Why you should monitor dormant demat accounts and tips to prevent misuse of KYC documents

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With long-term investments being the mantra for success in the stock markets, every depository participant (DP) has hundreds of demat accounts that have stocks of good companies lying there.

With long-term investments being the mantra for success in the stock market, every depository participant (DP) has hundreds of demat accounts with stocks of good companies.

While the DP is responsible to safeguard the holdings in the demat account, the illegal diversion of securities by Karvy Broking that came to light last year, raised concerns among investors regarding the safety of holdings in their demat accounts.

One of the best ways to prevent such misuse, according to Harsh Jain Co-founder and COO of investment platform Groww, is to keep the demat account active since dormant accounts are usually targets of rogue stockbrokers.

However, there are chances when investors are unable to make any transaction in the demat account for a long period. As a result, the account becomes dormant.

 

There is no fixed rule on how long a demat account will be allowed to remain inactive before being classified as dormant. It varies on the agreement between the DP, bank, or broker and the customer.

While the users may not be able to continue with the transactions, Jain advises them to at least monitor the accounts regularly so that they can identify any fraudulent transactions and take corrective action. Investors can also freeze their demat accounts if they don’t intend to transact for an extended period.

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This is important as a couple of instances have come to light where scamsters are known to have misused dormant demat accounts for carrying out illegal trades.

Let’s first understand how scamsters can misuse a dormant demat account:

After identifying a dormant trading account, a scamster can update material information in KYC, for instance, mobile number, bank account details etc, before executing trades. Thus, the registered owner of the said dormant trading account may have no knowledge of transactions taking place from his/her trading account.



Here, the mastermind, after getting his hands on documents required for KYC, may open the ‘Account Set’. Thus, the account set would be opened by misusing KYC documents.

In such a scenario the person to whom the documents pertain does not even know that an account has been opened in his/her name.

Here are some quick tips to help investors protect against misuse of their KYC documents:

According to Jain, investors must write the date and purpose of submission on any said document and sign them while submitting KYC. They can also specify ‘Not to be used for any other purpose’ clearly on the submitted documents.’

 

Most investors keep the login IDs and passwords, copies of KYC documents, etc., stored on their mobile phones. Therefore, if they lose or change their phones, they must ensure that all such information is deleted.

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