As ₹500 crore of unclaimed wealth piles up, Sebi streamlines a returns process

The markets regulator has now proposed guidelines to ensure that such unclaimed assets are not misused and returned to investors at the earliest. In a consultation paper, Sebi has outlined a process involving brokers and stock exchanges. Here is how this will work.

Defining ‘unclaimed’

If unutilized funds or securities cannot be credited back from a client’s broking account to their bank or demat account in the normal course of business, or the client is not reachable, the broking account shall immediately be put under ‘enquiry status’ and the funds in it be termed as ‘unclaimed’.

Brokers are required to return unutilized funds from a client’s broking account to their bank account periodically. If a broking account is inactive for 30 consecutive days, the funds in it need to be credited back as per the monthly settlement cycle—i.e., the first Friday of every month. 

For active accounts, unutilized funds need to be credited from a client’s broking account to their bank account on the first Friday of every month or quarter, as per the client’s preference.

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Shares are required to be transferred to a client’s demat account a day after the client punches the buy order—i.e., on a T+1 basis. If the broker is unable to transfer the securities to the client’s demat account, the client’s broking account will be placed under ‘enquiry status’ and securities in it will be termed as ‘unclaimed’.

Such transfer failures can happen if a client’s bank account (for receiving funds) or demat account (for receiving shares) has turned inactive or the account details are incorrect.

The unclaimed funds or securities can also be transferred to a client’s nominee or legal heir if the client has passed away and their bank or demat account has been closed.

Treatment of unclaimed funds

Brokers shall set aside the unclaimed funds of clients in investment vehicles having the ‘least market risk’, such as liquid or overnight mutual fund schemes and fixed deposits, and upstream or transfer such funds to a clearing corporation. According to Sebi, this would help investors to at least earn a minimum interest rate on their unclaimed funds.

Upstreaming entails parking of funds in such investments and pledging them in favour of a clearing corporation.

“Once upstreamed, the funds remain pledged in favour of clearing corporation till a genuine client claim is verified by the broker,” said Mohit Mehra, vice-president, primary markets and payments, at Zerodha.

Brokers would need to ensure that such investments can be redeemed as and when an investor’s claims are received or can be transferred to the stock exchange after one year of being unclaimed.

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Brokers should make at least six attempts to reach out to a client before transferring unclaimed funds to the stock exchange.

If the funds remain unclaimed with the exchange for three years, they will be transferred to the exchange’s Investor Protection Fund (IPF). The client can still initiate a process to claim such funds from the IPF, but the total claim will be limited to the initial funds and interest accrued up to the fourth year.

Treatment of unclaimed securities

Brokers will need to transfer shares to stock exchanges after seven days of being unclaimed. Per Sebi’s proposed rules, brokers would need to pledge such shares in favour of the demat account of the stock exchange.

Corporate actions such as dividends and bonus shall be credited in the respective client ledger and be transferred (or pledged, in the case of bonus shares) to the stock exchange.

Role of exchanges

Once unclaimed funds or securities are transferred to a stock exchange, the exchange would have to make efforts to trace the clients based on the information available in the unique client code (UCC) database of exchanges, depositories, KYC registration agencies, etc. 

If such clients are found to be registered with other brokers based on the above databases, the stock exchange shall send text messages or e-mails to the clients regarding their unclaimed funds or securities, as per the available data.

The stock exchange too would be required to deploy such funds in ‘least market risk’ investments such as liquid funds, overnight mutual funds, fixed deposits, treasury bills, or central government securities.

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The stock exchanges will be required to play a supervisory role to ensure brokers follow each step as stipulated by Sebi while the unclaimed assets are with the broker. Brokers will have to register with one of the exchanges with nation-wide terminals for transfer of unclaimed funds or securities.

Exchanges will need to make sure that brokers contact the nominee of the client, employer, introducer of the client or any other related persons whose details are with the broker and who might know the whereabouts of the client.

Settling of claims

If a claim is received before the unclaimed funds or securities are transferred to the stock exchange, the broker shall verify the genuineness of the claim and settle it within five working days.

If the claim is received after the unclaimed funds or securities are transferred to the stock exchange, the broker shall verify the genuineness of the claim  and then approach the stock exchange within five days from receipt of necessary information such as bank account details of client, or their legal heir or nominee, client’s unique client code, client’s PAN, and other details, as may be required by the exchange.

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If there is a default by the broker, the unclaimed securities and funds will get transferred to the stock exchange and all subsequent claims by the client for the unclaimed funds or securities shall be made to the exchange directly. The exchange will be required to verify the genuineness of the claim and process it within 10 working days of receiving the necessary documents.

A streamlined process

“At a broader level, these steps will help streamline the process of tracking and tracing unclaimed accounts and facilitating return to genuine claimants,” said Deepak Jasani, an independent market expert.

Getting back unclaimed securities or funds can be a cumbersome process for the investors. The new proposals clearly specify timelines within which a broker is required to transfer unclaimed funds or securities to a stock exchange and the time-period within which the exchange is required to transfer funds to a client’s account (or legal heir or nominee) after the broker receives a claim. 

A well-defined process should make it easier for investors to get back unclaimed assets from brokers.