Ghost Trades: SEBI’s New Mechanism for Centralised Recording of Investor Demise

Non-recognition of the demise of a demat account holder can give rise to multifarious complications in securities law, encompassing the determination of shareholder entitlements, adjudication of claims involving stockbrokers, resolution of disputes within stock exchanges, maintenance of accurate records within depositories, and the enforcement of investor protection and market regulatory measures by SEBI. Therefore, it is imperative to ensure meticulous and accurate recording of an account holder's demise within the framework of securities law.

An interesting case came before the Securities Appellate Tribunal (SAT) recently.

In a very recent matter of Prem Lata vs. SEBI & Anr. (SAT judgement dated August 23, 2023) a widow of an investor continued to trade using the trading account of her deceased husband for over 5 years and upon default by the stockbroker, lodged a claim with NSE. The Member and Core Settlement Guarantee Fund Committee of NSE rejected the claim as inadmissible under the Investor Protection Fund (IPF) on the ground that the claim was filed for the trades executed after the death of the accountholder.

The NSE Committee's decision was based on the premise that the agreement between the deceased husband and the defaulter / broker lost its effectiveness upon the husband's demise. As a result, any trades in the demat account after the account holder's passing could not be accounted for. Moreover, since the period between the account holder's death and the disabling of the broker's terminal exceeded 24 months, the widow's claim could, at most, be classified as a loan transaction. 

In the Appeal, the SAT held that in the absence of any provision, it cannot be presumed that upon the death, the trading account would cease to exist, and the record in the facts indicates execution of trades and settlement, even after the death hence the trading account continued to exist immediately prior to broker becoming defaulter. The Hon’ble tribunal, considering the peculiar facts and circumstances of the case, allowed the appeal stating that, the death of the Appellant’s husband has nothing to do in so far as the claim filed under IPF, and issued direction to the NSE Committee to process the claim of the Appellant and pass an appropriate order for disbursement of the claim amount within six weeks.

Apparently, on SEBI / NSE’s request, the Tribunal held that the relief granted in the peculiar facts and circumstances of the case “should not be treated as a precedent”. 

SEBI has recently issued a Circular No. SEBI/HO/OIAE/OIAE_IAD- 1/P/CIR/2023/0000000163 dated October 03, 2023 (“SEBI Circular”) introducing a centralized recording mechanism through KYC Registration Agency (KRA) for investor demise notifications. This aims to streamline the securities market transmission process and is to come into effect from January 01, 2024.

The SEBI circular outlines operational guidelines for regulated entities, including intermediaries dealing with natural person investors. Further, listed companies seeking to offer access to this centralised mechanism to their investors, who hold physical securities, can establish connectivity with the KRA through their Registrar and Transfer Agents (RTAs).

Typically, the designated nominees or legal heirs of the deceased account holder possess the rightful claim to the funds and securities held within the account. Following the submission of the necessary documentation, they have the authority to effectuate the transfer of these securities and funds to their respective demat and bank accounts.

Under the SEBI circular, when an intermediary is informed of an investor's demise from a joint account holder(s) or nominee(s) or legal representative or family member (hereinafter, “notifier”), the concerned intermediary must obtain the death certificate and PAN from the notifier. They must then verify the death certificate through online or offline means and keep a self-certified copy of identity proof, the relationship with the deceased, and notifier's contact details.

If the intermediary cannot access the death certificate, they'll flag the investor's KYC status as "On Hold" and request the death certificate from the concerned parties.

Upon verifying the death certificate, the intermediary must promptly submit a "KYC modification request" to the KRA, along with relevant documents. Debit transactions in the deceased investor's account will be blocked.

The KRA will independently validate and verify the request by the next working day, updating the KYC record as "Blocked Permanently" and informing linked intermediaries. These intermediaries must immediately block debit transactions and inform the notifier/nominee within 5 days, providing the transmission request form and document list for the transmission.

To ensure consistency, SEBI has asked Stock Exchanges, Depositories, and industry associations, such as the Association of Mutual Funds in India (AMFI) and Registrars Association of India (RAIN), to establish common Standard Operating Procedures (SOP) in consultation with stakeholders, including KRAs. These SOPs will be available on their websites and those of the intermediaries.

The lack of accurate data makes it uncertain how many dead demat accounts are still active, posing a potential threat to data integrity in the market. Therefore, precise record-keeping and prompt notification of investor decease are imperative for maintaining the efficiency of the financial market.

The SAT's identification of loopholes in SEBI and NSE regulations, along with SEBI's recent circular, represent significant strides towards enhancing and simplifying the management of demat accounts following the account holder's demise.

In accordance with the preamble, which has been enshrined as a statutory duty under Section 11(1) of the SEBI Act, 1992 it is noteworthy that the sequence places 'protection' ahead of 'promotion’ and ‘regulation' concerning the interests of investors and the securities market.

Commendable enterprise, and with effective implementation of this SEBI circular under Section 11(1), this initiative is poised to greatly enhance the efficiency and convenience of the share transmission process.

Sumit Agrawal is an author of a book on SEBI Act & a former SEBI Officer. 

Sonia Boob and Krishi Jain are Associates at Regstreet Law Advisors.