Ways to keep your demat account safe

Whenever there’s news of scam at a stockbroking house, investors rush to transfer their securities to another company. But when the broker is already under investigation, and most clients rush to transfer their stocks, the requests pile up.

Investors faced a similar problem when scandal at Karvy Stock Broking came to light. Recently, many are facing the same problem with Anugrah Stock and Broking. When a stockbroker illegally transfers clients’ securities to another account and uses them for its benefit, it’s a tough battle to get them back. All hopes are on courts, regulators and investigating agencies.

However, one of the ways to avoid falling victim to such scams is to sign up for the online transfer of securities with your depository. The service can help cross-check the statements that the broker is sending and also allows online transfer of securities in case there’s any issue with the broker. “While the facility to transfer securities without going through the broker is available, hardly 10% of the clients use it. The majority are not even aware of it,” said Venu Madhav, chief of operations at Zerodha.

Here’s how to use the services available with depositories—Central Depository Services Ltd (CDSL) and National Securities Depository Ltd (NSDL)—to transfer securities to another demat account without approaching your broker.

Transfer process

Four parties that are involved in the transfer process are, the client, a depository, a depository participant (DP) and a broker. In most cases, the broker is also the DP. When a client wants to transfer securities to another demat account, he fills up a delivery instruction slip (DIS) and submits it to the DP, which is typically your broker. The DP (or broker) then matches the signatures on the DIS. Some stockbrokers may call the client to verify the request. The DP then processes the request through a depository.

For securities such as stocks, the transfer is quick and easy, even if it is between the two depositories. But if someone wants to transfer government-issued securities, like sovereign gold bond, from CDSL to NSDL or vice versa, it can be time-consuming. “In some cases, the security will be rematerialized and then dematerialized for the transfer to be effective when two depositories are involved,” said Madhav.

Online process

CDSL offers a service called EASIEST, which stands for electronic access to securities information and execution of secured transaction. In this, clients get two options. In the first, they can add up to four CDSL demat accounts as trusted accounts where they would like to transfer holdings. Once signed up, it becomes an entirely online process without the need to send a request to broker or DP. Such transfers—to trusted accounts—can be done using a PIN (personal identification number). In the second option, called account of choice, the client can transfer stocks to any demat account. For security reasons, these transfers can be done only using digital signatures.

NSDL, too, has similar options under its service called SPEED-e. For password-based transfers, the client can add up to three accounts. To transfer to any other account, the investor will need a digital signature and a smart card that NSDL issues.

NSDL and CDSL charge for both the options. The PIN or password-based transfer to pre-notified accounts is cheaper, as some brokers levy a ₹120 fee as annual maintenance charge. The service, which allows transfer to any demat account using digital signature is costlier, with some brokers charging as much as ₹1,000 as yearly maintenance.

If an investor wants to allow another person to operate the account on his behalf, he needs to execute a power of attorney (PoA) agreement that needs to be submitted to the depository. In case of a joint account, one of the owners needs to give PoA to the other to avail of the service. These services also come with other benefits. The client can check the account balance and get the statement for transactions. This helps in checking whether the broker-provided information is genuine or not.

A demat account holder needs to sign up for these services at depositories’ websites. The depository will provide a form on sign up, which the investor must submit with its broker (or DP). Only after the DP authorizes the request, the services will be enabled. Once activated, the client will get the password and a smart card.

More control

If you are an investor who does not trade regularly, the depositories also offer an option to freeze the account for debit or credit of securities. A client can also specify a stock or the number of stocks that he wants to freeze. Once you freeze your demat account or a stock, the broker cannot transfer securities out of it. The charge for this is capped at ₹125 for each instruction. Say, an investor has a long-term portfolio, where he doesn’t sell stocks. He can freeze debit from this account. In this case, the stocks he buys would be credited to the account, but he won’t be able to sell any. In most recent scandals, brokers found loopholes in regulations and debited clients’ account to transfer securities to the demat accounts of their own.

The option to freeze the demat account is also available with the broker (or DP) without signing up for the depositories’ online services. But if you do it through the broker, it will take time to process this request. When you sign up for depositories’ services, investors can freeze or unfreeze the account whenever they want.

The tax fact

Transfer of securities to an account other than yours can attract tax. Typically, when you sell shares, only the gains are taxed. But when you transfer shares without any consideration to someone else, it would be considered as gift. It’s the recipient that has to pay tax on gift, not the donor. “If an individual gifts an asset to close relatives, including spouse, parents and children, the recipient does not need to pay tax. You can add demat account belonging to them as trusted account,” said Naveen Wadhwa, deputy general manager, Taxmann.com, a platform that provides tax research-related services.

Lending of securities without consideration does not attract any tax from either the lender or the borrower. In case you need to temporarily transfer securities to another account, it’s better to transfer them to one of your accounts.