NISM Series VI Depository Operations – Part 3: Account Opening, KYC, Types of Demat Accounts & Freezing

Quick Summary: Part 3 of our NISM Series VI short notes covers everything about opening a demat account – types of accounts, KYC requirements, e-KYC, FATCA, investor-specific rules for joint holders, HUFs, companies, minors, account numbering, and account freezing.

Opening a Demat Account – The Basics

Any investor who wants to use depository services must first open an account with a Depository Participant (DP) registered with a depository. The process is similar to opening a bank account.

Key points:

An investor can open accounts with multiple DPs, or open multiple accounts with a single DP.
Each DP is free to set its own fee structure.

Types of Demat Accounts 1. Beneficiary Account (Beneficial Owner Account)

This is the most common type of demat account. It is an ownership account. The holder of securities in this account is the actual owner (beneficial owner) of those securities.

Investors open this account to hold securities in dematerialised form and to buy or sell securities through the depository system. The account holder is entitled to all rights and liabilities attached to the securities held in the account.

2. Clearing Member Account

This account is opened by a broker or clearing member for settling trades executed on a recognised stock exchange. All pay-in and pay-out transactions related to trade settlement are routed through this account.

There are two types of clearing members:

All members of a stock exchange are clearing members.
Custodians who have been permitted by the stock exchange to act as clearing members.

Important: DPs must open separate accounts for their own investments to ensure no co-mingling of their assets with client assets.

Documents Required for Account Opening For Individual / Non-Body Corporate Investors:

Verify the identity of the applicant (In-Person Verification / IPV)
Record necessary details on the KYC Application Form
The DP may affix a stamp or print IPV details on the KYC Application Form
Attaching a separate sheet or affixing stickers on the KYC form for IPV details is not permitted

For Corporate Investors:

Memorandum of Association (MOA), Articles of Association (AOA), and Certificate of Incorporation
Board resolution authorising opening of the demat account
Names of authorised signatories with their designation, specimen signatures, and photographs
Proof of address of the corporate entity
Copy of balance sheets for the last 2 financial years
Copy of the latest shareholding pattern
Copy of the Board Resolution for investment in the securities market

Key Rule: A demat account can have a maximum of three holders. Proof of identity must be obtained for all holders.

e-KYC (Electronic Know Your Customer)

SEBI has permitted the use of the e-KYC service launched by UIDAI (Unique Identification Authority of India) using Aadhaar.

The Aadhaar e-KYC service provides:

Instant, electronic, non-reputable proof of identity and proof of address
Date of birth and gender (digitally signed and encrypted)
Mobile number and email address (if available)

e-KYC can be performed:

At the DP's service centre using biometric authentication
Remotely using an OTP on a website or mobile connection

Central KYC Records Registry (CKYCR)

The Government of India authorised CERSAI (Central Registry of Securitization Asset Reconstruction and Security Interest of India) to act as the Central KYC Records Registry.

Key rule under Prevention of Money-Laundering (Maintenance of Records) Amendment Rules, 2015:

Every reporting entity must file the electronic copy of the client's KYC records with the Central KYC Registry within three days after commencing an account-based relationship with a client.

Linking Demat Account with Aadhaar

As announced in Union Budget 2017-18, SEBI has instructed depositories and DPs to encourage all existing individual clients to link their demat accounts with their Aadhaar numbers. NSDL provides an online facility for direct Aadhaar linking, authenticated directly with UIDAI.

FATCA Compliance

India and the USA entered into an Inter-Governmental Agreement (IGA) for FATCA (Foreign Account Tax Compliance Act), which came into force on 31st August 2015.

Financial institutions must obtain self-certification and conduct due diligence for all individual and entity accounts opened from 1st July 2014 to 31st August 2015. If accounts found to be reportable were not certified by the deadline, they had to be closed and reported.

Account Opening Forms for Different Types of Investors Joint Holders

A demat account can be held in the names of more than one person.
All joint holders must sign the application form.
All holders must acknowledge receipt of the Rights and Obligations document.
On the death of a joint holder, the balance can be transmitted (on request of surviving holders) to a new account opened by the surviving holders. The earlier account is then closed.

HUF (Hindu Undivided Family)

The account is opened in the name of the HUF entity as it appears on the HUF's PAN card.
PAN card details of both the HUF entity and the Karta must be obtained.
Bank account proof of the HUF must also be obtained.
The form used is the same as for an individual account.

Companies

A company (artificial legal person) can open a demat account provided its Memorandum of Association authorises it to invest in securities of other companies.
The account must be operated by persons authorised by a resolution of the Board of Directors.

Minors

A minor can hold shares through a guardian.
A depository account for a minor can only be opened through the guardian.

Partnership Firms

A partnership firm cannot be a member of a company under the Companies Act.
Therefore, a depository account cannot be opened in the name of a partnership firm.

Additional Note: A demat account can also be operated by a Power of Attorney (PoA) holder.

Application Form – Details Required

The depository's prescribed application form requires the following information:

Name of Account Holder
Mailing and communication address
Details of guardian (if account holder is a minor)
Foreign address and RBI approval details (for NRI, FII, or OCB accounts)
Clearing Member details (for clearing accounts)
Details of the bank account
Income Tax PAN details

Client Account Number

After completing the account opening process, the system generates a unique Client Account Number, which the client uses for all future depository transactions.

The DP provides a copy of the account opening confirmation report to the client for verification.

NSDL Account Number Format:

16-digit number
First 8 digits = DP-ID (e.g., IN300100)
Last 8 digits = Client ID (e.g., 10005678)

CDSL Account Number Format:

Two-part number: 8-digit DP-ID + 8-digit Client Account Number

Clearing Member Account – Additional Details

The entities authorised to make pay-in and receive pay-out from a Clearing Corporation (CC) or Clearing House (CH) are called Clearing Members (CMs).

Two types of clearing members:

All stock exchange members are clearing members.
Custodians permitted by the stock exchange to act as clearing members.

Closure of Demat Account

A DP can close a demat account on receiving an application in the prescribed format from the account holder or all joint holders.
An account can be closed only when there is no balance in the account.
All pending transactions must be settled before closure.
A DP may also initiate closure if the client defaults on obligations under the Rights and Obligations document — but must give sufficient notice before doing so.

Consolidation of Demat Accounts

If a client has opened multiple demat accounts to dematerialise shares held in different name combinations, and no longer needs them all, the holdings can be moved into one account using a normal off-market transfer instruction.

Shifting of Clearing Account

A clearing member can transfer its clearing account from one DP to another. To do this, applications for closure of the old account and opening of the new clearing member account must be submitted simultaneously. All future pay-outs of securities go to the new account after the old clearing account is closed.

Mass Shifting of Accounts

When DPs expand to new locations, accounts may already be linked to a different DP module. Depositories provide a mass shifting facility to transfer multiple accounts at once.

Freezing of Demat Accounts

Account freezing means suspending further transactions from a demat account until the account is unfrozen.

Two types of freeze:

Freeze for debits only: Prevents transfer of securities out of the account; the client can still receive securities.
Freeze for debits and credits: No movement of securities in or out of the account. No transaction can take place.

The DP must immediately inform the client whenever the account status changes from 'active' to 'suspended' or vice versa.

Change in Client Details

A client can change the following details in the depository system (all changes must be in writing to the DP):

Name
Father's / Husband's name
Address
Nomination details
Bank details
Contact details
Name in corporate accounts
Name of beneficial account holder
Signature

Quick Revision Points for NISM Series VI Exam

Demat account = maximum 3 holders
Partnership firms cannot open demat accounts
Minors can open demat accounts only through a guardian
NSDL account: 16-digit (8-digit DP-ID starting with IN + 8-digit Client ID)
CDSL account: 8-digit DP-ID + 8-digit Client Account Number
Account can be closed only when balance is zero
KYC records must be filed with Central KYC Registry within 3 days of account opening
Demat account can be operated by a PoA holder
Freeze for debits only = can still receive securities
DP must inform client immediately about any account status change

Up Next: Part 4 – Dematerialisation, Rematerialisation & Transmission of Securities

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