The handling of demat accounts following the demise of the account holder has long been a subject of complexity and concern within the securities market. Accurate record-keeping and timely notifications of investor decease are imperative for maintaining the efficiency and integrity of the financial market. Recent developments, including a noteworthy case before the Securities Appellate Tribunal (SAT) and a Circular issued by the Securities and Exchange Board of India (SEBI), have brought much-needed clarity to this intricate issue.
Investment Beyond the Grave: The Prem Lata Case
In a recent case, Prem Lata vs. SEBI & Anr. (SAT judgment dated August 23, 2023), a widow continued trading using her deceased husband's trading account for over five years. When the stockbroker defaulted, she lodged a claim with the National Stock Exchange (NSE). However, the NSE's Member and Core Settlement Guarantee Fund Committee rejected her claim on the grounds that it was filed for trades executed after the account holder's death.
The NSE Committee's decision was based on the assumption that the agreement between the deceased husband and the broker lost its effectiveness upon the husband's demise. Consequently, any trades in the demat account after the account holder's passing could not be accounted for. The SAT's ruling, however, shed light on the complexities of the situation.
The SAT's Verdict
The SAT ruled that there was no provision suggesting that the trading account would cease to exist upon the account holder's death. The record indicated that trades and settlements had occurred even after the account holder's demise, implying the continued existence of the trading account. The tribunal allowed the widow's appeal, emphasizing that the account holder's death had no bearing on the claim filed under the Investor Protection Fund (IPF).
This case underscores the importance of meticulous record-keeping and the need for clarity in securities law when it comes to handling demat accounts after the demise of the account holder.
SEBI's Circular: A Game Changer
Recognizing the need for a more streamlined and efficient process for handling investor decease notifications, SEBI issued Circular No. SEBI/HO/OIAE/OIAE_IAD-1/P/CIR/2023/0000000163 dated October 03, 2023. This circular introduces a centralized recording mechanism through KYC Registration Agency (KRA) for investor demise notifications, set to come into effect from January 01, 2024.
The SEBI circular outlines operational guidelines for regulated entities, including intermediaries dealing with natural person investors. It allows listed companies to offer access to this centralised mechanism to their investors holding physical securities, by establishing connectivity with the KRA through their Registrar and Transfer Agents (RTAs).
Obligations of Intermediaries
When informed of an investor's demise by a joint account holder, nominee, legal representative, or family member, the intermediary must obtain the death certificate and PAN from the notifier. Verification of the death certificate is mandatory. If the intermediary cannot access the death certificate, they will flag the investor's KYC status as "On Hold" and request it from the concerned parties.
Upon verifying the death certificate, the intermediary must submit a "KYC modification request" to the KRA, along with relevant documents. Debit transactions in the deceased investor's account will be blocked.
Obligations of KRA and Intimation of Transmission
The KRA will independently validate and verify the request by the next working day, updating the KYC record as "Blocked Permanently" and informing linked intermediaries. These intermediaries must immediately block debit transactions and inform the notifier/nominee within 5 days, providing the transmission request form and document list for the transmission.
The lack of accurate data makes it uncertain how many dormant demat accounts remain active, posing a potential threat to data integrity in the market. Therefore, precise record-keeping and prompt notification of investor decease are imperative for maintaining the efficiency of the financial market.
The SAT's identification of loopholes in SEBI and NSE regulations, along with SEBI's recent circular, represent significant strides towards enhancing and simplifying the management of demat accounts following the account holder's demise. With effective implementation, this initiative is poised to greatly enhance the efficiency and convenience of the share transmission process.
In conclusion, SEBI's commitment to investor protection and market integrity is evident in its efforts to ensure that demat accounts are handled with precision and transparency, even in the face of an account holder's demise. As we move toward a more streamlined process, investors can have greater confidence in the securities market, knowing their investments will be protected and managed with diligence and care.
Follow LexTalk World for more news and updates from International Legal Industry