Financial Matters - Maintenance of Accounts & Types of Accounts ( NSDL )

Maintenance of Accounts at the Central System:

The NSDL central system known as DM maintains accounts of all account holders in the depository system. All the transactions entered at any point in the computer system connected to it are first effected in the central system and subsequently at these Computers. Thus, the central system of NSDL has the records of all details of every transaction conducted in the depository system.

Distributed Database:

Each of the computer systems connected to NSDL system has its own database relating to its clients. This helps in giving prompt and accurate service to the clients. However each of the databases is reconciled with the data at the central system everyday in order to ensure that the data in the distributed database tallies with the central database.

Common Software:

NSDL develops software required by depository participants, Companies, R&T Agents and clearing corporations for conducting depository operations. Thus, the computer systems used by all the entities will have common software given by NSDL. However, depending on the business potential, branch networks and any other specific features, DPs may develop software of their own for coordination, communication and control and provide service to their clients. Such exclusive software is called “back office software “.DPM system given NSDL gives “export and import” facility to take out the transaction details to be used by back office software and to feed in transaction details generated from the back office software.

Account Opening :

Any investor who wishes to avail depository services must first open an account with a depository participant of NSDL. The process of opening a demat account is very similar to a bank account. The investor can open an account an account with any depository participant of NSDL. An investor may open an account with several DPs or he may open several accounts with a single DP. There are several DPs offering various depository-related services. Each DP is free to fix its own fee structure. Investors have the freedom to choose a DP based on criteria like convenience, comfort, service levels, safety reputation and charges. After exercising this choice, the investor has to enter into an agreement with the DP. The form and contents of this agreement are specified by the business rules of NSDL. In this chapter we deal with the procedure for account opening under the NSDL system.

Types of Accounts

Type of depository account depends on the operations to be performed. There are three types of demat accounts which can be opened with a depository participant viz. (a) Beneficiary Account (b) Clearing Account and (c) Intermediary Account.

Beneficiary Account:

This is an account opened by investors to hold their securities in dematerialized 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 (i.e. equity shares, debentures, government securities, etc.) held in that account. Therefore, the account is called “beneficial owner account “. A beneficiary account can be in the name of an individual, corporate, HUF, Minor, Bank, Financial Institution, Trust, etc. or the broker himself for the purpose of his personal investments in demat form. The account is opened with a DP.

Documents for Verification:

For the purpose of verification, all investors have to submit the following documents along with the prescribed account opening form.

Proof of Identity :- A beneficiary account must be opened only after obtaining a proof of identity of the applicant.

Proof of address :- The account opening form should be supported with proof of address such as verified copies of ration card / passport / voter ID / PAN card / driving license / bank passbook.

In case any account holder fails to produce the original documents for verification within the aforesaid period of 30 days, it must be immediately brought to the notice of NSDL. Failure to produce the original documents within the prescribed time would invite appropriate action against such account holders, which could even include freezing of their accounts.

Common Information:

The process of opening an account with a depository, nature of such an account , and various factors to be considered for opening a depository account are explained below. Some details are common to all types of accounts. These are :

1. Name of the holder

2. Date of birth (for individual accounts )

3. Occupation

4. Address & phone / fax number

5. Bank details like name of bank, type of account (current / savings). Account number, branch address, MICR, etc.

6. PAN number, if applicable

7. Details of nomination

8. Specimen signatures

Clearing Member Account:

The entities that are authorized to pay in and receive the pay out from a clearing corporation / clearing house against trades done by them or their clients are known as clearing members. CMs are identified in the system through their CM-BP ID. All pay-out transactions are carried out through their accounts.

There are two types of clearing members:

1. All members of a stock exchange popularly known as brokers, are clearing members.

2. Custodians who are permitted by the stock exchange to act as a clearing member.

Intermediary Account:

As per SEBI Regulations on Stock lending and borrowing, only an approved intermediary can lend and borrow stocks from clients. This intermediary borrows from lenders and lends to borrowers. Intermediaries registered with SEBI as approved intermediary may open an intermediary account with a DP of its choice, for executing stock lending and borrowing transactions made through them. An intermediary account may be opened only after obtaining registration from SEBI under an approved Stock Lending Scheme, and getting the approval of the depository for opening the account.

Closure of Account:

Closure on client’s request – A 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. In case there is any balance in the account sought to be closed, the following steps are necessary.

(a) Re-materialization 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.

Freezing of Accounts:

Accounts freezing means suspending any further transaction from a depository account till the account is de-frozen. A depository account maintained with a DP may be frozen in certain cases.

1. If a written instruction is received from the client by the DP, requesting freezing of account; or

2. If written instructions are received from the depository pursuant to an order of the Central or State Government, SEBI, or any order by the court, tribunal, or any statutory authority.

An account may be frozen only for debits (preventing transfer of securities out of the account ). By freezing an account for debits only, no securities can be debited from the account , however, the client can receive securities in his account. An account can also freezed 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. A frozen account may be de-frozen or re-activated, by taking the reverse steps.

1. On the valid written request of the account holder where he had requested freezing.

2. On directions of depository made in pursuance of the order of the appropriate authority.

The DP should immediately inform the client about change in status of the account from ‘active’ to ‘suspended’ and vice-versa.

TRADING AND SETTLEMENT:

Settlement of off-market transactions :

Any trade that is cleared and settled without the participation of a clearing corporation is called off-market trade. Transfer from one beneficiary account to another due to a trade between them is called off-market transaction. Large deals between institution, trades among private parties, transfer of securities between a client and sub-broker, large trades in debt instruments are normally settled through off-market route

1. Seller gives delivery instructions to his DP to move securities from his account to the buyer’s account.

2. Buyer automatically receives the credit of the securities into his account on the basis of standing instruction for credits.

3. Buyer receives credit of securities Into his account only if he gives receipt instructions, if standing instructions have not been given.

4. DP needs to be extra careful in verifying the signature of the client if unusual quantities of securities are being debited to the account.

5. Funds move from buyer to seller outside the NSDL system.