Do you know how to change your depository participant?

Of late, instances of depository participants (DP) failing to honour the obligations of their clients have been on the rise. In a recent instance, investors alleged that Karvy Stock Broking had been delaying payouts due to them. Reports have speculated that the Hyderabad-based financial services group is facing liquidity problems. Karvy has dismissed these speculations as baseless.

Responding to this, it said: “In view of the large number of clients that we deal with, there are bound to be a few delays of insignificant amounts, and these are also addressed on priority basis.”

Market regulator Securities and Exchange Board of India has said that it is looking into the matter.

But setting this specific instance aside, defaults by brokers in India’s stock market are on the rise. In October, Kolkata-based broking house BMA Wealth Creators (which later changed its name as BRH Wealth Creators) was suspended by the NSE. Similarly, Fairwealth Securities, another relatively big broking house, was suspended by the bourses in October for mishandling clients accounts.

So, is there any recourse for the investors who wish to change their broker? Apart from delays or disputes, distance and even sentiment may be reason enough for an investor to seek a shift in his/her DP account from one broker to another. But is that easy? Yes, it is very easy to shift shares from one DP account to another without actually selling the investor’s holdings, which may result in losses and tax liabilities.

According to SEBI regulations, the DP should effect transfer to and from the demat accounts of the beneficial owner (investors) only on the basis of an order, instruction, direction or mandate duly authorised by the beneficial owner and the DP shall maintain the original documents and the audit trail of such authorisations.

The beneficial owner has the right to give standing instructions with regard to the crediting of securities in his demat account and the DP should act according to such instructions.

How to change?

At the time of opening an account, all investors would receive delivery instruction slips (DIS). These are equivalent to a bank cheque book with client ID and serial numbers of the DIS pre-printed. (If this is not given, investors must insist on it).

As investors must be aware, each company (or equity) has a unique International Securities Identification Number (ISIN) — a 12-digit alphanumeric code on the stock exchange. (For example, Reliance Industries ISIN No is: INE002A01018 and Infosys: INE009A01021). Exchange websites provide this number.

The DIS slip has various columns, such as client ID, client name, date, ISIN number, security name, quantity in figures and words, total instructions issued (specify the total number of ISINs), consideration amount, the reason for transfer, etc. Investors must duly fill in all the relevant columns with a signature and submit the slips to their current DP. Upon submission of DIS, the DP is required to process them and debit the client’s account with the number of shares. Simultaneously, the target demat account is credited with the same number of shares. Most importantly, the acknowledgement receipt for the DIS slip must be collected from the broker.

It will normally take about five business days for the existing broker to transfer the shares in its account to the new broker’s account. In extreme cases, it may take 15 days.

Need for tweak

However, these are routine procedures to be followed where the DP is active. In the case of the DP being suspended by the regulator, one’s shares may be stuck in the account. SEBI and the exchanges, in such cases, should allow investors to transfer their shares to another DP by directly dealing with the depository itself — such as CDSL or NSDL.

If the authorities fear the move could give rise to a legal dispute, they could transfer the shares to the clients with a lock-in period of, say, six months.