Why Dormant Demat accounts should be monitored

Introduction

If you want to increase your wealth and return on your investment, investing is a must. The idea of opportunity cost states that money in a lockbox is safe but it can accumulate a significant opportunity cost. If you invest the money, you could generate returns.

Although keeping your money in a bank is a safe and reliable way to earn some returns, diversifying your investments can help you increase your returns. Trades in the Securities Market are one way to do this. The securities market offers many options, including individual stocks, mutual fund, electronic traded funds or ETFs, Bonds and derivatives. An investor will need a Demat account to buy and store securities.

What's a Demat Account?

Demat accounts are held with a broker or depository participant. However, the account belongs to the account holder. Demat accounts allow individuals to purchase, store, and sell securities. They act as a link between an individual and the market through the facilitation of the depository participant. There are many depository participants (DPs), each offering a different set of services. A Demat account can be opened with a full-service broker who will help them trade, or a Demat Account with a discount broker where they can trade all by themselves. An individual could also open an account with another DP to help them purchase gold ETF's.

You will likely end up with multiple Demat accounts, each with a different DPS. What happens to your Demat account when you stop trading in securities markets through this Demat account? Let's look at what happens when a Demat accounts is not used, how to monitor it, and why it is important to keep your account active.

What happens to a Demat account?

If the account is inactive for a prolonged period of time, it goes into dormancy. However, the exact time period depends on which DP your Demat account is registered with. If you notice that your Demat account has not been used with a particular DP, which is possible if you have multiple Demat accounts, then you should check your dormant Demat.

It is important to prevent your Demat account becoming dormant. However, there are a variety of circumstances that could make it impossible to use the Demat account to trade. This situation could mean that the account is not accessible to the user. However, the account should be monitored to ensure that no unusual activity is detected. If they do notice unusual activity they can take immediate action to prevent it from becoming inaccessible.

Why monitor your dormant Demat accounts?

There have been a few instances in the past where a Defunct Demat account was the target of scammers looking to make illegal trades for a variety of reasons. Let's look at how someone could misuse an inactive Demat bank account. This could lead to them engaging in illegal activity that could impact the original Demat account owner.

Fraudsters often use dormant Demat accounts to engage in front running. Front running refers to the act of buying and selling shares using inside information about the share price. This allows the fraudster to increase their returns through their personal account. A scammer might access a dormant Demat Account. This is done by altering the KYC information. The original owner has no knowledge that any activity took place through their account. This Demat account could then be used by them to front-run.

Imagine a broker receiving a large order to purchase 800,0000 shares of stock. A broker understands that an order of such magnitude is likely to impact the stock's price. Therefore, they purchase the stock first in their own account in order to sell at a higher price when the order is processed.

Dormant Demat accounts give those who are involved in this scheme additional anonymity and reduce the chance of them being caught. It is less likely that a fraudster will be caught if they purchase stock to front-run through an inactive Demat account than if they did it through their personal Demat accounts.

Conclusion

Experts recommend freezing your Demat account if you don't plan to use it for a prolonged period. It will prevent operations from accessing the account. This will make transactions and possible frauds impossible. Even if you don't intend to freeze your Demat, if it goes into dormancy it is recommended that it be kept track of and that you pay attention for any suspicious transactions. Scams are often perpetrated through alteration of KYC documents. If you don't look for it, you won't be notified about unusual activity in Demat account. Keep track of all Demat accounts to ensure you don't fall for deceptive Demat account scams.