When will common demat a/c for all asset classes take wings?

KS Badri Narayanan Chennai | Updated on May 22, 2020

Foolproof system-level integration across various financial intermediaries is the need of the hour to take forward KYC

Six years have gone since the former Finance Minister P Chidambaram mooted an idea of a common dematerialisation (electronic account holding) for all asset classes. “Priority should be accorded to the steps like common demat account for financial assets, which will add considerable benefits to consumers,” he had then said and advised the Financial Stability Development Council to speed up the process.

In simple terms, the common demat account will subsume all the holdings of different asset classes such as equity, mutual funds, bonds, commodities, insurance for an investor. This will not only reduce complications and repetitive paper works involved for investors, but also save valuable time.

However, it appears that the idea has gotten stuck in procedural wrangles between various regulators such as RBI (banking regulator), IRDA (insurance regulator) and PFRDA (pension authority) and SEBI (equity, commodity regulator) and has made little progress. For a common demat account to work, the definition of ‘security’ under Depositories Act needs to be widened. Though the Act empowers SEBI to specify instruments as securities, it should also include instruments from banking and insurance sectors. This requires a meeting of financial sector regulators.

Besides, we all know, it is a must to satisfy KYC (know your customer) process for buying a insurance policy, opening of bank account, or demat account for equity/commodity trading.

Defeating cKYC window

For that very purpose, the Central Know Your Customer (cKYC) — a centralised depository of KYC records of customers across financial market segments — was launched by the Ministry of Finance, through the Central Registry of Securitisation Asset Reconstruction and Security Interest of India.

However, even now, if one wants open an account for equity trading he or she needs to submit a separate form, defeating the very purpose of cKYC. It appears that a lack of synchronisation between cKYC system and other financial intermediaries (banks, SEBI-registered KRAs, etc) is the main reason for slow progress on the front. Foolproof system-level integration across various financial intermediaries is the need of the hour to take forward KYC, which is not very difficult. If the issue is addressed, then having a common demat account for all financial asset classes may not take much time.

Nominee clause issue

Another main problem is the nominee clause, as various asset class have different set of rules for nominee. For instance, a nomination in banking terms refers to an account holder’s right to appoint one or more persons who are entitled to receive the money in case of the death of the account holder. However, for insurance, a nominee is just the recipient of the benefits and does not defacto become the owner. So, suitalbe amendment needs to be issued on nominee clause.

As the launch of one-nation-one-ration card, which is more cumbersome and needs cooperation from various State/district level systems, has shown the way on how to integrate various systems of intermediaries, having a common demat account for all financial accounts should be an easy task.

Published on May 22, 2020

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