Over the past few weeks, several investors have got emails from their brokerages that their trading accounts are being classified as “inactive" or “dormant" because they have not placed any trades from the account over the past one year. After the recent scandal that broke out in Karvy Stock Broking Ltd, stock exchanges have tightened the rules for classifying accounts as dormant through a standardized definition of inactivity—no trades for a year.
In the case of Zerodha, India’s largest stock broker by the number of active clients, as much as 40% of the client base comes under the dormant category. We tell you what the new rule is all about and what are its implications on you, the investor. We also tell you what you can do to reactivate your account.
The new rule
“Earlier, an account could be marked dormant or inactive based on the broker’s internal policy. A broker would generally classify an account as ‘inactive’ if there was no trading activity observed in the account for a period of ‘x’ months, ‘x’ defined by its internal guidelines. However, NSE, vide a circular dated 10 February, has standardized the period for marking an account ‘inactive’. According to the circular, an account shall be marked dormant if there’s no trading activity observed for a period of 12 months," said Venu Madhav, chief of operations at Zerodha.
The new dormancy or inactivity rules will apply to trading accounts and not demat accounts. A trading account is used to buy and sell stocks and other financial securities. A demat account, like a bank account, actually holds the stocks and securities that you own. “There’s no concept of marking a demat account ‘inactive’. The only provision available in the depository system is to ‘freeze’ a demat account. A demat account holder can voluntarily request for his account to be kept under ‘freeze mode’ during which time no debit transactions take place. This is usually done when the investor does not intend to carry out any demat transactions in his account for long periods of time and thus needs to safeguard the account from possible misuse. A ‘freeze’ request can also be given for both debit and credit instructions," said Madhav.
Brokers explained that no further transactions can be made through a dormant or inactive account until the KYC (know your customer) procedures are done once again. “A client desirous of trading will have to reactivate the account by complying with the reactivation rules of the stockbroker, which usually involves carrying out a re-KYC along with an in-person verification (IPV)," said Madhav. The IPV process requires the broker to verify and validate the documents provided by the client in person. Recent regulations have allowed brokers to carry out the process of IPV over the webcam as well.
However, you may not have to shell out anything extra to reactivate the account. “There are no direct costs involved. But the client will have to go through due diligence and submit documents for getting the account reactivated," said a spokesperson for Axis Securities Ltd.
The time taken to do KYC depends on the broker’s policy.
While some brokers advise investors to keep their accounts active by conducting regular transactions, some others said that may not be required since the KYC process to reactivate the account is fairly simple and involves no charges.
“A trade should be carried out if it warrants merit. The process of investing is already complex enough and is filled with uncertainties. It isn’t prudent to carry out a trade just to keep an account active, especially in today’s times where with the emergence of tech-first brokers like Zerodha the entire process can be done online and the account is reactivated seamlessly," said Madhav.
If you are among those investors whose trading accounts have been deactivated, do not get unduly worried. You simply need to go through the KYC process once again whenever you wish to resume trading.
If you are a buy-and-hold investor, you may not need to trade for a prolonged period of time. Hence, keeping your trading account active by conducting trades just for this purpose may not make sense for you.