Why You Should Monitor Dormant Demat Accounts?

For those who are looking to maximise returns and wealth, investment is essential. In order to achieve better returns, while maintaining money in banks is a good way of securing some return, one can also diversify their investments. Trading on the stock market is one such way of doing so. The securities market has a wide range of offerings, including company shares, mutual funds, EIFs, bonds and derivatives. However, an investor will need a Demat account for the purchase and storage of securities.

But when you do not use your Demat account for a longer period, it becomes a dormant Demat account. To understand what a Demat account is dormant and to handle and monitor a dormant Demat account, read this detailed guide below.

What is a Dormant Demat Account?

If the demat account app has not made any debit or credit transactions for more than six months at a time, it shall be classified by the depository participant as inactive. Once your account is declared inactive, it will become dormant unless you continue to make any debit or credit transactions. The agreement you sign with the depository participant shall normally state the time required for the Demat account to transition from active status to inactive.

You cannot make any debit or credit transactions without initially activating the Demat account after a depository has marked it as inactive. You'll have to go back through the whole Know Your Customer process if you want to do this. In order to open a Demat account, you'll need to know what documents are required. Your depository participant can also charge you a fee for reactivation of the account.

How Does the Demat Account Turn Into a Dormant Account?

If the Demat account is not used for more than an extended period, it enters a state of inactivity. However, the exact length of those periods is not uniform and depends on the Depositary Party that registered Demat's account. However, it is recommended that you check your dormant Demat account if you notice that you have not used your Demat account with a certain DP option if you have several Demat accounts.

Although it is advised that a Demat account should be prevented from becoming inactive, first of all, there may be many circumstances that make it difficult for one to use this account in order to trade. 

In this case, it is recommended that even if the account holder may no longer be able to manage it, they at least monitor it to make sure that there isn't any strange behaviour and to be prepared to take swift action if they do.

Why Should You Monitor Your Dormant Demat?

In the past, a number of cases have been reported in which a dormant Demat account has been the target of fraudsters who seek to carry out illegal transactions for a number of reasons. Let's take a look at how somebody could misuse an inactive Demat account and then engage in illegal activities that may have implications for the owner of the original Demat account.

Fraudsters are often using dormant Demat accounts to carry out a process known as backloading. The act of purchasing or disposing of shares based on insider knowledge about a company's price, or "front running," allows the person behind the scam to profit from higher returns on their account.

For example, a fraudster may use a dormant Demat account they have gained access to through the process of changing the KYC information for a given Demat account, resulting in the original owner not knowing the activity taking place through their account. Then, they could utilise this Demat account to get an early advantage.

The dormant Demat account will allow those running this system off the front to run additional layers of secrecy, which reduces their chances of being caught. It is less likely that a fraudster will be caught for front running if he purchases stock from an inactive Demat account he has gained access to than if he does so through his personal Demat account.
Click here to know how to check demat account status.

How to Reactivate a Dormant Demat Account?

Reviving a Demat account that has been inactive is a simple procedure. See if your account is truly dormant by contacting the brokerage company or depository participant (DP) as the first step. This generally depends on how much you pay in maintenance fees and how long the account has been dormant.

Once your account has actually stopped functioning, you need to obtain an authorisation form from the broker or DP and provide it with necessary documentary evidence such as a PAN card, passport, etc. If the value of the shares in your account is not very high, you may also have to pay all outstanding maintenance payments and a reactivation fee to the depositor.

Your Demat account must continue to work once the reactivation process has been completed. To keep up to date with the status of your Demat account and to check your holdings, you can log on to your Demat account once every six months. However, it will not be prevented from being inactive just by checking your account. The purchase or sale of securities via your Demat account will be essential to the continued functioning of your account. This will ensure that your Demat account remains active and that your financial interests are protected.

Conclusion 
Experts recommend freezing your Demat account when you plan to stop using it for an extended period. Due to its unavailability for operations, transactions will be impossible, eliminating the possibility of scams and account misuse. However, if you do not intend to freeze your Demat account and it does go into dormancy, you should monitor the account and keep a close watch for any transactions you may not be familiar with.  Suppose you don't go looking for unusual activity in your Demat account. In that case, you likely won't be notified of any unusual activity in your Demat account, as scams often occur through the alteration of your KYC documents. Keep a record of your Demat accounts, even if they are not actively used, so that you are not at the receiving end of Demat account-related scams.