Steps to Avoid Your Demat Account from Becoming Dormant
Up until a while ago, buying and selling equity shares directly was a hectic task. In a time where there was an absence of electronic trading platforms, buyers and sellers were given share certificates in physical form and were responsible for the preservation and safe-keeping of said certificates as proof of their buyer’s ownership of the shares. The responsibility of managing these share certificates was an inconvenient addition to the responsibility of managing the shares and share portfolio. As electronic trading platforms replaced the traditional system, holding share certificates in their physical form became optional and obsolete in some cases. This was the result of the process of dematerializing shares and the inclusion of the Demat account.
The Demat account was introduced to the Indian trading systems in 1996 and with its arrival, investors had to ensure that their physical certificates were converted to an electronic format and were being held in their Demat account. However for long not many people were clear as to what is demat account. To put it simply, the Demat account is used to enable electronic settlements of all transactions and trades. The function of the account is similar to that of a bank account, in that a bank account holds your money, whereas a Demat account acts as a holding account for your securities. It is not to be confused with a Trading account, as they share different purposes and you will need a Trading account for all your transactions along with your Demat account.
It is common for people to open online Demat accounts, given its convenient and easy-to-use nature. However, it is equally common for people to forget to regularly check on their accounts once they have opened them. This is usually happens when the accounts are opened by people who:
- Want to sell old shares that have been held in their physical form for a long time.
- Want to apply for Initial Public Offerings (IPOs)
What Happens When a Demat Account has Not Been Used for a Long Time?
When a Demat account is left unused for a long time, it is first termed as inactive by the Depository Participant (DP) before it is declared dormant. There is not fixed rule on how long an account can remain inactive before it is classified as dormant. It depends on the agreement between the account holder as the client and the DP (your bank or broker). The usual point of determination is the way the maintenance fees are charged. In that, if the fee is charged as one-time or life-time fee, the account may be allowed to remain inactive for an extended period of time without being declared dormant. However, if the fee is charged as an annual maintenance fee, the account can be declared dormant in as soon as a year.
Most DPs categories their clients as speculatively long-term or short-term based on their profiles. And often, the maintenance fees are decided on the basis of the client’s profile. In such cases, for long-term customers who make yearly or really spread out transactions, DPs charge a lower broker fee but a higher account opening fee, also allowing the customers a longer period of inactivity before their accounts are declared dormant. For short-term clients who make more frequent transactions, DPs charge a lower account opening fee and a possibly higher brokerage fee. The accounts of these clients are declared dormant after 12 months or more of inactivity.
Inactive accounts are not usually classified as dormant by the DPs as long as the account holder has paid the maintenance fees on time. Before a Demat account is declared dormant, the DP makes the account holder aware of their inactivity and the status of the account. Even after being made aware of the situation, if the client still does not use the account within a specified period of time, the account is classified as dormant. Once an account is rendered dormant, the account holder is prevented from the purchase and sale of securities unless the account is reactivated.
Should your Demat account be declared dormant, there are certain steps you can follow to reactivate your account:
- A reactivation form must be filled out, and Know Your Customer (KYC) details such as proof of identity and proof of address should be submitted. Customer service may also be notified via call or email.
- If the payment of maintenance fees had not been made, all dues are to be cleared.
- The DP might charge for the reactivation. The general reactivation fee is less than 500 rupees, but the fee may also be waivered if the valuation of the existing shares in the account is high.
What Can Be Done to Prevent a Demat Account Being Declared Dormant?
It is important to make sure that you communicate with your DP and that you regularly receive your transaction and holding receipts. A Transaction Statement has the details of all the transactions made from your account, as well as the share inflows and outflows that occur. A Holding Statement is a listing of your various shareholdings in different companies. According to depository guidelines, holding and transaction statements should be sent to the account holder by the DP within one month and fifteen days respectively. If the account is mostly inactive, the DP is still obligated to send a statement once every three months. As an investor, it is imperative that you keep track of these statements. These statements help you keep track of the activities on your account and tally them with your own records. And more importantly, these serve as legal proof of your shareholdings with your DP.
As an investor, if you are aware that your account might have limited activity, you could consider ‘freezing’ your account. Wherein ‘freezing’ or ‘locking’ is when the DP is given written instructions to prevent the account holdings from being moved around until notified by the account holder. As an account holder, you should pay your maintenance fees on time and keep a regular check to prevent the accumulation of dues. You should also keep a more or less regular track of your portfolio. By following these simple steps, you should be able to avoid having your Demat account being declared dormant.