there are risks in the scheme. Due to a faulty beneficiary account number, there will be some delay in share allotment (the shares will probably be allotted after listing). So if you are an investor looking to cash in on the very first day, you may be disappointed,” said a Mumbai-based broker. A safer method to subscribe to the issue will be to take a demat account on “rent” from account-holders, who are not applying for the issue, say investment experts."

-Source : The Economic Times