Investors ‘renting’ out PAN cards

Call them the ‘Rent-a-PAN-card’ investors.
A flourishing network of investors are emerging in Gujarat, such as in its capital Ahmedabad, who are essentially renting their permanent account numbers, which are required for stock market trades, to brokers in return for a flat, predetermined fee.
This is how the arrangement, dubbed vyaj koshtak or pancard ka bhada, works.
These individual investors apply for shares of an initial public offering (IPO) under the individual investor quota (usually 30% of an offering is set aside for such retail investors) in their own name, using their own PAN cards. But in reality, they are simply acting as a front for a broker who has agreed to pay them a pre-determined flat fee, ranging from Rs1,500 to Rs4,000, depending on the IPO, irrespective of how many shares they are allotted or what happens to the price of the shares once they list. Sometimes that fee, for “renting” the PAN card, is even paid upfront.
The investors then sell their allocated shares on opening day, turning over the profit to the broker, essentially enjoying a risk-free, fixed return for the service provided. Meanwhile, the broker is able to make profits on a significantly larger number of shares than he would get on his own.
Typically, the broker can take a hit if, for some reason, the shares list at lower than the IPO price, somewhat of a rarity in a nation that is obsessed with shares and IPOs, even in recent turbulent times in the markets.
“Since there is a risk of the shares getting listed below the issue price, the broker enters into such arrangement only in those IPOs where there is a high probability of listing at a premium,” says one Ahmedabad-based investor who didn’t want his name used.
For instance, the recent successful IPO of rating agency Icra Ltd as well Mindtree Consulting Ltd saw brokers pay Rs3,000 per application made on their behalf. Icra shares rose from Rs525 a share to Rs1,125 a share between 13 April and 17 April. Mindtree shares jumped from Rs575.20 on 7 March to Rs1,021.80 on 15 March.
On Friday, Mint first wrote about the plain vanilla koshtak, the grey market in cities such as Ahmedabad for IPOs, which usually involves one person promising to buy a stock that is to be listed, at a pre-determined premium on the issue price from someone who has applied for the shares. Mint noted the emerging demand under koshtak for shares of DLF Ltd, which is expected to be the largest IPO in India when it debuts on 11 June.
But the more complicated vyaj koshtak kind of deals highlight the way the retail quotas of IPOs can potentially be misused. Since there is nothing illegal about such applications from investors who are, on the face of it, genuine, it has largely escaped scrutiny by the Securities and Exchange Board of India, or Sebi, the nation’s markets regulator.

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