Posted by: Pradeep | September 11, 2008

Frozen DEMAT accounts can make Govt. of India richer by 20k Crores

In a move that could spell the fate of 12 lakh frozen demat accounts, North Block has sought the law ministry’s opinion if the assets in the accounts constituted unclaimed property. If the law ministry terms the assets as unclaimed property, the government would take a policy initiative to forfeit them. The frozen accounts have assets of Rs 20,000 crore. 

The law ministry’s opinion has been sought on the ownership of the assets and whether they could be constituted unclaimed property. The government may have to bring an amendment in the Depository Act or a provision in the Income-Tax Act for forfeiture of the assets, if the law ministry gives a favourable opinion.

Finance ministry sources said the account holders had been given reasonable time and opportunity to comply with the norm of providing the permanent account number (PAN). The general view in the ministry is the accounts in which PAN has not been furnished till date could be benami. Quoting PAN was made mandatory after the initial public offer scam, in which multiple demat accounts were used to get allotments. 

While any new account opened after April 1, 2006, had to give PAN, the accounts opened prior to the cutoff date were given time till December 31, 2006, to comply. The two depositories — National Securities Depository (NSDL) and Central Securities Depositories (CSDL) — have suspended the demat accounts whose holders failed to comply with the norm. As on August 31, 2008, NSDL had 9.38 lakh frozen demat accounts while CSDL had 2.88 lakh such accounts. NSDL has 86 lakh active accounts with securities worth Rs 4,138,989 crore. 

At present, there is no provision in the law for forfeiture of unclaimed shares or extinguishing them under the companies law. In the case of dividends which lie unclaimed for more than seven years, the amount is transferred to Investor Education & Protection Fund. The unclaimed securities in the accounts could also meet the same fate. 

Further chance and reasonable timeframe of 5-7 years should be given to the account holders before the government decides on a course of action. They can treat the accounts as inoperative or suspended on the lines bank accounts are operated. They also need to establish a mechanism to ensure the depository contacts the frozen demat account holder and conveys the consequences of not furnishing the documents.

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