Account Opening — the two account types, KYC, and every special case

Where this chapter sits

Chapter 4 carries 12% of the paper — the joint-largest chapter in the syllabus, alongside Chapter 3. It is also the most detail-dense: this is where the DP's daily work actually happens.

Almost every question here is a specific number, document or exception. Learn them precisely.

The starting point

An investor wishing to avail depository services must first open accounts with a DP registered with a depository. The process of opening a demat account is very similar to that of a bank account.

An investor has the option of opening an account with several DPs or opening several accounts with a single DP. Each DP is free to frame its own fee structure. Investors have the freedom to choose a DP based on certain criteria such as convenience, comfort, service levels, safety, reputation and charges.

The investor while opening an account has to submit an acknowledgement of receipt of the copy of the Rights and Obligations document to the DP. The form and contents of the Rights and Obligations document are specified by SEBI and DP Operating Instructions of the depository in which the DP is registered.

The investor's four freedoms:

• Can select the DP based on the investors convenience, comfort, service levels, safety, reputation, charges etc.
• Have the flexibility to open more than one account with the same DP or any other DPs
• No requirement of minimum balance
• Can close an account anytime with one DP and open another one with any other DP

4.2 The two types of account

There are mainly two types of demat accounts which can be opened with a depository participant viz., (a) Beneficial Owners Account, and (b) Clearing Member Account. The type of depository account depends on the operations to be performed.

Beneficiary Account — a beneficial owner's account is an ownership account. The holder/(s) of securities in this type of account owns the securities. The workbook's example: Mr. Ram who is a retail investor trades in the securities market. The securities which he buys or sells will be kept in his beneficial owner account.

Clearing Member Account — this account is opened by a broker or by a clearing member for the purpose of settlement of trades executed on a recognised stock exchange.

And three features of the CM account that are regularly examined:

• The clearing member account is a transitory account
• The securities in this account are held for a commercial purpose only
• The securities in this account will be eligible for any corporate action benefit declared

The last point catches people out — a transitory account still receives corporate action benefits.

4.3 The Beneficial Owner account

This account is opened by investors to hold their securities in dematerialised form with a depository and to carry out the transactions of sale and purchase of such securities in book entry form through the depository system.

A beneficiary account holder is legally entitled for all rights and liabilities attached to the securities held in that account. Therefore, the account is called "beneficial owner account".

Who can hold one: an individual, corporate, HUF entity, minor, bank, financial institution, registered (incorporated) trust, etc. or the broker himself for the purpose of his personal investments in demat form.

Association of Persons. An AoP refers to a group of individuals who come together for a common purpose or objective. Apart from opening of demat account by Association of Persons in the name of natural persons, an AoP may also open a Demat account in its own name for holding units of mutual funds, corporate bonds, and Government Securities in dematerialized form, subject to conditions:

• AoP shall be responsible for ensuring that it only subscribes to the financial instrument/securities that are permitted by statutes governing the constitution of AoP
• The PAN Card details of the AoP and the Principal Officer of the AoP shall be obtained
• The DP shall seek confirmation that the AoP holds only such securities in dematerialized form as permitted by the statutes governing its constitution; that the demat account is not to be used for subscribing/holding equity shares; that the Principal Officer of the AoP shall be treated as the legal representative of the AoP, in case of any dispute; and that at all times, member of the AoP shall be jointly and severally liable on behalf of the AoP

Note that an AoP account in its own name cannot hold equity shares — only mutual fund units, corporate bonds and government securities.

SARAL AOF. A majority of new investors in the securities market begin with participation in the cash segment without obtaining various other facilities such as internet trading, margin trading, derivative trading and use of power of attorney.

With a view to encourage their participation, it is decided that such individual investors can open a trading account and demat account by filling up a simplified Account Opening Form ('AOF') termed as 'SARAL AOF'.

The forms are available with the intermediaries and can be downloaded from the Exchanges' and Depositories' website. Investors who open an account through SARAL AOF shall also have the option to obtain other facilities, whenever they require, on furnishing of additional information.

But the standard requirements still apply: the standard set of documents viz. Rights and Obligations document, Uniform Risk Disclosure Document and Guidance Note and documentary proof related to identity and address as specified and other requirements for account opening form shall continue to remain applicable to SARAL Account Opening Form.

DP's own account: DPs are required to open separate accounts, for their own investments, thereby keeping the 'beneficial owner' accounts separate. This is to ensure that there is no co-mingling of their assets with that of their clients.

General guidelines for account opening

• Self-attested copy of PAN card is mandatory for all Clients including Promoters/Partners/Karta/Trustees/Whole Time Directors and persons authorised to deal in securities on behalf of company/firm/others
• Copies of all documents submitted by the applicant should be self-attested and accompanied by originals for verification
• If any proof of identity or address is in a foreign language, then translation into English is required
• Name and address of the applicant mentioned on the KYC form, should match with the documentary proof submitted
• Participants may verify the PAN of their Clients online at the Income Tax website without insisting on the original PAN card, provided that the Client has presented a document for Proof of Identity other than the PAN card
• If correspondence and permanent address is different, then proofs for both have to be submitted
• Sole proprietor must make the application in his individual name and capacity
• For non-residents and foreign nationals, copy of passport/PIO Card/OCI Card and overseas address proof is mandatory
• For foreign entities, CIN is optional; and in the absence of DIN no. for the directors, their passport copy should be given
• In case of Merchant Navy NRI's, Mariner's declaration or certified copy of CDC (Continuous Discharge Certificate) is to be submitted
• For a minor, photocopy of the School Leaving Certificate/Mark sheet issued by Higher Secondary Board/Passport of Minor/Birth Certificate must be provided
• Politically Exposed Persons (PEP) are defined as individuals who are or have been entrusted with prominent public functions in a foreign country, e.g., Heads of States or of Governments, senior politicians, senior Government/judicial/military officers, senior executives of state owned corporations, important political party officials

Who may attest documents: Notary Public, Gazetted Officer, Manager of a Scheduled Commercial/Co-operative Bank or Multinational Foreign Banks (Name, Designation and Seal should be affixed on the copy).

For NRIs: authorised officials of overseas branches of Scheduled Commercial Banks registered in India, Notary Public, Court Magistrate, Judge, Indian Embassy/Consulate General in the country where the client resides.

The two-part form: the KYC form shall be filled by an investor at the account opening stage while dealing with any of the above intermediaries. Additional details specific to the area of activity of the intermediary shall be obtained from the investors in Part II of the account opening form. Part II is prescribed by Depositories for their depository participants and by AMFI for all mutual funds.

In-person verification (IPV)

It is mandatory for all DPs to carry out 'in-person' verification (IPV) of their Clients.

At the time of opening demat accounts, the DP should establish the identity of the applicant(s) (including guardian in case of minor account) by verifying the photograph(s) affixed in the KYC Application Form as well as proof of identity document(s), with the person concerned.

In case of joint accounts, IPV needs to be carried out for all the holders of the account. DP may use 'web-camera' for carrying out IPV.

The five details to be recorded at the time of IPV:

1. name of the person doing IPV
2. his designation
3. organisation
4. his signature
5. date

How to record: DP may either affix a stamp or print the IPV details or write the same on the KYC Application Form. If IPV is done through web camera, then mention "IPV through webcam" as well.

And a hard prohibition: attachment of separate sheet to the KYC Application Form or affixing stickers on the KYC Application Form for recording of IPV details will not be permitted.

Who else may do it: the IPV carried out by one SEBI registered intermediary can be relied upon by another intermediary. For stock brokers, their sub-brokers or Authorised Persons... can perform the IPV. For mutual funds, their AMCs and the distributors who comply with the certification process of NISM or AMFI and have undergone the process of 'Know Your Distributor (KYD)' — and for direct applications, they may also rely upon the IPV performed by the scheduled commercial banks.

NRIs and foreign nationals: considering the infeasibility of carrying out IPV, photocopies of KYC documents should be attested by Notary Public, any Court, Magistrate, Judge, Local Banker, Indian Embassy/Consulate General of the country where NRI/FN is residing.

When IPV is NOT required:

a. Verification of the client with UIDAI is carried out through biometric authentication (fingerprint or iris scanning).

b. Verification of the client with UIDAI is carried out through one-time password (OTP) received on client's mobile number or on e-mail address registered with UIDAI provided, the amount invested by the client does not exceed Rs. 50,000 per financial year per Mutual Fund and payment for the same is made through electronic transfer from the client's bank account registered with that Mutual Fund.

Note the OTP route has a ₹50,000 annual cap; the biometric route has none.

Holders, POI and POA

A demat account can have maximum three holders.

Proof of identity is to be obtained for all the holders. For First holder proof of correspondence address as well as permanent address is to be obtained in case the correspondence address is not the same as the permanent address. For joint holder's proof of only permanent address is to be obtained.

PAN Card details of all the holders is compulsory for all categories of demat account holder(s). In some cases, the PAN is not required to be entered. Such cases have to be handled by entering the appropriate exemption codes.

Proof of Identity (POI): Passport · Voter ID card · Driving license · PAN card with photograph · Unique Identification Number (UID) (Aadhaar) · Identity card/document with applicant's photo issued by Central/State Government and its Departments, Statutory/Regulatory Authorities, Public Sector Undertakings, Scheduled Commercial Banks, Public Financial Institutions, Colleges affiliated to Universities (valid only till the time the applicant is a student), Professional Bodies such as ICAI, ICWAI, ICSI, Bar Council etc., and Credit cards/Debit cards issued by Banks.

And: e-KYC service launched by UIDAI shall also be accepted as a valid process for KYC verification.

Proof of Address (POA) — documents having an expiry date should be valid on the date of submission:

• Passport/Voters Identity Card/Ration Card/Registered Lease or Sale Agreement of Residence/Driving License/Flat Maintenance bill/Insurance Copy/Aadhaar Letter
• Utility bills like Telephone Bill (only land line), Electricity bill or Gas bill — not more than 3 months old
• Bank Account Statement/Passbook — not more than 3 months old
• Self-declaration by High Court and Supreme Court judges, giving the new address in respect of their own accounts
• Proof of address issued by Bank Managers of Scheduled Commercial Banks/Scheduled Co-Operative Bank/Multinational Foreign Banks/Gazetted Officer/Notary public/Elected representatives to the Legislative Assembly/Parliament/Documents issued by any Govt. or Statutory Authority
• The proof of address in the name of the spouse may be accepted

Third party correspondence address: Client can also provide third party address as correspondence address in depository account provided Participant ensures that all prescribed 'Know Your Client' norms are fulfilled for the third party also. The DP must obtain POI and POA for the third party and comply with Rule 9 of Prevention of Money Laundering Rules, 2005. However, the above provision shall not apply in case of PMS (Portfolio Management Services) clients.

Note two things about the telephone bill: only a land line bill qualifies, and it must be not more than 3 months old.

Participants can apply stricter criteria and accordingly, decide to accept, select documents out of the list of documents prescribed by SEBI. The SEBI list is a minimum requirement, not a ceiling.

Corporate investors — the nine documents

1. Memorandum & Articles of Association (MOA & AOA) & Certificate of Incorporation
2. Board resolution authorizing opening of demat account and specifying the names of the persons authorised by Board to operate the said demat account. It must specify the manner of operation of the account and authority given to the authorised signatories
3. Names of authorised signatories, designation along-with their specimen signatures and photographs, duly verified by the Managing Director or Company Secretary
4. Proof of address of the corporate, evidenced by the document registered with Registrar of Companies or acknowledged copy of Income Tax Return or Bank Statement or Leave and License Agreement/Agreement for sale or Landline telephone bill/electricity bill/Pan card of the corporate entity
5. Copy of the balance sheets for the last 2 financial years (to be submitted every year)
6. Copy of latest share holding pattern including list of all those holding control, either directly or indirectly, in the company in terms of SEBI takeover Regulations, duly certified by the company secretary/Whole time director/MD (to be submitted every year)
7. Photograph, POI, POA, PAN and DIN numbers of whole time directors/two directors in charge of day to day operations
8. Photograph, POI, POA, PAN of individual promoters holding control — either directly or indirectly
9. Copy of the Board Resolution for investment in securities market

And the verification stamp: an authorised official of the DP shall verify the copies of the proof of address/identity documents with the original documents and write or put a stamp with the words: "verified with original" and affix his/her signature.

e-KYC and technology

The Aadhaar e-KYC service provides an instant, electronic, non-repudiable proof of identity and proof of address along with date of birth and gender (digitally signed and encrypted). In addition, it also provides the resident's mobile number and email address (if available).

e-KYC may be performed at the service centre of Participant using biometric authentication, as well as remotely using an OTP.

If KYC verification is carried out through Aadhaar based e-KYC and PAN is verified from the income tax website, the information downloaded from UIDAI shall be considered as sufficient information for the purpose of KYC verification and the client is not required to fill up the KYC form and put his/her signature on the same.

Nine entities shall undertake Aadhaar Authentication service of UIDAI — they register with UIDAI as KYC user agency ("KUA") and allow SEBI registered intermediaries and mutual fund distributors to undertake Aadhaar Authentication of their clients.

Online KYC (April 2020 guidelines): the SEBI registered intermediary shall continue to ensure to obtain the express consent of the investor before undertaking online KYC.

The App shall facilitate taking photograph, scanning, acceptance of officially valid document (OVD) through Digilocker, video capturing in live environment etc. Only the authorized person of the RI shall use the app.

The App shall also have features of random action initiation for investor response to establish that the interactions are not pre-recorded, time stamping, geo-location tagging to ensure physical location in India. RI shall carry out the liveliness check in order to guard against spoofing.

Video In Person Verification (VIPV):

• Intermediary through their authorised official, specifically trained for this purpose, may undertake live VIPV of an individual customer, after obtaining his/her informed consent
• The VIPV shall be in a live environment
• The VIPV shall be clear and still, the investor in the video shall be easily recognisable and shall not be covering their face in any manner
• The VIPV process shall include random question and response from the investor including displaying the OVD, KYC form and signature or could also be confirmed by an OTP
• The RI shall ensure that photograph of the customer downloaded through the Aadhaar authentication/verification process matches with the investor in the VIPV
• The VIPV shall be digitally saved in a safe, secure and tamper-proof, easily retrievable manner and shall bear date and time stamping

Accessibility: SEBI has reiterated its commitment to enabling equal access to financial services... by ensuring that digital KYC processes are inclusive and accessible to person with disabilities, including those with visual impairments. Intermediaries are now mandated to offer assistive digital services.

CKYCR

The Government of India... authorised the Central Registry of Securitisation Asset Reconstruction and Security Interest of India (CERSAI)... to act as and to perform the functions of the Central KYC Records Registry... including receiving, storing, safeguarding and retrieving the KYC records in digital form of a "client".

The timeline: every reporting entity shall within three days after the commencement of an account-based relationship with a client, file the electronic copy of the client's KYC records with the Central KYC Registry.

The six mandatory KYC attributes

SEBI in consultation with all MIIs has made 6-KYC attributes mandatory for all the categories of clients:

1. Name
2. Address
3. PAN
4. Valid mobile number
5. Valid email-id
6. Income range

On PAN: Participants shall verify the PAN online using the Income Tax Database. And in case PAN is not seeded with AADHAAR before the date specified by the Government, it will not be considered as a valid PAN.

On mobile and email: Participants shall ensure that separate mobile number and email address is captured for all BO account holders. However, after submitting a written declaration, BO can update mobile number and email address of its family members — family for this purpose has been defined as self, spouse, dependent parents and dependent children.

Where the same number or email appears in more than one demat account without a family flag, DPs shall be required to send 15 days' notice for modification, failure to comply with which would result in classification of such accounts as non-compliant accounts.

And: DPs shall ensure that the mobile numbers/email addresses of Depository Participants/their KMPs/other employees etc. are not captured.

What is not a valid mobile number: Mobile no. is of 10 digit but starts with any number between 1 to 5 · '0000000000'/'1234567890' is captured · Single number is appearing in all 10 digits.

What is not a valid email ID: 'No email' is mentioned · '@' is not mentioned · words 'not provided' and 'xyz' are mentioned · invalid email domain (e.g. digits before the domain name) · there is '.' (dot) at the end · there is no '.' (dot) after '@' and before text · more than one '@'.

Verification: Depository shall take necessary steps to verify that mobile number, email ID updated in the beneficial owner account is accessible by sending an SMS, and email directly to the account holders' mobile number and the email ID. On electronic confirmation, a 'verified' flag will be enabled. Accounts where the mobile number or email id cannot be verified shall be considered as non-compliant accounts.

Income Range — Individuals: Below Rs. 1 lac · Rs. 1 lac to Rs. 5 lacs · Rs. 5 lac to Rs. 10 lac · Rs. 10 lacs to Rs. 25 lacs · More than Rs. 25 lacs.

Income Range — Non-Individuals: Below Rs. 20 lacs · Rs. 20 lacs to Rs. 50 lacs · Rs. 50 lacs to Rs. 1 crore · More than Rs. 1 crore.

The consequence of non-compliance: non-compliant demat accounts will be liable to be made inactive i.e., no debit will be allowed in such demat account (except for settlement of already open positions). The demat accounts where the clients have not updated all the 6 KYC attributes... will be frozen for debits under Freeze reason code - 37 (Non-Compliant - 6 KYC Attributes).

And the unfreeze: when the demat account becomes compliant with 6 KYC attributes and if it was frozen only with reason code - 37, the demat account can immediately be unfrozen by the Participant.

Common information required

Name of the holder · Date of birth (for individual accounts) · Occupation and financial details · Address and phone/fax number · Bank details like name of bank, type of account (current/savings), account number, branch address, MICR, IFSC etc. · PAN number · Details of nomination (for individual accounts only) · Specimen signatures · e-mail address · Mobile number · Address for communication.

Joint accounts

In case of Joint accounts, the depositories have introduced an option whereby the joint holders in client account may authorise jointly, any one of the holders or survivor(s) to operate the Client account for the following types of operations:

1. Transfer of securities including Inter-Depository Transfer
2. Pledge/Hypothecation/margin pledge/margin re-pledge (Creation, Closure and Invocation and confirmation thereof)
3. Freeze/unfreeze account and/or the ISIN and/or specific number of securities

However, for all other transactions at joint account level, the mode of operation shall jointly be by all the account holders.

Application form details

Name(s) of account holder(s) — investors are advised to open their account in their fully expanded name, i.e., to spell to the first name as well as the middle name. By opening the account in the fullest/expanded name, chances of wrong credits/debits and rejection of demat requests are minimised.

The workbook's illustration: there may be two investors with the same initials and same last name — A K Khanna may be either Arun Kumar Khanna or Ashok Kishore Khanna.

And the benefit: investor can dematerialize shares held in any form of name like A.K. Khanna, Arun K. Khanna, A. Kumar Khanna, Arun Kumar K., etc., into one account.

A married lady: if an application is received from a married lady, along with a PAN card in her maiden name along with her marriage certificate, the BO account can be opened in the married name of the lady.

Mailing and communication addresses — Client has the facility to mention two addresses in the KYC application form (Part I) i.e., correspondence and permanent address. The correspondence address would be the default address that would be forwarded to the Registrar & Transfer Agent (RTA) as well as used for printing Transaction Statement (SOT) from Depository System.

Details of guardian in case account holder is a minor — the guardian holds and operates the beneficial owner account held on behalf of the minor till he/she becomes a major.

Foreign address and RBI approval details for NRI, FPI or OCB accounts — the DP must obtain original or attested copies of the power of attorney as the case may be and the approval letter from RBI permitting them to invest (this is not required in CDSL).

Clearing member details — a broker account as a clearing account can be opened only after the depository approves it and allots clearing-member business partner identification number (CM-BP-ID). However, the concept of a separate CM-BP-ID is not followed by CDSL.

Escrow Account — opened in the form <Issuer name> - <Reason for opening the escrow account> - operated by - <Operator Name>, for example Infosys Technologies Ltd. – Buyback Account - Operated by – Karvy Consultants Ltd.

And it is time-limited: the escrow account shall be active for the limited period of the activity for which it has been opened... After the specified period is over the account shall be closed by the DP irrespective of whether the closure instruction is received from the account holder or not.

Details of bank account — acceptable proof is specimen copy of cheque/cancelled cheque · copy of Bank Statement · copy of Bank Passbook · letter from Bank, and it must show Bank Name · Branch Address · IFSC/MICR code · Name of account holder · Account Number.

Bank Account Verification service: this typically involves transferring ₹1 via IMPS to the bank account of the client and upon successful transfer, name of the client in the target bank account is received as response. Participant shall match the name of the Client with the name and other details received from the bank.

PAN — PAN non-compliant demat accounts shall also be "suspended for credit" other than the credits arising out of automatic corporate actions. Other credits including credits from IPO/FPO/Rights Issue/Off-market transactions or any secondary market transactions shall not be allowed into such accounts.

And the earlier state: accounts with missing or discrepant PAN details were 'Suspended for Debit' until PAN details are verified and updated.

PAN exemptions: U.N. entities/multilateral agencies which are exempt from paying taxes/filing tax returns in India are exempted from the mandatory requirement of PAN, subject to documentary evidence and the use of appropriate PAN exemption codes.

For AoP, Partnership Firm, Unregistered Trust: though the BO account would be in the name of natural persons, PAN of the respective AoP, Partnership Firm, Unregistered Trust, etc shall be obtained.

Change of residential status: the DP can modify the status and sub-status of the existing demat account from Individual status to NRI non-Repatriable vice versa or NRI Repatriable to Individual account/NRI non-Repatriable but the change of status/sub-status from Resident Individual, NRI-non Repatriable to NRI Repatriable is not allowed.

Other identifiers: VID is a 16-digit numeric field which can be used by Aadhaar holder in lieu of his/her Aadhaar number. LEI is a 20 character alpha numeric code used to identify parties for Large Value Transactions i.e. for value of transaction ₹50 crore and above.

Nomination: a beneficial owner can make a nomination of his account in favour of any person by filing the nomination form with his DP. Such nomination is considered to be conclusive evidence of the account holder(s) disposition in respect of all the securities in the account.

Investors opening new trading and or demat account(s) on or after October 01, 2021, shall have the choice of providing nomination or opting out nomination. All existing eligible trading and demat account holders shall provide choice of nomination... on or before March 31, 2023, failing which the trading accounts shall be frozen for trading and demat account shall be frozen for debits.

Special account types

HUF — shares can be held in the name of Existing Karta on behalf of HUF. Therefore, HUF demat accounts can be opened in the name of Existing Karta but not in the name of Deceased Karta and HUF entity. The depository account of an HUF will be opened in the name of HUF entity as it appears on the PAN card of the HUF entity. PAN card details of both the HUF entity and Karta of the HUF shall be obtained. The form for opening a HUF account is the same as the non-individual account. HUF accounts cannot be opened with joint holders.

Companies — a company, being an artificial person, can open a demat account, provided its memorandum authorizes it to make investment in the securities of other companies. A demat account in the name of a company should be operated by the person(s) authorised by a resolution passed by its board of directors.

Minors — a minor may hold shares through his guardian. Accordingly, a minor may open a depository account only through his guardian.

The procedure: obtain photocopy of the School Leaving Certificate/Mark sheet issued by Higher Secondary Board/Passport of Minor/Birth Certificate · obtain POI, POA, PAN and photograph of the Guardian... Carry out 'in-person' verification of the Guardian · account opened in the name of minor should not have joint holdings · two KYC Application Forms must be filled i.e. one for the guardian and another for the minor (to be signed by guardian) · PAN details of the minor should be captured by the DP.

When the minor attains majority — and note the two ages: majority is 21 years of age in case of Minor whose Guardian is court-appointed or 18 years where Minor's account is represented by a natural guardian.

The DP must then: communicate to the Client immediately advising him/her to submit a fresh account opening form · in NSDL, suspend the account for debit and disable the standing instruction for credit (in CDSL such account is automatically suspended for debits) · capture the signature of the Client (Minor turned Major) in the system in place of the signature of the Guardian · obtain a fresh acknowledgement copy of the Rights and Obligation document · and any request or instruction from the guardian... having execution date falling on or after the date the Minor has turned Major, shall be processed/executed only after receipt of confirmation from the Client.

Partnership firms — a partnership firm cannot be a member of a company under the provisions of Companies Act. Thus a depository account cannot be opened in the name of a partnership firm.

All the partners of the firm, however, can sign as joint holders, and a joint account may be opened in the name of the proprietor or partners [Maximum 3 partners].

An exception to this is given for opening a CM Account. The CM account can be opened for broker firms since partnership firms are allowed to become members of a stock exchange.

The documents: copy of the balance sheets for the last 2 financial years (to be submitted every year) · certificate of registration (for registered partnership firms only) · copy of partnership deed · authorised signatories list with specimen signatures and photograph · photograph, POI, POA, PAN of Partners · and an undertaking in the prescribed format from the Partners to the effect that the Partners would comply with the provisions of the Companies Act.

Signatures and special cases

The account opening form should be signed by the sole holder, in case of single holding; all joint holders, in case of joint holding; authorised signatories, in the case of corporate accounts; by guardian, in case of a minor.

For NRIs: both CDSL and NSDL require that the account opening form be signed by the NRI. This account can be operated under signature of account holder(s) or a Power of Attorney Holder. However, according to the CDSL operating instructions, accounts cannot be opened/closed under signature of power of attorney holder.

Illiterate person — must affix the thumb impression (left hand thumb in case of a male and right hand thumb in case of a female) on the Rights and Obligations document as well as on the account opening form.

All accounts opened by illiterate person(s) with NSDL DPs must be either introduced by an existing account holder or must be attested by applicant's bank. CDSL however does not need an introducer.

The Client(s) must come in-person, the DP must read out/explain the contents of the account opening form, Rights and Obligations document and delivery instruction form, and put his signature and the remark "Details explained to the Client(s)". Instruction forms issued to such Client(s) should be pre-stamped as "Thumb Impression". At the time of opening of account, the aforesaid rules should be explained to the Client(s) in the presence of a witness, who will have to sign the Rights and Obligations document and the account opening form, as a witness.

Visually challenged person — any visually challenged person can open and operate the demat account including online facility like any other investor. The additional steps: if so requested by the client, the Participant should read out and explain to the Client, the contents of the account opening form and rights and obligations document · a remark should be put in the system... that the Client is "Visually Challenged" · Delivery Instruction Slip issued to such Clients should be pre-stamped as "Visually Challenged".

Signature in another language: in NSDL, if the signature is in any language other than those specified in the Schedule VIII to the Constitution of India or English, it should be attested by a Magistrate or a Notary Public or a Special Executive Magistrate.

The client account number

The system then generates a client account number which should be referenced by the client for all its transactions in the depository system.

In case of CDSL, the account number has two parts, i.e., 8-digit DP-ID (identification number of Depository Participant) and 8-digit client account number. Example: 13015600 00000082.

Similarly, an account with the NSDL will have 16-digit number with the first 8 digits indicating the DP-ID starting with IN300100 and the last 8 digits giving the client id i.e. 10005678.

Both are 16 digits; the NSDL DP-ID begins with "IN".

Standing instructions and Power of Attorney

A DP may register the transfer of securities to or from a beneficial owner's account only on receipt of instructions from the beneficial owner. No debit or credit can be given to the account of a beneficial owner without a due authorisation.

However, a clause in the Rights and Obligations document enables clients to give standing instructions to DPs, at the time of opening the account itself, for receiving securities to the credit of their accounts without any further instruction from them. Though not mandatory, it would be better to ask clients to specifically sign in the standing instruction column.

Power of Attorney:

• A Power of Attorney executed prior to the promulgation of The Depositories Act is valid and enforceable
• It is the responsibility of the DP to verify whether the Power of Attorney is adequate and sufficiently authorizing the holder
• A DP shall not obtain Power of Attorney (POA) from its client(s) as a requirement for opening a demat account
• POA Holder does not have the sole authority to operate the account
• Account holders who have executed a POA cannot be denied Delivery Instruction Slip (DIS) books
• DPs are not authorised to merge the securities kept under various accounts of the clients

Where a client has executed a POA, such depository accounts can be operated both by the client(s) as well as by the POA holder.

DDPI. A separate document viz. 'Demat Debit and Pledge Instruction' (DDPI) has been introduced by SEBI in April 2022, under which the clients shall explicitly agree to authorize the stock broker/stock broker and depository participant to access their BO account for the limited purpose of meeting pay-in obligations for settlement of trades executed by them.

The DDPI shall serve the same purpose of PoA and significantly mitigate the misuse of PoA.

4.4 The Clearing Member account

The entities which are authorised to do pay-in and receive the pay-out from a Clearing Corporation (CC)/Clearing House against trades done by them or their clients are known as clearing members (CM).

There are two types of clearing members: all the members of a stock exchange are clearing members; and custodians who have been permitted by the stock exchange to act as a clearing member.

The seven demat account categories a stock broker may maintain:

Opening the CM account. In NSDL, the major difference is that the clearing member has to first register itself with the clearing corporation and obtain a clearing corporation clearing member identification number (CC-CM-ID).

The clearing account is identified by the combination of CC-CM-ID given by the clearing corporation, CM-BP-ID given by the depository and the Client-ID given by the DP.

The Depository then allots the CM-BP-ID. Based on the CM-BP-ID so allotted, the account is then activated by the DP and Client-ID is generated.

In CDSL, the concept of CM-BP-Id is not there and the system generates a 16-digit ID similar to the BO ID.

How many: generally, there will be only one CM account per broker for a stock exchange. In CDSL a CM may open additional CM Account(s)... for the purpose of Futures & Options (F&O) and/or Securities Lending and Borrowing Mechanism (SLBM) transactions. This is not applicable in NSDL, as Clearing Members maintaining CM Accounts with DPs of NSDL can open and maintain only one CM Account per stock exchange.

And the use restriction: the clearing account should only be used for clearing and settlement purposes and not for any other purpose, e.g., holding of securities. All the securities received in a settlement account should be transferred to respective beneficial accounts as soon as possible, but in no case later than the time prescribed.

The opening of clearing member account constitutes a "standing instruction" to receive credits from the clearing corporation when there is a pay-out (not applicable in case of NSDL).

PMS Pool Account. DPs have been advised to facilitate the opening of a Pool Account for the Portfolio Management Service (PMS) Provider similar to Clearing Member Pool Account after which transfers from/to the PMS Pool Account would be considered as Market Transfers instead of "Off Market" transfers. PMS provider is required to open Pool account(s) per Clearing Corporation (CC) viz., NCL, ICCL, MCCIL.

4.5 Closure of account

On the client's request. DP can close a depository account on receipt of an application in the prescribed format. The application should be made by the account holder or by all the joint holders.

An account can be closed only when there is no balance in the account. Where there is a balance:

(a) Rematerialisation of all securities standing to the credit of the account at the time of making the application for closure; or

(b) Transferring the balance to the credit of another account opened by the same account holder(s) either with the same participant or with a different participant.

Where the account cannot be closed — due to pending demat/remat requests, ISIN in suspended status or due to open pledges, etc., the Participant should freeze the account i.e. "suspended for debit and credit".

In CDSL, account closure can be initiated even if balances are present in the account. CDSL system will change status of such an account to 'TO BE CLOSED' and close the account when all balances are reduced to zero.

And a document duty: DPs should provide the Statement of Transaction (SOT) to the Client for the period from the beginning of the quarter in which the account is closed till the date of closure. Further, the SOT should bear the words "Account Closed" and should be prominent.

Long-pending demat requests: Client must submit a letter in prescribed format requesting to cancel the pending demat request in respect of those demat requests which are pending for more than 60 days.

Consolidation of accounts. Clients who opened multiple accounts may want to bring all their share holdings into one or fewer accounts. This can be achieved by using normal off market transfer instruction.

Closure by DP. The DP may also initiate closure of a client's account if the client has defaulted in performing its obligations laid out in the Rights and Obligations document. The DP should give sufficient notice to the client before initiating closure. In CDSL, a 30 days' notice is required. The notice should clearly state the reasons for closure.

Closure/shifting of clearing account. In NSDL, applications go simultaneously to the old and new DP, the new DP forwards to the depository for approval, once the application is approved, the new DP opens a new clearing account and intimates the depository about the new Client-ID, and the depository advises the old DP to close the account. In CDSL, there is no requirement of approval of depository in this category.

Mass shifting. Depositories have provided a facility to shift in mass, all the accounts from one DP module machine to another as a DP opens new centres. This facility is called mass shifting facility.

And the fee waiver: charges shall not be levied by a depository on DP and consequently, by a DP on a Beneficiary Owner (BO) when a BO transfers all the securities lying in his account to another branch of the same DP or to another DP of the same depository or another depository, provided the BO Account/s at transferee DP and at transferor DP are one and the same, i.e. identical in all respects. In case the BO Account at transferor DP is a joint account, the BO Account at transferee DP should also be a joint account in the same sequence of ownership.

4.6 Freezing of accounts

Account freezing means suspending any further transaction from a depository account till the account is unfrozen. ISIN/specific number of securities in a demat account may be frozen in certain cases.

The five grounds:

1. If a written instruction is received from the client by the DP, requesting freezing of account
2. If an electronic request is made by a client to his DP or to the Depository — this is not necessarily followed by both the depositories
3. If orders are received by the DP or the depository from the Central or State Government, SEBI, or any order by the court, tribunal, or any statutory authority
4. If a request is received by the Depository from a DP or client, in case of NSDL
5. If orders are passed by Disciplinary Action Committee (DAC) or if DP becomes insolvent, bankrupt or if a DP is being wound up

The two levels: by freezing an account for debits only (preventing transfer of securities in/out of the account), the client can receive securities in his account. An account can also be frozen for debits as well as credits (preventing any movement of balances out of the account). No transaction can take place in such an account until it is reactivated.

Unfreezing happens on the valid written request of the account holder where he had requested freezing or directions of depository made in pursuance of the order of the appropriate authority.

And: the DP should immediately inform the client about change in status of the account from 'active' to 'suspended' and vice versa.

4.7 Changes in client details

All the changes have to be indicated in writing to the DP. The changeable particulars:

Change of name in case of individual BO · Father's/Husband's Name · Standing instruction facility · Address (both local as well as correspondence), telephone number, mobile number · Occupation details · Nominee details · Bank details · PAN Number details · In case of NRIs, the Reserve Bank of India reference number and approval date for NSDL · E-mail addresses · Change in signature.

Change of address requires a written application for change of address from the Client (In case of joint holdings, all holders must sign) and proof of new address alongwith the original document of the new address for verification.

After effecting the change, the Participant should send a communication to the Client, confirming the change of address, to the old and the new addresses — both addresses, which is the point. The Participant shall upload the updated information of the Client on the system of KRA/CKYC.

Change of name of an individual BO:

And a structural rule: while carrying out the modifications, the name of any existing account holder of an account can neither be deleted nor can any new name be added.

Karnataka and Punjab have a special procedure because the name change is published by the State Government in the Official Gazette only for Government employees and not for private persons. For reasons other than marriage there, DPs collect: request letter for change of name · sworn affidavit executed before the Notary Public/Magistrate of First Class/Executive Magistrate mentioning the reason for change of name and his complete address · paper publication in one local newspaper and one national newspaper · and KYC in changed name.

Minor correction of name — a written request plus one of PAN card · AADHAAR card · Passport · Driving Licence · Voter's identity card issued by the Election Commission of India · Job card issued by NREGA.

Minor correction in name (which looks obvious, easily explainable and raises no doubt) would include: correction of spelling mistakes · expansion of the name by incorporating the fully expanded name and/or inclusion of the middle name · abbreviation of name.

Where it may be facilitated: R. S. Shah → Ramesh Sunder Shah · Ram Sevak Sharma → R. S. Sharma · Paresh Patil → Paresh Dashrath Patil · Sridhr Srinivasarao → Sridhar Srinivasarao.

Where it may NOT be facilitated: Paresh Patil → Paresh Patel · Sunita Mukesh Gaikwad → Sunita More · P. S. Shah → S. P. Shah · Shekhar Rajan M → Rajan Shekhar P · Ram Kumar Sheth → Ram Kumar.

And a caution: in case an individual changes the spelling of its name for any reason including for numerology, etc., it will be considered as a change in name, and not a correction in name. Concurrent auditor must conduct 100 percent audit of all cases involving minor correction in name.

Change of signature. The Client should make a request in writing specifying reasons · new signature should be duly attested by Client's banker, only in case where the beneficiary owner cannot come personally · Client should visit DP's office personally and produce valid proof of identity and bring the latest transaction statement of its account · in the presence of officials of DP, Client should affix his/her new signature.

4.8 Accredited Investors

The eligibility criteria:

(i) Individuals, HUFs, Family Trusts and Sole Proprietorships:

• Annual Income >= INR 2 Crore; OR
• Net Worth >= INR 7.5 Crore, out of which at least INR 3.75 Crore is in the form of financial assets; OR
• Annual Income >= INR 1 Crore + Net Worth >= INR 5 Crore, out of which at least INR 2.5 Crore is in the form of financial assets

(ii) Partnership Firms set up under the Indian Partnership Act, 1932 in which each partner independently meets the criteria for accreditation

(iii) Trusts (other than family trusts) with net worth greater than or equal to INR 50 Crore

(iv) Body Corporates with net worth greater than or equal to INR 50 Crore

Net worth rules: in case of accreditation of individual investors, HUFs and Sole Proprietorships, the value of the primary residence... shall not be considered for calculation of net worth.

Joint holdings: where the joint holders are parent(s) and child(ren), at least one person should independently fulfill the eligibility criteria · where the joint holders are spouses, their combined income/net worth should meet the eligibility criteria.

Net worth formulas: for Body Corporates, Net worth = (Capital + free reserves) – (Accumulated losses + deferred expenditure not written off); for Trusts, Net worth = (Book value of all assets, other than intangible assets) – (Book value of total liabilities).

Validity: upon meeting the eligibility criteria for accreditation for preceding one year, the accreditation shall be valid for a period of one year. If the applicant consistently meets the said eligibility criteria for accreditation in each of the preceding three years, the accreditation shall be valid for a period of two years.

4.9 UCC mapping

As a part of its investor protection measure, in 2018, SEBI had directed the Market Infrastructure Institutions (MIIs) to put in place an "Early Warning Mechanism" to detect the diversion of client's securities by the stock broker at an early stage.

MIIs are stock exchanges, Clearing Corporations and Depositories.

The two things the mechanism watches: (a) Diversion of pay-out of securities to non-client/other client accounts; and (b) Mis-matches between gross (client-wise) securities pay-in and pay-out files of a stock broker generated by the Clearing Corporation which shall be compared with actual transfer of securities to/from the client's depository accounts by the Depository.

The mechanism:

• UCC allotted by the trading member (TM) to the client shall be mapped with the demat account of the client
• A client may trade through multiple TMs in which case each such UCC shall be mapped with one or more demat account(s)
• Stock Exchanges shall share the UCC data with the Depositories which shall include the PAN, segment, TM/CM code and UCC allotted — Depositories shall map the UCC data in the demat account based on the PAN provided in the UCC database
• Clients may make a request to their DP to de-link or add UCC details — before any addition of UCC in the demat account, the Depositories shall validate the same with the Stock Exchanges/client
• Stock Exchanges and Depositories shall have a mechanism in place to ensure that inactive, non-operational UCCs are not mis-used