How to reactivate Trading Account
Many Investors open trading accounts exclusively for conversion of physical shares, for IPO application, and more. Such accounts tend to be inactive once such objectives are achieved. Further, the debacle of Karvy stocks. Broking has been a stepping stone in tightening regulations surrounding trading in securities. It has raised concerns over the fraudulent use of trading accounts and related repercussions. With the revised regulations regarding trading accounts, the government aspires to maintain stricter control and instil vigilance amongst investors. But, how do you know if an account is inactive?
What is an inactive trading account?
An inactive trading account is when there has been no trading activity within a specified period. Earlier, such period was defined by each intermediary independently, typically ranging from eleven months to five years. However, the advent of trading account related misfeasance has distinctly defined the period of inactivity. If an account does not have any trading activity for a year, then it is termed an inactive or dormant account. Dividend receipt or corporate action such as stock split, bonus among others is not considered as account activity. The depository participant is mandated to report it as an inactive account.
What happens to a dormant trading account?
Once an account is marked as inactive, you cannot trade until the account is reactivated. Any debit or sale activity in a dormant account is viewed as being sensitive by the intermediary. Controls and systems are established which require such sale to be authorized or the account to be reactivated prior to the execution of the transaction. Reactivation of the account takes anywhere between five to seven days. The intermediary may intimate the clients in advance about account inactivity and eventual classification as a dormant account so that the client may take corrective action.
How to reactivate Trading Account?
To understand the process to reactivate a trading account, it is essential to understand the difference between a trading and a demat account.
Demat vs Trading Account
Most intermediaries offer a 2-in-1 account which includes a Demat and trading account. Thus, investors tend to be unaware of the difference between both accounts.
The purpose of a Demat account is to hold the securities owned by an investor. On the other hand, a trading account is required to transact in the securities held in a Demat account. A trading account provides markets access to the investor, facilitating the purchase and sale of securities in the market.
It is possible to own a Demat account without any underlying trading account. For example, in the case of an IPO application, while a Demat account is mandatory, a trading account is not. However, a trading account is required to further sell shares allotted in an IPO. In addition, it is worthwhile to note that multiple trading accounts may be linked to a single Demat account and vice-versa.
Therein lies the opportunity for malicious use of trading accounts. In order to curb such malpractices, SEBI has introduced guidelines around dormant accounts and reactivating trading accounts.
The first step to reactivate a trading account is KYC verification. KYC verification may be done online or by physically submitting the required documents. In-person verification may be mandated at times. However, given the COVID-19 pandemic, in-person verification is done online using a camera provided adequate controls are maintained.
The specific procedure to reactivate a trading account varies with each depository participant but the basics remain constant. A request letter needs to be submitted to the depository participant to reactivate the trading account. The letter may be delivered to the head office of the intermediary. Alternatively, the process may be digital if such a service is offered by the depository participant. PAN card and address proof may be required to be submitted along with the reactivation request.
In the case of the Demat account, a periodic charge is levied even in case of inactivity. For trading accounts, such cost is minimal or non-existent. Any pending dues to the intermediary must be cleared prior to reactivating the trading account.
Reactivating a trading account has a dual benefit – reduces cost and increase accessibility to markets. The cost associated with maintaining multiple dormant trading accounts can be eliminated by reactivating and consequently closing the trading account. This also protects the investor from falling prey to scammers. By reactivating a trading account, a trader has access to buying and selling opportunities presented by the market. It is imperative for any investor to limit the number of trading account(s) to a bare minimum.
Final Words
Trading in the securities markets provides a host of opportunities. At the same time, it requires every investor to be vigilant and proactive. A long-term investor may not require an active trading account at all times while a short-term investor may have multiple trading accounts. In both cases, the investor must be aware of the risks involved and establish adequate mitigants.