SEBI Releases Framework for Auto Deactivation of Trading, Demat Accounts for Inadequate KYCs
Moneylife Digital Team 29 July 2022
Securities and Exchange Board of India (SEBI) has released a framework for automated deactivation of trading and demat accounts in cases of inadequate know-your-customer (KYC) norms. 
 
In a circular issued on 29 July 2022, SEBI says, "...all market infrastructure institutions (MIIs) shall deactivate all trading and demat accounts, i.e. implement a restraint or freeze on debit and credit (except for corporate actions) of all trading and demat accounts of the entity based on the entity's permanent account number (PAN), within five working days from the last unsuccessful delivery report."
 
"MIIs shall send an email and SMS to the entity before deactivation. It is clarified that if one of the MIIs is able to deliver the SCN or order, as the case may be, to the entity and obtain signed acknowledgement, then none of the accounts of the entity shall be deactivated. However, the MIIs, through their registered intermediaries, shall ensure that the KYC records linked to all accounts held by the entity are updated, and accurate and confirm the new KYC details to the concerned KYC registration agency (KRA)," it added.
 
However, while enforcing the deactivation of trading or demat accounts of such entities, pending pay-in and pay-out obligations and open positions may be permitted to be settled, squared off or closed out, as the case may be, the market regulator clarified.
 
Further, MIIs are required to ensure that they communicate the details of the deactivation along with the reasons thereof to the respective registered intermediary. SEBI says, "They (MIIs) shall also ensure that the reasons for the deactivation are displayed in a clear and unambiguous manner when the entity attempts to transact using his trading and demat account."
 
The framework would also apply to joint accounts. However, SEBI says, before deactivating the joint accounts, MIIs should endeavour to contact the entity through the co-holders for delivery of show-cause notice (SCN) or order simultaneously by following the same process.
 
According to SEBI, every address recorded to comply with KYC procedure has to be accurate and an intermediary has to update the address from time to time. However, it says that, in some cases, accurate or updated addresses of clients are not maintained. "This is borne out of the fact that when SEBI issues any notices during any enforcement proceedings on such addresses, the same remain unserved."
 
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