A lot of investors are, of late, suffering from ‘dormant account syndrome’.
Demat and trading accounts of investors who haven’t done a single trade, i.e. buying or selling stocks in his/her account for a period of 12 months, will be inactive.
For trading account, the term ‘inactive account’ refers to such account where the client has not logged in either through internet or telephone or no transactions have been carried out by the clients either Online or Offline in last six calendar months. In case of Demat account, the term Dormant/Inactive account refers to such accounts where no customer induced (debit/credit) transaction had taken place for a continuous period of 6 (six) months
Dividend payments or corporate actions (credit of shares due to stock split or bonus) in the account will not be considered as a transaction.
Per SEBI directive, brokers are required to flag the client as inactive in unique client code database of the exchange in case clients (investors) have not traded in the last 12 months across all Exchanges.
Client funds and shares in demat accounts being used by brokerages without their knowledge was quite prevalent in early 2000s. When the market crashed in 2008, a lot of investors/clients complained to SEBI that their account was misused by brokers for margin, settlement and other purposes, resulting in heavy losses to them.
Following this, the Securities and Exchange Board of India, in consultation with Investor Associations and Secondary Market Advisory Committee, came out with stringent norms that included a proposal to inactivate client account. “The aim was to instil greater transparency and discipline in the dealings between the clients and the stock brokers,” the regulator added.
The stock broker should frame the policy regarding treatment of inactive accounts which should, inter-alia, cover aspects of time period, return of client assets and procedure for reactivation.
“Members are required to undertake fresh documentation, due diligence and in-person verification where a client is coming for reactivation after a period of one year of being flagged as inactive i.e. after 2 years from their last trading date,” said the SEBI circular.
Investors whose account has been pushed into inactive can either call or send mail to customer service of broker from their registered telephone number/email ID requesting for reactivation by validating answers or can submit physical letter of request for reactivation at any of the designated facilitation centres along with the KYC documents.
Generally, it takes 3-5 days to turn the trading and demat accounts active. The current norm forces investors to do unnecessary transaction once a year just to keep the account alive, which may result in losses, too.
However, the time has now come to review this norm, given the latest developments. SEBI has already mandated that “no clients’ funds shall be retained by SBs/ CMs on End of Day basis.” Besides, investors get alerts on their registered mobile/email on every transaction from both depository and brokerages. SEBI also mandated that brokers share portfolio with investors every week.
After the recent Karvy scam, SEBI even tightened the pledging of shares norm framework, where it would be impossible for brokers to misuse client’s shares.
As investor account is now directly linked with banking accounts, account aggregator service can be put into best use for at least investors who enter the market with long-term goals. At the time of entering contract with brokerage itself, clients can be identified as infrequent investors and the 12-month non-trading window can be expanded to at least five years.
At a time when the government and policymakers are concentrating on ease of doing business, these small steps will make a lot of difference to investors.