Investor Issues
Common demat account: Issues and challenges
Common demat account would be very useful for investors and needs to be pushed by the finance ministry 
Finance Minister has spoken about the need for a common demat account across financial assets. Chairing the Financial Stability and Development Council meeting, attended by all financial regulators, Chidambaram has asked regulators to expeditiously introduce a common demat account for financial assets and work together so that inter-regulatory issues should be resolved in a time bound manner by the FSDC Sub-Committee. Highlighting the need for a common demat account Mr. Chidambaram said, “Priority should be accorded to the steps like common demat account for financial assets which will add considerable benefits to the consumers.”This seems to be a great idea. While the modalities of operations of common demat account will take time, the fact remains that the common demat account will help investors hold different asset classes such as equity, bonds, commodities, insurance etc. together in one demat account, without any need to open multiple demat accounts. While there is no doubt that this will reduce the complications and paper work involved for the investors, the fact remains that there will be some challenges on this front as well.  Here are some of the challenges that will be faced while offering the common demat account to the investors:
Common KYC is required across asset classes: Before starting common demat account, it will be important to ensure that there is a common KYC (Know Your Customer) process across all types of financial institutions. Today an investor has to undergo multiple rounds of KYC depending upon where he or she opens an account. There are operational issues as well. While an account with a bank can be opened without a PAN number, it is not possible to open a demat account for shares without a PAN. So what will be the process if a common demat account is opened for different asset classes offered by different types of financial institutions?  All financial institutions need to come together to work on modalities of common demat account. Apart from standardisation of KYC documents, the modalities of money laundering procedures across asset classes also need to be created.
Nomination process related issues: There are some issues related to nomination process that also needs to be worked on. For instance, nomination process in shares and insurance is not one and the same. A person who is nominee in the shares becomes account holder post the death of the person holding shares, while in case of insurance a nominee is just the recipient of the benefits and does not de facto become an owner. Under Section 109A of the Companies Act, if the nomination is made under procedure prescribed by law, the nominee will be entitled to become the rightful owner of shares. And, such right shall exclusively favour the nominee and exclude all other persons.
In comparison, Section 39 of the Insurance Act says the appointed nominee will be paid, though he/she may not be the legal heir. The nominee, in turn, is supposed to hold the proceeds in trust and the legal heir can claim the money. How will this dilemma be solved? Though dematerialisation of insurance is yet to gain popularity, this argument is considering long term view of financial markets. Similarly, Reserve Bank of India (RBI) guidelines specifies the deceased’s nominee would receive the money in the capacity of a trustee of the legal heirs. This applies to other financial transactions like provident fund, mutual funds and so on.
While this can be resolved at the operational level, an investor needs to be communicated about the same to avoid any confusion in future. Also nomination formalities need to be worked out separately for different asset classes.
Operational issues in inducting asset classes for dematerialisation: Common demat account will have to undergo, various operational process issues related challenges. This was experienced when National Savings Certificate (NSC) was inducted in the process of dematerialistion. Any asset class which is included in the demat account has to undergo a clear cut process definition to avoid any complexity. Since multiple financial institutions and asset classes will be involved in the common demat account process, it will be challenging task to integrate everything. Also rematerialisation process also needs to be framed for all asset classes. 
Issues related to system integration: There will be need for system level integration across different service providers. In current context of demat of shares, depository, depository participants, clearing house of the stock exchanges and register and share transfer agent operate through a common system.  Post implementation of common demat account across asset classes, the number of intermediaries will increase which will mean more and more players to be integrated into a common system. Integrating systems that manage different asset classes such as insurance, commodity, equity, debt and other asset classes will be a humongous task. Also, a basic question like making demat facility available across country including in the remote areas where post offices and banks are currently operating from will be challenging. 
While these challenges can definitely be overcome, more important is the fact that investors will benefit from a single demat account. If an investor is given access to common demat account with nominal charge and complete portability it will go a long way in enhancing strength of financial system in India.



Usha Pillai

3 years ago

My limited experience with having a common demat account for my equity holdings and MF units has been pathetic. I converted all my MF units to demat form and then discovered that the Mutual fund houses would not send me statements anymore, showing activity for the financial year, including dividend declarations. They say that the demat custodian is responsible whereas the custodian denies it. I am still fighting a losing battle.


3 years ago

What is the need of another class of demat account? why cant the existing account be upgraded/modified to become an account which can hold all financial assets?
Imagine the plight of a person having an existing demat account for shares and bonds another for Insurance policies and now a common demat account. When will this and the KYC madness end?

Sensex, Nifty struggling to rally: Tuesday closing report

Nifty will now move sideways with an upwards bias that may take it to 6,100

US market plunged Monday after the data showed factory activity in that country expanded in January at the weakest pace in eight months. The weakness spread to Asia and overshadowed the indices back home.  Indian benchmarks had a weak opening on Tuesday and then made an effort to edge higher. The indices managed to shrug off the mood of gloom and turn green in the last hour of the session.


The BSE Sensex opened at 20,051 while the NSE Nifty opened at 5,948. The indices hit its low at 19,963 and 5,933, respectively. Sensex hit a high at 20,256 and closed at 20,212 (up 3 points or 0.01%), while the Nifty hit a high of 6,018 and closed at 6,001 (up 0.90 points or 0.01%). The NSE recorded a volume of 59.30 crore shares.


Among the other indices on the NSE, the top five gainers were PSU Bank (2.01%); Infra (1.45%); Bank Nifty (0.88%); Dividend Opportunities (0.88%) and FMCG (0.84%) while the top five losers were IT (1.84%); Pharma (0.65%); Metal (0.64%); Service (0.12%) and PSE (0.1%).


Of the 50 stocks on the Nifty, 31 ended in the green. The top five gainers were NTPC (3.65%); PNB (3.53%); Bharti Airtel (2.99%); Tata Motors (2.88%) and Ranbaxy (2.49%). The top five losers were HCL Technologies (3.47%); NMDC (3.23%); M&M (3.03%); Gail (2.52%) and Dr Reddy (2.28%).


Of the 1,486 companies on the NSE, 693 companies closed in the green, 705 companies closed in the red while 88 companies closed flat.


The extended part of the Winter Session of Parliament begins on 5 February 2014. The business may conclude on 21 February 2014. The UPA hopes to approve the splitting of the state of Andhra Pradesh into two states as well as a number of anti-corruption bills during the Winter Session of Parliament.


The Ministry of Petroleum and Natural Gas has decided to raise the share of domestic gas to 100% of the requirement for CNG (transport) and PNG (domestic). Accordingly, the price of CNG (transport) in Delhi supplied by Indraprastha Gas (IGL) is reduced by about Rs15 per kg (about 30%). There will also be a reduction of about Rs5/SCM (about 20%) in the price of piped natural gas (PNG) for domestic use. The similar reductions in price of CNG and PNG will take place in other cities with city gas distribution projects.


US indices closed Monday in the negative. Data showed factory activity in the US expanded in January at the weakest pace in eight months as orders slumped. The Institute for Supply Management's factory index decreased to 51.3 from 56.5 the prior month, the Tempe, Arizona-based group's report showed. Readings above 50 indicate expansion.


All the Asian indices which were trading today closed deeply in the red. Nikkei 225 was the top loser falling 4.18%.


The Reserve Bank of Australia kept its key interest rate at a record low 2.5%, after a monetary policy review today. The bank also indicated that it is no longer leaning toward cutting interest rates.


European indices were trading in the red while the US Futures were trading marginally higher.


UK construction expanded at the fastest pace since August 2007 last month as residential activity led a pickup in all areas of building. An index of activity rose to 64.6 from 62.1 in December, Markit Economics said today in London.


NSE asks stock brokers to implement risk reduction mode

When 95% of the broker’s capital is utilised towards margins, he would be compulsorily placed in risk reduction mode from 10th February, NSE says

The National Stock Exchange (NSE) has asked its trading members to ‘compulsorily’ implement a risk reduction mode when 95% of their capital is utilised towards margins.


The move is applicable for the currency derivative segment and would be with effect from 10th February, the Exchange said in a circular.


NSE said, “To enhance the risk management capabilities of the members and to avoid a situation of disablements, a member shall be compulsorily placed in risk reduction mode when 95% of the member’s capital is utilised towards margins”.


The stock broker would be moved back to the normal risk management mode as and when the collateral of the stock broker was lower than 90% utilisation level.


Under this mode, all unexecuted trades would be cancelled when 95% of the stock broker’s collateral available for adjustment against margins gets utilised.


When a member moves to risk reduction mode, fresh orders placed by a trading member to reduce the open positions will be accepted.


Besides, these fresh orders will be checked for sufficiency of margins and those which do not satisfy the criteria will be rejected.


In 2012, the exchange had set the limit for ‘risk-reduction mode’ at 90%.


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