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.
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?