Chapter 4: Functions of DP - Account Opening

Under the depository framework, investors open electronic securities accounts known as Beneficiary Owner (BO) Accounts or Demat Accounts. Demat accounts are broadly categorized into:

1. Beneficiary Accounts: Maintained by individual retail investors, joint holders, Hindu Undivided Families (HUFs), corporate bodies, trusts, societies, and partnership firms to hold securities for investment purposes in their own name.
2. Clearing Member (CM) Accounts: Maintained by registered stockbrokers/clearing members to facilitate the receipt, pooling, and settlement of securities during exchange trade cycles.
3. Basic Services Demat Account (BSDA): A low-cost demat account framework mandated by SEBI for retail individual investors with small portfolio sizes to reduce transaction costs and foster financial inclusion.

BASIC SERVICES DEMAT ACCOUNT (BSDA) SLABS

Criteria for BSDA: The account holder must be an individual sole or first holder, must hold only one demat account across all depositories where they are the sole/first holder, and must maintain an overall portfolio value within the specified thresholds.

To open a demat account, an applicant must undergo the standard Know Your Customer (KYC) process mandated by SEBI and the Prevention of Money Laundering Act (PMLA), 2002:

1. Mandatory Identity and Address Verification Documents

• Permanent Account Number (PAN): Mandatory for all demat accounts without exception. The PAN is verified online with the Income Tax Department database.
• Proof of Identity (PoI): Officially Valid Documents (OVDs) including Aadhaar card, Passport, Voter ID card, or Driving License.
• Proof of Address (PoA): Aadhaar card, Passport, Voter ID, latest utility bills (electricity, water, telephone/broadband not older than 2 months), or registered rent agreement.
• Bank Account Details: A personalized cancelled cheque leaf, bank passbook, or bank account statement (not older than 3 months) carrying the investor's name, account number, and IFSC/MICR codes. Linking a valid bank account is mandatory to enable automated direct electronic credits for dividend and interest payments.

2. In-Person Verification (IPV) and Video KYC

SEBI mandates that every intermediary must conduct In-Person Verification (IPV) of the client before activating a demat account:

• Physical IPV: An authorized official of the DP verifies the physical applicant in person, checks original documents against submitted photocopies, signs the KYC form, and affixes an IPV stamp with their employee name, code, and date.
• Digital Video In-Person Verification (VIPV): Enabled by SEBI to facilitate contactless account opening. The client engages in a live video interaction where geo-location tagging, time-stamping, randomized question verification, face-matching against Aadhaar/PAN records, and live OTP verification are conducted.

Different legal entities require tailored constitutive documentation to establish authority and beneficial ownership:

• Hindu Undivided Family (HUF): PAN card in the name of the HUF, HUF declaration signed by the Karta and all adult coparceners, identity and address proofs of the Karta, and bank statement in the name of the HUF. The account is opened in the name of the Karta followed by '(HUF)'.
• Minor Account: Birth certificate or school-leaving certificate of the minor proving date of birth, PAN and KYC documents of the natural or court-appointed legal guardian. Cannot be opened jointly; operated exclusively by the guardian until the minor attains majority.
• Corporate Body (Company): Certificate of Incorporation, Memorandum and Articles of Association (MoA & AoA), Board Resolution authorizing account opening and designating authorized signatories, PAN of the company, and KYC of authorized signatories and beneficial owners.
• Partnership Firm: Certificate of Registration (for registered firms), Partnership Deed, Authorization Letter signed by all partners designating authorized signatories, PAN of the firm, and KYC of all partners. Note: Since a partnership is not an incorporated body, the demat account is opened in the individual names of the partners.
• Trusts & Foundations: Certificate of Registration of Trust, Trust Deed, Board of Trustees Resolution authorizing demat operations, PAN of the trust, and KYC of all trustees.
• Non-Resident Indians (NRIs): Indian PAN card, foreign address proof, copy of Indian passport with valid visa or Overseas Citizen of India (OCI) card, bank account confirmation specifying whether account is NRE (Non-Resident External - Repatriable) or NRO (Non-Resident Ordinary - Non-Repatriable), and Portfolio Investment Scheme (PIS) permission letter where applicable.

Understanding the architectural differences between NSDL and CDSL account numbering is critical for depository professionals:

+-----------------------------------------------------------------------------------+
|                        DEMAT ACCOUNT NUMBERING STRUCTURE                          |
+-----------------------------------------------------------------------------------+
|                                                                                   |
|  NSDL FORMAT: 16-Character Alphanumeric                                           |
|  +---------------------------+-----------------------------------+                |
|  |       "IN" + 6 Digits     |             8 Digits              |                |
|  |     (Depository DP ID)    |      (Beneficiary Client ID)      |                |
|  +---------------------------+-----------------------------------+                |
|  Example:  I N 3 0 0 1 2 3   -   1 0 2 9 3 8 4 7                                  |
|                                                                                   |
|  CDSL FORMAT: 16-Digit Purely Numeric (BO ID)                                     |
|  +---------------------------+-----------------------------------+                |
|  |          8 Digits         |             8 Digits              |                |
|  |     (Depository DP ID)    |      (Beneficiary Client ID)      |                |
|  +---------------------------+-----------------------------------+                |
|  Example:  1 2 0 8 1 6 0 0   -   0 0 1 2 3 4 5 6                                  |
|                                                                                   |
+-----------------------------------------------------------------------------------+

• NSDL Structure: Total length is 16 characters. It always starts with the two alphabetic letters "IN", followed by a 6-digit DP identifier (e.g., IN300123), followed by an 8-digit client identifier (e.g., 10293847).
• CDSL Structure: Total length is 16 digits, purely numeric. The first 8 digits represent the DP identifier (e.g., 12081600), and the remaining 8 digits represent the unique client beneficiary identifier (e.g., 00123456). This 16-digit composite number is commonly termed the Beneficiary Owner ID (BO ID).

Historically, stockbrokers collected broad Power of Attorney (PoA) documents from clients, allowing them to debit securities from client demat accounts for settlements. To prevent systemic misuse, unauthorized pledging, and fraud, SEBI phased out PoAs for secondary market transactions and replaced them with the strictly limited Demat Debit and Pledge Instruction (DDPI) framework:

COMPARISON: POWER OF ATTORNEY (PoA) vs DDPI

Nomination provides a simplified, non-discretionary mechanism to facilitate the orderly transfer of securities upon the demise of an account holder:

• Maximum Number of Nominees: An individual demat account holder (sole or joint) can appoint up to three nominees.
• Percentage Allocation: The account holder must specify the percentage share of securities allocated to each nominee, and the aggregate total must equal exactly 100%. If no percentage is specified, the securities are distributed equally among all valid nominees.
• Nomination for Minors: A minor can be appointed as a nominee, provided the account holder appoints a natural or court-appointed guardian to represent the minor nominee.
• Opt-Out Declaration: SEBI mandates that every individual opening a demat account must either submit a formal nomination form or provide a signed, explicit Opt-Out Declaration confirming their conscious decision not to appoint a nominee.
• Legal Status of Nominee: Under established Indian jurisprudence, a nominee does not acquire absolute beneficial ownership against legal heirs; rather, the nominee acts as a trustee and legal recipient authorized by the depository to receive the securities, holding them for the benefit of the lawful legal heirs entitled under testamentary or intestate succession laws.

Before activating a demat account, the investor and the DP must formalize the operational terms:

• Rights and Obligations Document: Replaced the cumbersome physical agreement format under SEBI circulars. Standardizes the statutory rights, responsibilities, liability boundaries, and dispute settlement processes between the investor and the participant.
• Tariff Schedule: DPs must provide a clear schedule of fees upfront, including account opening charges, Annual Maintenance Charges (AMC), transaction fees (debit charges), dematerialisation/rematerialisation fees, and pledge charges.
• Unilateral Modification Prohibition: DPs cannot increase fees unilaterally without providing a mandatory 30-day prior written notice to the client.
• Zero Account Closure Fee: Under SEBI regulations, no DP can levy any fee or penalty for closing a demat account, nor can they charge for transferring securities to another DP when an account is being closed.