SEBI weighs two-year dormancy rule for demat accounts

The Securities and Exchange Board of India (SEBI) is contemplating a uniform two-year dormancy rule for demat accounts, aligning them with trading accounts. This proposal aims to tackle potential misuse of long-unused accounts for illicit activities. SEBI is consulting depositories, exchanges, and brokers to classify demat accounts with no activity for two years as dormant.

This classification would apply to investors who hold shares in their accounts but have not conducted any transactions during this period. They would then need to undergo specific verification procedures before resuming trading. It's important to note that dormancy status would not result in loss of ownership of securities in the account.

Currently, trading accounts are considered inactive after two years without trading activity, but no similar uniform time-based requirement exists for demat accounts. The regulator's primary concern is that dormant accounts could be exploited as mule accounts for securities routing or facilitating fraudulent transactions. They could also be susceptible to cyberattacks targeting various entities in the securities market.

Discussions are ongoing about the closure of long-unused accounts, especially those with zero holdings, although the process for identifying and closing these accounts is yet to be finalized. India had 24.4 crore demat accounts by the end of October, with a majority of them estimated to be inactive. The proposed framework is also expected to alleviate the operational burden on depository participants (DPs), who must maintain investor accounts regardless of activity.

This could reduce their technology, data storage, and compliance costs. DPs have also experienced situations where investors failed to pay applicable account maintenance charges. The proposal is still under discussion, and the final framework, including definitions of account activity and reactivation requirements, remains to be determined.