Beneficial owner account
Also written BO account
The ownership demat account investors open with a DP to hold and trade securities in electronic form, distinct from a broker's clearing member account, which only holds securities in transit.
In plain language
There are two kinds of demat account, and they do very different jobs. One is for owning securities. The other is only for moving them through settlement.
The beneficial owner account is the ownership kind. Whoever holds this account is legally entitled to everything that comes with the securities in it — dividends, bonus shares, voting rights, all of it. That is why it is called a beneficial owner account: the holder is the actual beneficial owner.
An individual, a company, an HUF, a minor, a bank, a trust, or even a broker investing for himself can all open one, with a DP of his choice.
How it works
A beneficial owner account can be opened in a single name or jointly, up to a maximum of 3 holders. It needs no minimum balance, and an investor may open more than one such account, with the same DP or with different DPs.
A newer route, the SARAL Account Opening Form, lets a resident individual open both a trading account and a demat account using a simplified form, aimed at new investors who start out only in the cash segment without add-on facilities like margin trading or a power of attorney.
A DP must also carry out in-person verification (IPV) of every applicant before opening the account, verifying identity against a proof-of-identity document and, for joint accounts, against every holder. Even an Association of Persons (AoP) may now open a demat account in its own name, but only to hold mutual fund units, corporate bonds and government securities — not equity shares — and only after its Principal Officer confirms the AoP is permitted by its own governing statute to hold those instruments.
A worked example
Mr Ram, a retail investor, opens a beneficial owner account with a DP to trade shares on the NSE. He buys 500 shares of a listed company at Rs 640 each — Rs 3,20,000 in all — and those shares sit in his beneficial owner account, where he is entitled to every dividend and bonus the company declares.
Compare this to his broker, who separately maintains a clearing member account with the same DP for settlement purposes only. When Mr Ram's trade settles, the shares pass briefly through the broker's clearing member account before landing in Mr Ram's beneficial owner account. Mr Ram, not his broker, is the one entitled to keep the shares, receive the dividends and vote at the company's AGM.
Mr Ram's wife separately opens her own beneficial owner account with a different DP and invests Rs 1,50,000 in a debt fund. Nothing stops either spouse from holding more than one account, or from choosing different DPs.
Why NISM asks about it
Chapter 4, sections 4.2 and 4.3, opens with this two-account distinction — beneficial owner account versus clearing member account — before the rest of the chapter works through documentation, KYC and account-opening procedure in detail.
Expect a direct question on who is entitled to the rights and benefits of securities held in a beneficial owner account — the account holder, because it is an ownership account, unlike a clearing member account, which the workbook is careful to call transitory.
Common exam traps
- A beneficial owner account is an ownership account; a clearing member account is a transitory settlement account. Confusing the two is one of the most basic errors in this chapter.
- Maximum three holders in the standard account-opening module — four or more names need a separate procedure with restrictions on receiving credits.
- An AoP demat account cannot hold equity shares — only mutual fund units, corporate bonds and government securities, and only under conditions the AoP's Principal Officer confirms.
- In-person verification is mandatory for every holder, including a minor's guardian, not just the primary applicant.
Check yourself
1.The two main types of demat accounts that can be opened with a depository participant are:
- a)Savings account and current account
- b)Beneficial Owners Account and Clearing Member Account
- c)Trading account and settlement account
- d)Proprietary account and pool account
Show the answer
Answer: (b) Beneficial Owners Account and Clearing Member 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 is Mr. Ram who is a retail investor... The securities which he buys or sells will be kept in his beneficial owner account which he would have to open with a DP.
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.
Three features of the CM account to remember: 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.
Option D names two of the seven categories a stock broker may maintain, which is a different classification: Proprietary Account (hold own securities) · Pool account (settlement purpose) · Client Unpaid Securities Account · Client Securities Margin Pledge Account · Client Securities under Margin Funding Account · Client Nodal Mutual Fund Overnight Scheme (MFOS) Account · Client Unpaid Securities Pledgee Account (CUSPA).
And note: clearing members and brokers have to open a beneficiary account if they have to deal with their own holdings.
2.A pledgor submits an unpledge request after repaying his loan, and the pledgee rejects it. What happens to the securities?
- a)They are automatically credited to the pledgor's free balance after seven days
- b)They continue to remain as pledged balances in the pledgor's account
- c)They are transferred to the pledgee's account
- d)The depository releases them on the pledgor's written representation
Show the answer
Answer: (b) They continue to remain as pledged balances in the pledgor's account
In case of rejection by the pledgee, the securities continue to remain as pledged balances in the pledgor's account.
This is the point of the whole confirmation architecture: the pledgor can request un-pledging or closure after the performance of the underlying agreement — request, not effect. Repaying the loan does not release anything by itself. There is no automatic timer, so option A is wrong.
Option C confuses closure with invocation. Securities move to the pledgee only on invocation, where they are transferred from the "pledged balance" of the pledgor's beneficial owner account to the "free balance" of the pledgee's beneficial owner account.
The pledgor is not left in the dark: the reasons for rejection are displayed in the DP system of the pledgor's DP, from a defined list including "agreement number differs from that on the agreement", "market value of pledged ISINs insufficient" and "POA not received from all holders". In CDSL those coded reasons are absent and the pledgee DP enters the reason in a remark field.
Where this is taught
Free preparation for NISM Series VIRelated terms
- Basic Services Demat AccountA low-cost demat account for a small investor who holds only one demat account and whose holdings stay within Rs 2 lakh of debt and Rs 2 lakh of non-debt securities — its annual charge can be nil.
- Depository participantThe SEBI-registered agent through whom an investor reaches a depository — NSDL and CDSL cannot open investor accounts themselves, so every demat account is opened and operated through a DP.
- Clearing member accountThe special demat account a broker or custodian opens to settle exchange trades, through which clients' sold shares go to the clearing corporation and bought shares arrive; also called the pool account.
- First holderThe first-named holder of a joint demat account: all communications, dividend and interest warrants, annual reports and meeting notices go to them, though beneficial ownership vests in all joint holders.
- Four-or-more-holder accountA special-procedure demat account for four or more joint holders of the same physical certificate, opened only to dematerialise the holding, restricted from crediting instructions, and closed once demat is complete.