By: Tarun Thakur
INTRODUCTION
Recently in the month of October 2023, Securities Exchange Board of India (hereinafter ‘SEBI’), in its exercise of powers under Section 11(1) of Securities and Exchange Board of India Act, 1992 (hereinafter ‘SEBI Act’) released a circular, which has been in effect from 1st January, 2024. The circular introduces a centralized mechanism system for reporting the demise of an investor through KYC Registration Agencies (hereinafter ‘KRA’). The new mechanism aims to streamline the process of reporting and transmission of securities after the investor’s demise to the nominees or legal representatives of the investor. This regulation is a much-needed reform as earlier there was no centralized system of reporting and transmitting securities, and for different securities like mutual funds and physical shares, there existed different methods of transmission. The main intent behind bringing this new mechanism is that previously there was no proper system to record demise and, in some cases, there was no recognition of demise by the intermediaries resulting in non-recognition of the dead demat accounts which further created a hurdle for transmission of securities. Therefore, by bringing in this circular, SEBI made a crucial breakthrough from the previous norms which were ineffective, and the new mechanism is expected to ensure that there is unerring data available about the demise of the investor and the dead demat accounts.
INTENT BEHIND THE NEW MECHANISM
This system has been introduced by SEBI as there was a surge in cases where the investor’s demise was not reported and, in some cases, nominees were handling the account after the demise of the investor. There was also a problem about how the regulators will get to know that the investor has died and how the securities will be transferred. Before the new mechanism, it was difficult to transmit securities as the demise of the investor would go unreported and instead of transmission, securities would go unclaimed as same is reflected by the data which says that nearly 82,000 crores are lying in unclaimed bank a/c, mutual funds etc.
Though these problems were existing from a long time now, the watershed moment which spurred SEBI to introduce the new mechanism is the recent case of Prem Lata v. SEBI, which can be attributed as the main genesis of this. In this case , there was a trading account of an investor who died in 2012, but his widow continued to trade through that account until 2017 when the broker defaulted and the complaint was filed with the National Stock Exchange (hereinafter ‘NSE’) by the widow; but the Member and Core Settlement Guarantee Fund Committee of NSE declared the claim as not admissible under Investor Protection Fund (hereinafter ‘IPF’), basing its reasoning on the fact that the claim was for the trades that were executed after the death of the investor. The same was appealed by the widow of the investor and Securities Appellate Tribunal (hereinafter ‘SAT’) held that no assumptions can be made and it cannot be assumed that upon the death of the investor the account will automatically cease to exist. By stating this, SAT allowed the appeal and ruled that the claim is admissible. In this case, the tribunal ruled that this case should not be treated as precedent, now why the SAT stated this is unclear as of now. As in this case the death of the investor was not reported, SEBI realized the problems that can arise from non-reporting, and as a result, SEBI notified the circular only after two months of the judgement.
NEW MECHANISM: UNLOCKING THE BENEFITS
The foremost thing about the new regulation is that it is the first globally centralized reporting system and no other country has this kind of system in place. Earlier, there were different reporting system for different securities and transmission process was also different for each security. Now after this centralized system has been placed, there will be only one single process, and nominees or family members of the investor do not need to get in to any additional process and submit any additional documents.
Secondly, after this regulation, the number of frauds in the securities market are expected to decrease as also mentioned in the guidelines that once the death of the investor is verified, all intermediaries shall immediately block all debit transactions requested from that account. As a result, no one except the rightful nominee will be able to request any transaction from the account, this will ultimately help in curbing fraud. The new mechanism will also help in dealing with the unclaimed assets problem as the new mechanism will help nominees in claiming the securities that otherwise would have gone unclaimed.
Another major benefit is that, earlier, the succession to securities was not easy and there were no specific rules or regulations which precisely laid down the procedure as to how the securities will be transmitted after the demise of the investor. So now this new mechanism is expected to fill in the lacunas that were present earlier as the current mechanism is comprehensive in nature and lays down all the procedure that needs to be done after the investor’s demise clearly.
GAPS IN THE NEW MECHANISM
Irrespective of the fact that the current mechanism is comprehensive in nature, there are some gaps which still need to filled.
First is that the new mechanism only mentions that upon intimation of death by the investor, the process of transmission of securities will start, and is silent on what course of action will be employed if the nominees or family members of the investor do not report the death, because if there will be no reporting, the whole purpose of the new mechanism will be defeated. The new mechanism should have incorporated the outreach attempts/or some compliances which must be done by the intermediaries to check if the demat account is still active or not, the intermediaries can also be mandated to conduct some regular checks like engaging with the investor in different ways like via email, calls and make it compulsory for investor to acknowledge that message.
Another concern which needs to be addressed is that what should be done if an investor does not have filed any nominees. In such case, who will report, and even if reporting is done by someone else, then how the securities of that person will be dealt with. This is a major concern but the guidelines are silent on this point. What needs to be done is that SEBI should make it compulsory for an investor to file a nominee so that on the demise of the investor, his securities can be dealt with. However, this requires extensive public consultations as to how to procced further and fill this gap.
Another concern which SEBI needs to address is to ensure that intermediaries and all the stakeholders comply with the new rules as the new mechanism does not stipulate any penal provisions if there is any non-compliance by any of the stakeholder. SEBI must keep track within the securities market about how much compliance is being done by the intermediatory and other stakeholders.
CONCLUSION: THE WAY FORWARD
As long as death is certain and panacea to death still needs to be discovered, the mechanism brought in by SEBI was need of the hour, otherwise, as highlighted before, the death of an investor would go unrecognized which will further give birth to other complications. The comprehensive framework notified by SEBI is a strong step as earlier there was no framework dealing with reporting of an investor’s death. However, some concerns still need to be addressed as the full efficiency of the new mechanism hinges upon the successful dealings of the concerns which were also discussed earlier.
While the new guidelines present a significant leap, there are some boxes which still need to be ticked. SEBI’s needs to be proactive in its approach and track the changes in market dynamics is imperative. Time will tell how the situation will unfold and what issues may further arise, which will need to be resolved by SEBI as to bolster the new framework and make it a true masterstroke.
(Tarun Thakur is a law undergraduate at National law University, Odisha. The author may be contacted via mail at tarun.thakur0709@gmail.com)
Cite as: Tarun Thakur, SEBI’s New Centralized Reporting Mechanism: A Masterstroke or Not?, 25 January 2024<https://rmlnlulawreview.com/2024/01/25/sebis-new-centralized-reporting-mechanism-a-masterstroke-or-not/> date of access.
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