What Happens To My Shares If My DP Shuts Down?

Raghav was a worried man as newspapers were indicating that his DP could shut down. He had a portfolio of Rs2.50cr and he was worried about his shares if the DP closed. These shares were part of his company ESOP which he was planning to save for retirement.

DP closures are nothing new. In the last 20 years scores of depository participants (DPs) have shut shop. There are cases where licenses have been cancelled or DPs have defaulted or they voluntarily shut down. What happens to your shares in the DP; are they really safe?

Shares reside with the Depository not with the DP

The good news; don't need to worry about your shares even if your DP shuts down. Let us first understand the demat structure in India. There are 2 principal depositories in India (NSDL and CDSL); both promoted and owned by reputed government-backed institutions. The DP where you have your account is affiliated either to NSDL or CDSL or to both and all are regulated by SEBI.

Each DP account is either a NSDL or CDSL account and shares ultimately reside in these depositories. The DPs are only intermediaries acting on behalf of the depositories. Even if your DP shuts down, your shareholdings are safe with NSDL or CDSL. All you need to do is open a new DP account and do an off-market transfer of shares to the new DP. It is as simple as that. Ideally, your new DP should be an established and reputed player.

What if my broker and DP are the same entity?

This is slightly more complicated as some shares could be pending for delivery. If it is beyond T+3 date, escalate the non-transfer of shares to the head of broking and the compliance officer. Keep NSDL/CDSL and SEBI in the loop. When you suspect problems with your DP and plan to close the DP account, avoid putting fresh trades. Clean up your pending deliveries, take credit into your DP account and then do a simultaneous closure and transfer of your demat account. The DP may hold back account closure requests if there are any charges pending. In such cases, you must immediately pay up these charges and take acknowledgement of no-dues from the DP.

What if my broker and DP are different?

This can be a different kind of a challenge. Online trading platforms allow you to give power of attorney for DP debits where DP and broker are the same. However, if broker and DP are different, you would be giving debit instruction slips (DIS) to your broker for each sale transaction. Before closing the DP account ensure that there are no issued DIS in progress. Secondly, giving a signed DIS to your broker is a strict “NO”. If you have given, immediately take it back and document use of each DIS in detail. This must be mandatorily done before you surrender the DIS booklet to the DP at the time of closure.

Some ground rules to follow in such cases

If your DP has informed that they plan to shut down or if you suspect that your DP could shut down, here are some basic ground rules.

• Start the process of moving out your DP account immediately. Don't wait too long as things can get complicated as pressure builds up. It is best to be out before that.
• Avoid fresh trades in the trading account linked to that DP. You can either change the trading account along with your DP account or at least change the DP mandate for your trading account before putting further trades.
• In case your existing trading account is linked to this particular DP account, first ensure that all share credits are received fully before giving an application for DP account closure and transfer.
• Check for charges due on your DP account. The DP may hold back transfer-out of shares if there are outstanding amount in the form of annual maintenance charges, demat request charges, debit charges etc. These must be paid immediately and acknowledgement sought for the payment.
• In case there are any pledges in your DP account, you cannot close the DP account till these pledges / liens are removed. You must first sort this out and get the pledge removed before applying for account closure.
• There is no separate intimation required to the registrar of the companies you are holding. When the DP account gets shifted, the DP mandate for these stocks also gets automatically shifted for the purpose of dividends, bonuses, splits and rights.
• Keep print records of all correspondence, periodic demat holding statements; demat account statements and statement of charges to avoid mismatches when you close the DP account.
• Your DP shutting down is no real worry for your holdings. They are safe with the depository. You must immediately initiate the process of plugging the gaps.