Investing is essential for those who are seeking to increase their returns and wealth. The concept of opportunity cost dictates that while money kept in a locker is safe, it amasses a large opportunity cost, as you could be generating returns on the money itself if you were to invest it.
While keeping money in a bank is a good and secure way to get some returns, one could also look to diversify their investments in order to increase returns. One such way is to trade in the Securities market. There are a wide number of offerings in the securities market, ranging from individual company stocks, mutual funds, electronically traded funds, or ETFs, Bonds, Derivatives to name a few. In order to purchase and store securities, however, an investor will require a Demat account.
What is a Demat Account?
A Demat account is held with a depository participant, for instance, your broker, though it belongs to the holder of the account. A Demat account allows individuals to buy, store and sell securities, functioning as a link between the individual and the market, facilitated by the depository participant. There are a number of different depository participants (DPs), with a variety having specific services they are known for and offer. For instance, an individual might avail of a Demat account with a full-service broker that will assist them in their trading, or they can open a Demat account with a discount broker, where they can do all the trading themselves with little to no assistance. Similarly, an individual might open an account with a different DP that might help them make purchases such as gold and gold ETFs.
It is likely that you end up with a number of Demat accounts with different DPS. However, what happens to your Demat account if you decide to stop trading in the securities market through that Demat account? In this article, let’s take a look at what happens to a Demat account when it is left dormant, how you can monitor your inactive Demat account and the importance of not leaving your Demat account dormant and unattended.
When does a Demat account go dormant?
An inactive Demat account enters a state of dormancy when it remains unused for extended periods of time. The exact duration of these time periods, however, is not uniform and depends on the DP the Demat account is registered with. However, if you notice that you have not used your Demat account with a certain DP (a possibility if you are operating several Demat accounts), then it is advised you check up on your dormant Demat account.
While it is advised that you prevent your Demat account from becoming dormant, to begin with, a number of situations could arise that make it difficult for one to employ that Demat account to trade. In this situation, while one might not be able to operate the account anymore, it is advised that they, at the very least, keep tabs on the account, to ensure that there is no unusual activity, and if they notice any such unusual activity, they are able to act quickly and efficiently.
Why should you monitor your dormant Demat account?
In the past, a number of instances have been noted, wherein a dormant Demat account has been the target of scamsters looking to carry out trades that are illegal, for a slew of reasons. Let’s take a look at how someone can misuse an inactive Demat account, resulting in them engaging in illegal activities that could have a bearing on the original owner of the Demat account.
Dormant Demat accounts are often employed by fraudsters to engage in a process known as front running. Front running is the process of buying or selling shares based on insider information on the price of a share, enabling the individual running the scam to generate increased returns through their personal account. For instance, a scamster might use a dormant Demat account they have gained access to (this is done through the process of altering the KYC information for a given Demat account, resulting in the original owner having no knowledge of the activity taking place through their account). They might then employ this Demat account to front-run.
Let’s say for example, a broker gets a large order to buy 800,0000 shares of a certain stock. The broker knows that an order of this scale is likely to affect the price of the stock, as a result of which they first purchase the stock in their personal account, in order to sell at a high when the client’s order is processed and the price rises.
A dormant Demat account allows those employing this process off the front running additional layers of anonymity, reducing the chances of them getting caught. If a fraudster purchases a stock to front-run from an inactive Demat account they have gained access to, it is less likely that they will be caught for front running, than if they were to do it through their personal Demat account.
Experts recommend that if you plan on not using a Demat account for an extended period of time, then you freeze your Demat account. This will make it unavailable to operations, making transactions, and as a result possible scams and misuse of the account, impossible. If you are not looking to freeze your Demat account, however, and it does enter a state of dormancy, then it is recommended that you keep track of the Demat account, and keep an eye out for any transactions that you might not recognise. Since scams often take place through the alteration of KYC documents, chances are you will not be notified of unusual activity in your Demat account, unless you go looking for it specifically. To ensure that you are not at the receiving end of Demat account-related scams, keep track of your Demat accounts, even if they are not actively in use.