Nominee or no nominee? Post Oct 1, new demat account holders given choice

Capital market regulator SEBI has recently stated that investors seeking to open new trading and demat accounts will be permitted to opt in or opt out of providing nominations, come October 1. A SEBI circular states that it has issued a format by way of a declaration form to do so.

Also, existing trading and demat account holders would need to provide their choice of nomination by March 31, 2022, the circular said, adding that failure to provide this choice would mean freezing of accounts.

Also, new trading and demat accounts that are opened from October 1, 2021 will only be activated upon receiving the nomination declaration forms, the regulator said in the circular. The nomination and declaration form, the market watchdog notes, will be signed under the wet signature of the account holder and there would be no need for any witnesses. However, a witness would be required if a thumb impression is made by the account holder. An account holder may also be allowed to use the e-sign facility, the circular notes. The market regulator has noted that intermediaries would need to make sure that systems are in place for provision of the e-sign facility and also to maintain client confidentiality and safety.

The new rule has been brought in to ensure that a demat account holder has the option of deciding whether to nominate someone to whom their securities will be transferred in the unfortunate event of the account holder’s demise. In case an account holder doesn’t have a nominee, the securities are transferred to the legal heirs. However, this entails documentation. It should be noted that a nominee and a legal heir are not necessarily the same; while a nominee has the right to hold the assets a legal heir is entitled to get assets of a deceased person according to laws of succession.

SEBI moves to boost retail investor confidence

The market regulator, has from time to time, brought in new norms to ensure that investors are safeguarded and they continue to show confidence in trading and holding securities. To this end, SEBI has in the past brought in several practices including dematerialisation of securities and electronic or computerised trading based, among others. For instance, earlier this month, SEBI issued a circular that gave investors the option of blocking securities on their demat accounts in case of transactions related to sale of shares, apart from the early pay-in (EPI) system.

This option would be made available from August 1 2021, as per SEBI’s circular. SEBI also noted that this blocking system was optional and the EPI system would also continue. The block system means that shares of an investor who intends to make a sale will be blocked in the individual’s demat account in favour of the corporation that performs the intermediary role. In case the sale is not done, the shares of the demat account belonging to the investor will stay put in their account The unlocking of such shares happens once the trade day comes to a close.

A significant change that SEBI brought in during the first wave of the pandemic in April 2020 was to permit the use of technology to ensure online KYC (Know Your Client). This meant that eSign could be used to attach signatures of account holders on a document of the client that has been originally verified.

Easing of norms and increased digital adoption during the pandemic, apart from a sustained bull run in the markets, have led to a rise in the number of demat accounts in the fiscal year 2021. Indian investors opened more than 14 million new demat accounts in fiscal year 2021, which is a three-fold increase from nearly five million accounts opened in the previous fiscal year, as per depository data. One of the reasons for this huge increase was the ease of opening accounts and the norms brought in by SEBI to boost retail investor confidence and interest.

Conclusion

SEBI’s new circular gives investors who open their new trading and demat accounts from October 1 the choice of providing nomination or not. The circular noted that a declaration form would be issued in this connection. Further, SEBI has noted that all existing demat account holders would have to provide their choice of nomination by March 31, 2022, and added that failure to do so would mean freezing of their accounts.

The capital market regulator constantly monitors investor behaviour and addresses any loopholes in the system to ensure that retail investors can continue to trade confidently. The watchdog also brings in fresh norms from time to time to make sure that systems are user-friendly and in keeping with changing situations.

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