Operational Aspects of Investment Management PDF

CHAPTER 17: OPERATIONAL ASPECTS OF INVESTMENT MANAGEMENT LEARNING OBJECTIVES: After studying this chapter, you should understand about:  Investors and the investing process  Learn about PAN, KYC and other processes  Demat and Remat processes  The Power of Attorney (PoA) and other agreements  Processes involved for account opening of Non-Resident Investors (NRIs)  Change in status of special investor categories  Various Payment Instruments  Documentation required for financial advice  Process of investing in mutual funds through stock exchange platforms 17.1 Investors and the investing process 17.1.1 Who can Invest? Investors eligible to invest in the securities markets can be broadly classified into individual investors and institutional investors. Individual investors include resident investors who are competent to contract, Minors, Hindu undivided family (HUF), Non-resident Indians (NRIs) and Foreign Portfolio Investors (FPI). Individual investors invest and transact from the funds that are owned by them or borrowed by them. Typically, the ticket-size of their investments is small and these investors are spread out geographically. Institutional investors include companies, trusts, charitable organizations and societies. They may be financial institutions, portfolio investors, pension funds, insurance funds and banks, among other. They differ from individual investors in that they need to follow, a formal process for making and executing investment decisions. The charter of the institution and the laws governing it should enable investments as a permitted activity. The apex governing body of the institutional investor, usually the Board (or Trustees, as the case may be), has to approve (or authorize) the investment decisions. There may be guidelines that stipulate rules for asset allocation, choice of securities, management of risk and return, and the like. Investment decisions have to adhere to that approved pattern. Institutional investors transact through authorized signatories who are designated to execute the documentation pertaining to investment decisions on behalf of the institution. The 325 documentation, eligibility, tax treatment and process of investments also depend on the investor category. Sebi has introduced the concept of “Accredited Investors” which includes individual investors, Sole proprietorship,HUFs, Trusts, Partnerships, Companies that meet prescribed criteria on networth, income, assets under management, as applicable. Accredited investors are expected to have a greater ability and inclination for risk and therefore they have access to products that meet this profile. The offer document of a product or scheme specifically mentions the persons who are eligible to invest in the product or scheme on offer. Usually, the entities listed below can invest, subject to limits and restrictions laid down by the SEBI regulations, RBI’s norms, if applicable, and the offer document of the particular scheme. * Resident Individuals * Hindu Undivided family (HUF) * Minors through guardians * Registered societies and clubs * Non-resident Indians (NRI) * Persons of Indian Origin (PIO) * Banks * Financial institutions * Association of persons * Companies * Partnership firms * Trusts * Foreign portfolio investors (FPIs) * Insurance companies * Pension funds * Mutual funds 17.1.2 Client onboarding Process Investors need to fulfil certain mandatory requirements to be eligible to invest in various investment products. These pre-requisites may be imposed by the prevalent regulations, such as the need to be KYC compliant to be eligible to use any financial product or service, or they may be defined by the product or service providers and may be specific to investing in a particular product and will be specified in the terms of offer. Once these basic requirements are met then the specific conditions with respect to the instrument like a public issue or a mutual fund investment would have to be completed. For example a public issue is open for subscription during a limited period as notified by the company. The date on which the issue will open for subscription and the earliest closing date 326 are mentioned in the announcements about the issue. Investors have to make their application during this period. With effect from January 1, 2016 payment for applications made in a public issue must be made only using the ASBA (application supported by blocked amount) facility. ASBA is an application for subscription to an issue containing an authorization to the investors’ bank to block the application money in the bank account and release funds only on allotment. SEBI has introduced the use of Unified Payment Interface (UPI) with facility of blocking Funds (ASBA facility), as a new payment mechanism for retail investor applications submitted through intermediaries. 17.1.3 Terms of Offer The offer document of a financial product specifies the conditions to be fulfilled by a prospective investor and the documentation that will be needed to support this. Conditions may be laid down in terms of who can invest and how much can be invested in the scheme. Some products may exclude a certain category of investors from investing. For example, NRIs cannot invest in the small savings schemes of the post office. A product may also be launched for a specific category of investors such as provident funds and pension funds. Investment instruments may also have a certain minimum threshold amount for investment which may exclude small ticket investors from it, or there may be a ceiling on the maximum amount that can be invested. Pension plans of mutual funds may have an upper age restriction. Institutional investors, Hindu undivided family and individual investors not meeting the age criteria are not allowed to invest in these schemes. Insurance products may have specifications about age, eligibility and health check requirements. 17.1.4 Regulatory Requirements Investors must have a Permanent Account Number (PAN) issued by the Income Tax Authorities to be eligible to invest in most financial products in India. Exemptions may be given to certain category of investors or types of transactions. Barring these exempted transactions, providing PAN details is a mandatory requirement to invest in financial products and to access financial services such as banking, insurance, depository services and others. Capital market investments made through a demat account or in physical mode requires PAN card details to be provided. Investments in deposits with the Post Office Savings Bank, Post Office Savings Schemes and Savings Certificates by investor accounts that are classified as medium and high risk(based on the amount being invested being higher than Rs. 50,000 and the balance in all other schemes not exceeding Rs. 10 lakhs), have to provide the PAN card. Making a bank Fixed Deposits exceeding Rs.50,000 and insurance premium payments in excess of Rs. 50,000 requires the PAN card to be provided for verification. Contributions in 327 cash in excess of Rs. 50,000 to the NPS account requires PAN details to be provided. Opening a Tier II account with the National Pension System (NPS) also requires a PAN card. Similarly, the ‘Know Your Customer’ process has to be undergone by all investors in compliance with the regulations of the Prevention of Money Laundering Act, 2002. It imposes obligations on providers of financial services and products such as banking companies, financial institutions, mutual funds, insurance companies and other intermediaries, to verify and maintain the records of documents that establish the identity of all their investors. 17.1.5 Mandatory Investor Information An application for buying a financial product or subscribing to a financial service must be complete with respect to certain mandatory fields in the application form, without which the application can be deemed invalid and is liable to be rejected. The mandatory fields are typically marked or highlighted so that investors do not miss providing any such information. Name: The financial product or service is held in the name of the investor who is identified by name. In the case of mutual funds, shares and bonds, demat account, post office savings bank accounts and most company deposits a purchase application can be made by a maximum of 3 joint holders. In others, such as a fixed deposit with a bank or the senior citizens savings scheme and the NSC, there can be a maximum of two holders. A National Pension System (NPS) account is held in the sole name of the subscriber. Where an investment or account can be held jointly, the investors can decide on the mode of operation. The holders may have the option to operate the investment either jointly or on either or survivor basis. The name of the first holder is used to create the investment records. All payouts, such as dividend, interest and redemptions, are made in the name of the first holder. The tax benefits from the investments and any tax liability on the income accrue to the first holder. Correspondence regarding the investments is sent to the first holder. Names of all the joint holders are however maintained in the records. Signature: The signature of the investor is the identity of the investor in the records of the issuer. It is verified for every transaction. All valid transactions should carry the signature of the investor. In case of a joint application, the form must provide for signatures of all joint holders irrespective of the holding pattern. Address: The address of the first holder is mandatory in order to enable physical identification of the investor’s location. Address of the investor must match with the address and proof of address provided while completing the KYC formalities. Bank account information: The application form may require the investors to provide bank account details of the sole or first holder at the time of purchase. Account number, bank and branch details, type of account, IFSC code and MICR code has to be provided. This is the account in which the interest, dividends and redemption proceeds will be credited. Mutual funds and other investments in the capital markets such as, investing through a demat account, or in physical form inequities, bonds and debentures, in secondary markets or IPOs and most deposits made with companies, among others, require the bank account details to 328 be provided at the time of application. In case of products such as the NPS, bank account details are optional for the tier I account but mandatory for the tier II account. Bank account details are not required for applying to the POSB products though there is an option in products such as the Monthly Income Scheme (MIS) to get the interest credited to a post office savings bank account. Permanent Account Number (PAN): PAN has been notified as the single identification number for all capital market transactions. Barring some exempted small value transactions, it is compulsory for all categories of investors to quote PAN in the application form. Other financial products, such as fixed deposits with banks and post office and savings certificates, among others, also require the PAN card to be provided for investments over specified limits. The original PAN card is verified against a self-attested photocopy at the time of investment. KYC Compliance: KYC completion status of the applicant must be provided in the application form, and proof of being KYC compliant also needs to be provided at the time of making the investment. Risk Profiling : It is mandatory for an Investment adviser to undertake the process of risk profiling of the investor. This gives an idea about the position of the investor and the kind of risk that they are able to take. Risk profiling becomes the basis for the selection of various investment options for the investor. This is a requirement that the investment adviser should never miss out on and it should be made a part of the overall process. 17.1.6 Investor Folio or Account A folio number or account number, customer identity number or certificate number is allotted to the investor at the time of the initial purchase or investment or account opening. It is created by the investment product or service provider or their agent, such as the registrar and transfer agent, on receipt of a valid application. The information provided in the application form is captured to create a unique customer record. All transactions pertaining to the investment, financial or non-financial, are recorded under this. The identity number assigned to the investor must be quoted at the time of initiating any transaction pertaining to the investment. A certificate, passbook or an account statement giving details of the number allotted, investment made and the investor information that is captured for the records is given to the investor. Information of the investor used to create the account or folio includes name, status, contact details and bank account information if it is mandatory for the particular product or service. The mode of holding and operating the account, in case of joint holders, is also recorded. The nomination of persons entitled to receive the investment in the event of the death of the holders is also recorded. The folio or account conditions such as address, nature of holding 329 and operating the account, bank account information and nomination apply to all investments held under it. Some investment options such as the NPS, recurring deposits with banks and POS scheme and mutual fund schemes allow an investor to make additional investments in the same account over a period of time. The account number or folio number has to be quoted to enable this. In the case of mutual funds, investors have the choice of making subsequent investments in the same scheme or other schemes of the same service provider by quoting the existing folio number. The Unique Customer Identification Code (UCIC) recommended by the RBI to be used by banks and NBFCs for their customers also helps smoothening the process of establishing the investor’s identity and address across different products and services of the institution. Similarly, in the case of POS scheme products, an investor who has undergone the KYC process once to open an account or buy a savings certificate can just quote the existing account number or the certificate numbers in a new application at the same post office. The KYC verification need not be done again in such cases. Investments made in an open-ended mutual fund scheme after the initial or first investment is called an additional investment. Additional investments can be made in a lump sum or they can be in the form of a systematic investment plan where the investor commits to investing a fixed sum of money at periodic intervals. Additional investments being made under the same folio can be done using a transaction slip. Transaction slips are forms that can be used to carry out various transactions such as additional purchase, switch transactions, redemption and other such services in an existing folio. Transaction slips require minimum details to be filled in by unit holders. These details are name, folio number, scheme name and plan. Apart from this, the investor needs to fill in details with respect to the specific transaction that the investor wishes to carry out, and strike off the other fields. No further information of the investor needs to be provided. Proof of compliance with regulatory requirements of PAN and KYC also need not be provided separately. An application form can also be used to make an additional investment in the same folio by quoting the folio number. Investors holding an NPS account can make periodic investments into their Tier 1 or Tier 2 account by quoting the Permanent Retirement Account Number (PRAN) allotted at the time of opening the account. Investors can hold only one Tier I and Tier II account each in the NPS. Investors investing in the securities markets can consolidate all their investments into their demat account. Purchases and sales in the stock markets and mutual funds, investing in IPOs of shares and bonds can all be routed to the same account by quoting the demat account at the time of transaction. 330 17.2 PAN and KYC Process 17.2.1 Permanent Account Number (PAN) Permanent Account Number (PAN) is an identification number issued by the Income Tax authorities. Form 49A issued is the prescribed form to apply for a PAN. Proof of identity and proof of address must be provided while submitting the form. The Income Tax department has tied up with some organisations such as the Unit Trust of India (UTI) and National Securities Depository Limited (NSDL) who can accept Form 49A and verify the documents. Section 114 B of the Income Tax Rules lists the transactions that mandatorily require the PAN to be quoted. Most financial market transactions require the PAN details to be provided for all categories of investors, including NRIs and guardians investing on behalf of minors. Some investments or financial transactions may not require the PAN card details for small ticket sizes, but for higher amounts it may have to be provided. Where the PAN card is mandatory, the original is verified against the attested copy at the time of making the investment. For such transactions, in the event that the PAN is not available, then a declaration in form 60/61 giving details of the transaction has to be provided. For mutual fund transactions, the verification and attestation can be done at the distributor, broker or mutual fund’s office, or by a bank manager or a gazetted official. The investor’s financial advisor can also attest the PAN card, if the advisor has complied with the Know Your Distributor (KYD) norms and registered as such, with Association of Mutual Funds in India (AMFI).There are a few exemptions to the requirement for PAN card in mutual fund transactions. An attested copy of the PAN card is maintained by the Registrar and Transfer agent. Any subsequent transactions require the investor to mention the PAN. The PAN is then verified at the back-end from the investor records. Similarly, other service and investment product providers maintain the records of PAN card verification conducted and use it for future transactions and investments of the investor. Exemptions from PAN There are certain mutual fund transactions which are exempt from the requirement for submitting PAN. These are micro investments, i.e. investments upto Rs.50,000 in aggregate under all schemes of a fund house. The limit of Rs. 50,000 is reckoned on a rolling 12 month period or in a financial year. Micro investments in mutual funds made by individual investors alone are exempt from PAN requirement. Hindu undivided families and non-individual investors are not eligible for this exemption. Investments in mutual funds exempt from the requirement of PAN may be made as a lump sum investment or through a systematic investment plan. Such investors must enclose a copy of the KYC acknowledgement letter quoting ‘PAN Exempt KYC’ Reference 331 number obtained from the KYC Registration Agency along with the application form. Eligible investors must hold only one PAN Exempt KYC Reference number. Cash investments not exceeding Rs. 50,000 per mutual fund in a year is permitted for investors who may not have a PAN. Opening a Basic Savings Bank Deposit Account (BSBDA) does not require a PAN card. Similarly, insurance premium payments in cash up to Rs. 50,000 per transactions, cash contributions to the NPS account to the extent of Rs. 50,000 do not require PAN details to be provided. The PAN card is not a prescribed proof of identity for investments in Post Office Savings Bank deposits, schemes and savings certificates by investors categorized as ‘low risk’ based on the value of the investment being made and the balance of all previous investments not exceeding Rs. 50,000. 17.2.2 Know Your Customer Process In order to ensure that illegal funds are not routed into Indian markets, the government has promulgated the Prevention of Money Laundering Act (PMLA). According to this Act, the identity of those entering into financial transactions must be known and verified. The procedure to do this is known as Know Your Customer (KYC) norms. KYC norms apply for opening bank accounts, trading accounts, demat accounts, capital market investments, life and general insurance policies, investments in POSB products, fixed deposits, National Pension System (NPS) and other such financial transactions. Banks, depository participants, insurance companies, post office, brokers and other financial intermediaries conduct the KYC compliance process at the time of initiating a transaction with an investor. The KYC process involves verification of proof of identity and proof of residence of the customer. Investor’s identity has to be verified with a document carrying their photograph. Such identification can be a passport, driving license, voter’s identity card, Aadhaar Card and the like. Proof of address can be verified from address as stated in the passport, ration card, voter’s identity card, and latest utility bills. The KYC process also requires verification of the PAN card where available. It is mandatory for all investors who wish to invest in mutual funds to complete KYC formalities with a KYC Registration Agency (KRA). The e-KYC services of the Unique Identification Authority of India (UIDAI) have also been recognized as valid process for KYC verification. The client will have to authorize the intermediary to access the identity and address data from the UIDAI system. Investors making micro investments must comply with the KYC requirement through a registered KRA or UIDAI. The exemption available to micro investments from providing PAN details will continue to apply for the KYC process. The investors will have to quote the ‘PAN Exempt KYC Ref No.’ in the application form. 332 Registered Investment Advisers (referred to in the circular as Registered Intermediaries (RI)) make use of following technological innovations which can facilitate online KYC: eSign service is an online electronic signature service that can facilitate an Aadhaar holder to forward the document after digitally signing the same. The eSign signature framework is operated under the provisions of Second schedule of the Information Technology Act and guidelines issued by the controller. e KYC and Technology Technology is playing an increasing role in making the investment process simpler and there are new guidelines with respect to the use of this through a circular dated April 24, 2020 by SEBI. This covers the use of eSign, e documents under the digi locker and electronic signature. The process allows for the KYC to be completed through an app or online, the in-person verification can be done through video and online submission of documents under eSign. The process involves the investor visiting the app or the online website of the Registered Intermediary (RI) and then filling up the KYC form online along with the submission of documents too online. Details like the name, photograph, address, mobile number, email id, bank details of the investor are captured online along with the PAN , signed cancelled cheque which is provided through eSign. This is then verified through various means. The mobile number and email is verified through a One Time Password or other verifiable mechanism. The Aadhar number is verified through the UIDAI authentication system, PAN is verified through online Tax database, bank account system is verified through penny drop mechanism or some other mechanism using API of the bank. Any other Officially verified documents has to be submitted through digilocker or eSign mechanism. Once this is done the online process can be completed by the investor taking a printout of the KYC form and submitting this along with their wet signature through a scanned copy under eSign or affixing the online cropped signature and submitting the same to the RI by eSign. This route can be used by the Investment adviser as a way of completing the e KYC process easily, without the investor having to submit a lot of physical documents. At the same time this can be done from the confines of the home of the investor, so this is also able to bring a lot of people on board the investment process without having to spend a lot of time and effort in doing all this physically. This also leads to saving of a lot of paperwork. The adviser must encourage their clients to use this route for the completion of their KYC. When it comes to the issue of Aadhar based KYC there is a detailed procedure that investors can follow. A KYC User Agency (KUA) and sub KUA also need to follow the laid down procedure. An investment adviser who wants to be registered as a sub KUA needs to enter into an agreement with an one KUA. They also should be registered with the UIDAI as a sub 333 KUA. This will lead to easier online onboarding of clients plus it gives a lot of convenience to the clients in their management of the processes. This leads to saving of time and hence is beneficial for everyone. In person verification For the first time investor, this is a mandatory step which is required to be followed. The KYC procedures require the intermediary with whom the client conducts the Know Your Customer formalities to do, an ‘In Person Verification (IPV)’ of the client. The name, designation, organisation, and signature of the person doing the verification have to be recorded in the form. The officials of the asset management company and the distributors who are compliant, with the KYD norms are eligible to conduct, the in person verification. At the time of making an investment, the investor needs to furnish a proof of being KYC compliant. This is the acknowledgment sent by the KYC Registration Agency or from the UIDAI in case of e-KYC. An authorized official of the intermediary conducts an in person verification of the applicant as part of the process. Banks categorize investors as low medium and high risk based on their financial implications of the relationship to the bank and the profile of the account holder(s). While a proper introduction from an existing account holder with the bank and verification of proof of address will suffice for the low risk category, medium and high risk categories have greater diligence exercised in establishing identity, address and source of funds. Periodic updation of records is also done with more frequent updation being done for the higher risk category investors. Insurance companies are permitted to use KYC compliance process conducted on an individual by a bank. The POS scheme also categorizes investors based on the risk perception, like banks, and the rigor of the KYC process is higher for the higher risk categories. For the medium and high risk category, the PAN card or form 60/61 declaration is mandatory. For the high risk category, the source of funds invested has to be established. Circular specified above modifies the IPV requirements for intermediaries. IPV/ VIPV would not be required when the KYC of the investor is completed using the Aadhaar authentication / verification of UIDAI. IPV / VIPV shall not be required by the RI when the KYC form has been submitted online, documents have been provided through digilocker or any other source which could be verified online. Feature for Video in Person Verification (VIPV) for Individuals – To enable ease of completing IPV of an investor, intermediary may undertake the VIPV of an individual investor through their App. The following process shall be adopted in this regard: i. Intermediary through their authorised official, specifically trained for this purpose, may undertake live VIPV of an individual customer, after obtaining his/her informed consent. The 334 activity log along with the credentials of the person performing the VIPV shall be stored for easy retrieval. ii. The VIPV shall be in a live environment. iii. The VIPV shall be clear and still, the investor in the video shall be easily recognisable and shall not be covering their face in any manner. iv. The VIPV process shall include random question and response from the investor including displaying the OVD, KYC form and signature or could also be confirmed by an OTP. v. The RI shall ensure that photograph of the customer downloaded through the Aadhaar authentication / verification process matches with the investor in the VIPV. vi. The VIPV shall be digitally saved in a safe, secure and tamper-proof, easily retrievable manner and shall bear date and time stamping. vii. The RI may have additional safety and security features other than as prescribed above. Investors subscribing to the NPS will have the KYC process conducted by the Points of Presence Service Providers (POP-SP). Two sets of the proofs of identity and address along with a photo-identity are handed over to the POP-SP. After verification, the POP-SP retains one set while the other set is sent along with the account opening forms to the Central Recordkeeping Agency (CRA) of the NPS. The Banks functioning as POP in NPS also play a pivotal role in enabling the subscriber to get his/her KYC verification done for their PRANs generated under eNPS. Uniform KYC Process for Securities Markets Investors deal with multiple capital market intermediaries such as mutual funds, Depository Participants (DPs), stock brokers, portfolio managers, venture capital funds and others. Thus far, investors were required, to undergo, the KYC process at the time of initiating transactions with each intermediary. To eliminate this duplication, SEBI has mandated a uniform KYC procedure for compliance by clients from January 1, 2012. This means that an investor who has undergone a KYC procedure with any of the specified intermediaries can use the same to invest with a mutual fund and vice versa. The new KYC form has two parts. Part one will have information to establish identity and address, common to all intermediaries. Additional information as required by each intermediary can be collected using part two of the KYC form. SEBI has introduced the system of KYC Registration Agency (KRA) to enable this. Intermediaries covered under the uniform KYC norms include mutual funds, DPs, stock brokers, portfolio managers, venture capital funds and collective investment schemes. 335 As a part of this uniform KYC Process for Securities Markets, a Central Registry has been set up which functions as the Central KYC Record Registry under the PML Rules. This has been discussed hereunder: 17.2.3 Centralised KYC Registration Agencies (KRA) Vide Notification dated November 26, 2015, the Government of India authorised the Central Registry of Securitisation and Asset Reconstruction and Security Interest of India (CERSAI) to act as and to perform the functions of the Central KYC Record Registry under the PML Rules 2005, including receiving, storing, safeguarding and retrieving the KYC records in digital form of a client.18 As per the 2015 amendment to PML (Maintenance of Records) Rules, 2005 every reporting entity shall capture the KYC information for sharing with the Central KYC Records Registry (CKYCR) in the manner mentioned in the Rules as per the KYC template for ‘individuals’ finalised by CERSAI. The Registered Intermediaries (RI) are required to upload the KYC records with CKYCR, in respect of all individual accounts opened on or after August 01, 2016. Some of the key functions of Central KYC Registry have been mentioned below: It shall be responsible for electronically storing, safeguarding and retrieving the Know Your Customer (KYC) records and making such records available online to reporting entities or Director. Information updated about a customer shall be disseminated on request by Central KYC Registry to any reporting entity that avail the services of the Central KYC Registry in respect of the customer. The services of the Central KYC Registry will be available on payment of prescribed fee, in advance. It shall process the KYC records received from a reporting entity for de-duplication and issue a unique KYC Identifier for each client to the reporting entity. The Central KYC Record Registry, which started operating from 2016, caters to Reporting Entities (REs)of all four major regulators of financials sector i.e. RBI, SEBI, IRDAI & PFRDA. Where a customer submits a KYC identifier to a reporting entity, then such reporting entity shall download the KYC records from the Central KYC Registry by using the KYC Identifier and shall not require a customer to submit the documents again unless: * There is a change in the information of the customer as existing in the records of Central KYC Registry. * The current address of the client is required to be verified. 18Client as defined in clause (ha) subsection (1) of Section 2 of the Prevention of Money Laundering Act, 2002 Dated November 2015. 336 * The reporting entity considers it necessary in order to verify the identity or address of the client, or to perform enhanced due diligence or to build an appropriate risk profile of the client. 17.3 Dematerialisation and Re-materialisation of Securities A depository is an institution that offers the service of holding the securities of the investors in electronic form. Its services can be compared to that of a bank which holds the depositors’ funds and facilitates the conduct of fund related transactions. Similarly, a depository allows the investors to hold their securities in electronic rather than physical form and provides services related to transaction in securities. The Depositories Act was passed in 1996 which allow companies and investors to issue, hold and transact in securities through a depository. There are currently two depositories operational in India, National Securities Depository Ltd. (NSDL) & Central Depository Services (I) Ltd. (CDSL). The securities can be dematerialised at the time of issue or subsequently. SEBI Regulations requires all public issues whose size is in excess of Rs. 10 crores to be issued only in dematerialised form. Investors in mutual funds can either ask for a demat issuance of units, or convert their holdings into demat mode. However, they are free to hold them in physical form. Companies are required to apply to a depository for dematerialising their securities. Under the SEBI (Depository and Participants) Regulations of 1996 the categories of securities eligible for dematerialisation are: * Shares, scrips, stocks, bonds, debentures, debenture stock or other marketable security of any incorporated company or other body corporate. * Units of a mutual fund, rights under a collective investment scheme, venture capital funds, certificates of deposit, commercial paper, money market instruments, government securities and unlisted securities. As per the Depositories Act, 1996, the physical securities that are dematerialised are required to be destroyed by the R&T agent and a credit entry is made in the electronic records of the depository. The dematerialised securities are fungible. This means that once a share is dematerialised, it does not have a distinctive identity in terms of share certificate number or distinctive numbers or folio numbers. The investor’s ownership of the security is described in terms of number of shares held. In the depository, the dematerialised securities are identified in terms of the ISIN19 (International Securities Identification Number) and the number of shares. 19The ISIN is a 12-character long identification code. It has three components--a pre-fix, a basic number and a check digit. Securities issued by the same company, issued at different times or carrying different rights, terms and conditions are considered different securities for the purpose of allocating ISIN and are allotted distinct ISINs. 337 17.3.1 Dematerialisation Dematerialisation is the process of converting physical securities into electronic form. It involves the investor, the DP, the issuer/R&T agent and the depository. The steps in this are: * Investor hands over the securities to be dematerialised along with the Dematerialisation Request Form (DRF) to the DP. * The DP sends the request through the electronic system to the issuer/R&T agent and the depository. The Dematerialisation Request Number (DRN) that is generated by the system is entered on the DRF and sent along with the physical documents and a standard covering letter to the R&T agent. * The certificates received by the R&T agent will be mutilated and have the words ‘Surrendered for Dematerialisation” on it. The R&T agent has to verify that: * The DRF has the DP’s authorization * The dematerialisation request has been received in electronic as well as physical form. * The DRN in the physical documents matches with the DRN in the electronic request. * The certificates have the distinguishing marks such as hologram/water mark. * The mutual fund account statements have all the complete details and match with ISIN provided in the demat form. The R&T agent will verify the physical documents with the details in the covering letter and DRF and forward the documents for dematerialisation. The process of giving effect to dematerialisation by the R&T agent is similar to that of transfer of registered ownership. The data to be captured, reports to be generated, documents to be filed are similar. In the Register of Members (RoM) of the company, the depository’s name is included in the place of the investor to the extent of securities dematerialised. However, no stamp duty is payable on dematerialisation unlike other transfer of ownership transactions. Once the RoM of the company is amended, confirmation is sent to the depository and the investor’s account with the DP is credited with the number of dematerialised shares. A dematerialisation request may be fully or partially rejected for some of the following reasons: * Mismatch in the information between the DRF and physical certificates. * Certificates are fake, stolen or for which duplicates have been issued. * Securities stand in a different name(s) from that mentioned in the DRF. * The Securities do not pertain to the issuer/R&T agent. * Signature of the holders does not tally with the records of the R&T agent. 338 The R&T agent mutilates the physical certificates once the process of dematerialisation is complete. The details of the certificate destroyed are entered into the Register of Destroyed Certificates. The account number of the beneficial owner is entered into the holding master maintained by the R&T agent for future reference. For dematerialisation at the time of an IPO, the following steps have to be followed: * The Company, R&T agent and the depository enter into an agreement for admission of securities in the depository. * The depository assigns an ISIN for the security. *The allotment advice for demat shares will have the client account number, DP id and depository details. *For the demat shares, the depository will be entered as the registered holder in the register of members of the company and the details of the corresponding beneficial owners will be uploaded in the depository’s system. *The issuing company or the R&T agent may also maintain the details of the beneficial owners. Physical transfer of shares has been discontinued from 01 April, 2019. The DRFs are required to be stored for at least a period of 5 years. 17.3.2 Rematerialisation of Securities Rematerialisation of securities is the process of converting the electronic holding of a security to physical form. The steps involved in this process are: * Investor submits a Rematerialisation Request Form (RRF) to the DP. * The DP validates the signature and the availability of the shares in free form in the investor’s account. * The request is then electronically forwarded to the depository. * The RRF will have details such as the name(s) of the holder(s), signature, Number of shares to be rematerialized, address, bank account details, PAN Number, age, tax status and nominees, if any. * The depository validates the information and forwards an electronic request through the depository system to R&T. This can also be viewed by the DP. * The DP sends the RRF to the Issuer/R&T agent who cross verifies it with the electronic confirmation received from the depository and forwards it for processing. * Acknowledgement of this is sent to the DP. * The R&T agent will capture the information in the RRF and create a new folio or add to an existing folio. The procedure to be followed is the same as that for creating a folio in other circumstances. * The R&T agent will assign a new certificate number and distinctive numbers from the set of shares already dematerialised. 339 * The names of the beneficial owners will be included in the Register of members of the company and the name of the depository removed to that extent. * In the records of the depository, the investor’s account will show a reduction to the extent of rematerialization. * The R&T agent shall ensure that the applicable revenue stamps are affixed. * The R&T agent will print certificates in the name of the investor and dispatch them directly to the shareholder. * Confirmation of the rematerialisation will be electronically sent to the depository and the DP will be informed of the same. 17.4 Power of Attorney Individual investors can empower someone they trust to do transactions on their behalf, by granting and executing a Power of Attorney (PoA). This facility is generally used by non- resident investors who stay in a foreign country and are thus unable to manage their financial transactions, or by investors who like their brokers or advisors to manage their investments on their behalf. A Power of Attorney has two parties: the grantor, who is the primary investor or account holder and grants the rights; and the Attorney, or holder, who is authorised to execute an agreed set of actions on behalf of the grantor. The grantor and the holder have to abide by the guidelines for PAN and KYC compliance. Power of attorney holders usually exercise all the rights of an investor. They can do normal transactions such as purchase, payment for purchase, sale, settlement of transactions and redemptions. The rights of the holder depend on what the grantor is willing to delegate under the power of attorney and what is allowed for PoA transactions by the investment or service provider. However, the attorney cannot appoint a nominee for the investment. The grantor of power of attorney can continue to operate the account even after giving a power of attorney. To be valid the PoA must be: Typed on a non-judicial stamp paper. * Stamped according to the rules applicable in the state in which it is executed. * Signed by the grantor on all pages. * Signed by the grantor and the holder of the power of attorney on the last page. * Notarised by a notary public. This requirement varies among different entities and intermediaries. For example, some mutual funds may require the PoA to be notarized, while a PoA to operate a demat account needs to notarized only if the depository participant so requires. If the Power of Attorney is executed abroad, it can be typed on a plain paper, attested by a designated official of the Indian embassy abroad or by a notary abroad, signed on all pages 340 by the grantor and sent to India for the holder of the power of attorney to sign on the last page. It is then stamped and notarized in India, if required. Since minors cannot enter into valid contracts, there can be no PoA for a minor’s transactions. The guardian plays a role similar to a PoA holder acting on behalf of the minor. A certified copy of Power of Attorney, with signatures of both the parties has to be submitted to the entity where the PoA will be exercised. A PoA holder cannot open or close a bank or a demat account. The signatures of the holders of the account are necessary for this. The holder of the PoA can operate the account on the basis of the rights granted. In case of investments such as mutual funds, POS schemes, the PoA holder can make the initial investments and subsequent purchases and operate the account on behalf of the grantor. The grantor's signature is also recorded in the folio for purposes of verification. Typically, the grantor of the PoA can also conduct the transactions for which the PoA has been granted. A PoA holder cannot make or change nominations in an account or investment. 17.4.1 General Power of Attorney A General Power of Attorney gives the agent the authority to handle all the affairs during a period of time when the investor is unable to do so, such as when he is travelling out of the country or when his physical and/or mental health are compromised. A General Power of Attorney is typically very broad, giving the agent extensive powers and responsibilities. General Power of Attorney typically includes (but is not limited to): * Handling banking and other transactions * Filing tax returns * Buying, selling, or managing real estate and other property * Entering contracts * Settling claims 17.4.2 Specific Limited Power of Attorney A Specific Power of Attorney gives the agent the authority to conduct a specific act or acts on the investor. Because this type of Power of Attorney is limited to the act or acts designated in the document, it is especially important to be very clear about the powers one wishes to give to the agent. One may use a Special Power of Attorney to appoint an agent to act on his behalf in the event that if he becomes ill or disabled, are embarking on extended travel, or are otherwise unable to handle a specific type of task. He may designate any of the powers listed above (under General POA) to the agent, or any other powers he deems necessary. 341 17.5 Account Opening Process for Non-Residents 'Non-resident Indian' is an individual who is a citizen of India or a person of Indian origin and who is not a resident of India. Thus, in order to determine whether an Individual is a non- resident Indian or not, his residential status is required to be determined under Section 6 of the Income Tax Act. As per section 6 of the Income-tax Act, an individual is said to be non- resident in India if he is not a resident in India and an individual is deemed to be resident in India in any previous year if he satisfies any of the following conditions: 1. If he is in India for a period of 182 days or more during the previous year; or 2. If he is in India for a period of 60 days or more during the previous year and 365 days or more during 4 years immediately preceding the previous year. However, condition No. 2 (mentioned above) does not apply where an individual being citizen of India or a person of Indian origin, who being outside India, comes on a visit to India during the previous year. A person shall be deemed to be of Indian origin if he, or either of his parents or any of his grand-parents, was born in undivided India. An NRI under Indian Income Tax Act is defined as a Person of Indian Origin (PIO) if he or she: * Has held an Indian passport at any time, or * Is a grandchild of citizens of India, or * Is a spouse of an Indian citizen, or *Is a spouse of a person covered under the first two points above In terms of Regulation 2 of FEMA Notification No.13 dated May 3, 2000, Non-Resident Indian (NRI) means a person resident outside India who is a citizen of India. NRI investors, including Persons of Indian Origin and FPIs, are allowed to invest in India. The key issue in NRI investment pertains to repatriation of investment proceeds on sale or redemption of units. Repatriation norms vary depending upon the source of the funds from which the original investment was made. NRIs can earn income in rupees from India, or in foreign currency from another country. If the source of funds for an NRI investment is foreign currency, it can be freely taken outside the country; that is, it is repatriable. If the source of funds is Indian Rupees, it is non-repatriable. Investment made from these two sources of income cannot be clubbed together. The reason for the rupee investment proceeds being non-repatriable is that since the rupee is not fully convertible on capital account, RBI norms do not permit investment in Indian rupees to be freely converted to other world currencies and to be taken out in foreign currency. Since the treatment of investment proceeds from NRI investment depends on the source of funds, the source has to be identified at the time of making the investment. The bank account 342 through which the investment is routed is used to determine the source of funds. The funds that are remitted from abroad into the Non Resident External (NRE) Account or Foreign Currency Non Resident (FCNR) Account and invested can be freely repatriated back. NRI investors have to give a declaration in the application form about the type of account from which the investment was made and indicate whether it is on a repatriation basis. The rules and regulations pertaining to repatriation can be modified by the Reserve Bank of India. If investments are made from Non-Resident Ordinary (NRO) account, proceeds are repatriable only to the extent of USD 1 Million per financial year. If made from NRE account, FCNR account, or through a draft drawn on a foreign bank and supported by Foreign Inward Remittance Certificate (FIRC), then the proceeds are repatriable without any limit. All incomes earned in India on investments are freely repatriable, irrespective of the source of funds used to make the investments, provided taxes as per Indian laws have been paid. Such income may include interest on bonds and bank accounts, rental income, dividends from shares and mutual funds. Income in the form of sale proceeds of capital assets such as property, land, shares, bonds, mutual funds held in India are repatriable to the extent of funds remitted from abroad for buying those capital assets. KYC for NRIs NRIs have to be KYC compliant in order to make investments in India. A soft copy of the KYC form is widely available at the websites of mutual funds, brokers, service providers and KRAs. It has to be completed and submitted along with the necessary documents to a point of service (PoS) in person, or mailed to the KRA agency directly. The following is the additional documentation, apart from proof of identity, proof of address and PAN card, for NRIs and PIOs: * Certified True Copy of Passport * Certified True Copy of the Overseas address * Permanent address * A certified true copy of the PIO Card (for PIOs) * In case of Merchant Navy NRIs, Mariner’s declaration or certified copy of CDC (Continuous Discharge Certificate) is to be submitted. All documents must be submitted in English and can be attested by the Consulate office or overseas branches of scheduled commercial banks registered in India. The Central Board of Direct Taxes has notified Rules 114F to 114H, as part of the Income-tax Rules, 1962, that require Indian financial institutions to seek additional personal, tax and beneficial owner information and certain certifications and documentation from all investors/account holders. 343 From January 2016, it is mandatory for all Indian and NRI investors (existing and new) to file a Foreign Account Tax Compliance Act (FATCA)/Common Reporting Standards (CRS) self- declaration to comply with the above Income Tax/CBDT guidelines. While the details might be slightly different with each financial institution, the common information mandated are fields such as—Name, Permanent Account Number (PAN), Address, Place (city/state) of birth, Country of birth, Nationality, Gross Annual Income, occupation and if a person is the resident of another country. If the country of residence is other than Indian then the Tax ID number, and type are required. In case of non-individual entities, the details of the Ultimate Beneficial owner (UBO) are also required to be submitted. Portfolio Investment (NRI) Scheme (PINS) Account The Portfolio Investment (NRI) Scheme (PINS) is a scheme of the Reserve Bank of India (RBI) and is mandatory for Non-Resident Indians (NRIs) and Persons of Indian Origin (PIOs) who like to purchase and sell shares and convertible debentures of Indian companies or units of domestic mutual funds on a recognised stock exchange in India. All purchase and sale transactions in listed securities of NRIs is routed through their PINS account held with a designated bank, which maintains and reports to RBI as required, the investments made by NRIs. Only an NRI/PIO can open a PINS account. PINS account with the bank is identical to the NRE account. However, even if the NRI has an existing NRE account, he must open a separate PINS account for the purpose of trading in shares. An NRI/PIO can have only one PINS account (One NRE (PIS) account for investment on repatriation basis and one NRO(PIS) account for investment on non-repatriation basis) at a given point of time. PINS account can be opened only in designated branches of banks (authorised dealers) as authorised by RBI under the Portfolio Investment Scheme. Addresses of designated branches are usually available on the bank’s website. NRI can select only one authorised dealer for the purpose of investment under Portfolio Investment Scheme and route the transactions through the branch designated by the authorised dealer. Application for PINS permission can be made through the bank by filling the PINS application form. Details of all shares purchased through the primary market need to be enclosed. Along with PINS account, PINS demat account opening form also needs to be enclosed. 344 Documents Required Copy of current passport, valid work permit or employment visa, PIO card (if applicable) and address proof need to be enclosed with the application. The application form with required documents needs to be submitted at the designated branch. Seafarers employed by foreign shipping companies can open a PINS account by submission of required documents such as Continuous Discharge Certificate. Permitted credits to the NRE(PIS) account for routing PIS transactions include foreign inward remittance by way of Telegraphic Transfer, Demand Draft, cheque, traveller’s cheque, foreign currency or transfer from existing NRE or FCNR accounts as well as dividends from shares or mutual funds or sale proceeds of shares/mutual funds acquired on repatriation basis. Debits to the account includes outward remittance of income or dividend earned, amounts paid for purchase of securities and charges applicable for acquiring these securities. Credits to the NRO (PIS) account will include inward remittance of foreign exchange, dividends and income earned under the PIS, net sale proceeds and transfer from other NRO, NRE of FCNR(B) accounts. Debit to the account will be in the form of outward remittance of income or dividend earned, amounts paid for purchase of securities and charges applicable for acquiring these securities. NRIs cannot purchase more than 5% of the paid-up capital of a company on both repatriation and non-repatriation basis subject to an overall limit of 10% by all NRIs. The purchase of debentures of each series of an Indian company shall not exceed 5% for each individual within an overall limit of 10% for all NRIs. This limit can be increased by an Indian company to 24% by passing a General Body resolution. NRI Demat account NRIs can open a demat account with any Depository Participant in India. NRI’s needs to mention the type (‘NRI’ as compared to ‘Resident’) and the sub-type (‘Repatriable’ or ‘Non- Repatriable’) in the account opening form. No permission is required from RBI to open a demat account. However, credits and debits from demat account may require general or specific permissions as the case may be, from designated authorised dealers. Holding securities in demat only constitutes change in form and does not need any special permission. NRI must open separate demat accounts for holding ‘repatriable’ and ‘non-repatriable’ securities. NRIs can hold joint demat accounts. For the purpose of determining ownership of holding, the first holder is taken into account. Hence, even though other joint holders may be 345 person residing in India, the sale proceeds of such securities can be repatriated in case the first holder is permitted to repatriate funds. Trading in Currency or Commodity segment is not allowed using such demat accounts. Short selling of stocks is not allowed using such demat accounts. NRI Trading account NRI investors can open a trading account with a registered broker of a stock exchange. NRIs can have two separate trading accounts linked to NRE & NRO accounts. Special considerations in case of NRI trading accounts: * NRIs cannot trade in securities which are in the breach list (List of companies where foreign investment has reached its permissible limit as applicable for FPI/NRI/Overall Sectoral Limit) * Clear funds should be available for purchases * Securities should be available before making a sell order * Depending upon whether the purchases are made on repatriation/non-repatriation basis, pay-out of the securities is transferred to the respective demat account. * Purchase/Sale transactions in cash segment are settled by delivery only. * The contract notes in original have to be submitted to the designated branch where the investor holds the PIS account within the time specified. 17.6 Process of Consolidating, reorganising and folio keeping/Maintenance of Investments Investor accounts and folios require maintenance for changes to the details provided at the time of opening an account. Investor information such as contact address and bank account details are provided in the application form which is used to allot a unique identification number to the investor. Request for changes to static or personal information in the folio or account have to be intimated to the investment company or service provider or their agent, such as the registrar and transfer agent, to update the investor records. Documents that prove the change also needs to be furnished along with the request. All joint holders need to sign such change requests in order to be valid. Once the request is received, the supporting documents are verified and necessary changes are made to the investor records. An intimation of the updation or statement of account showing the change as a transaction is sent to the investor. 17.6.1 Change of Address and Contact Details The KYC process that has to be undertaken by each investor or account holder in a financial transaction establishes the identity and address of the investor. The proof and record of the identity and address of an investor are maintained with the entity that conducted the KYC process, such as the KYC registration agency (KRA) in case of capital market transactions or 346 the concerned bank or insurance company or other product provider as the case may be. Hence, any change to these details must be carried out in the KYC records. In case of capital market transactions, such as investment in mutual funds, opening a demat or broking account, investing in a portfolio management scheme, venture capital fund or other collective investment schemes, the uniform KYC process is done through the KRA. The KYC details change form can be used to carry out such changes. The form should also be accompanied by a documentary proof of the new address, such as passport, current utilities bill and other approved address proof documents. The KRA will update the records and communicate the change of address to all the entities with which the investor has holdings. Only intimation to the Asset Management Company, Registrar and Transfer Agent, DP, Broker or PMS provider about change of address will not be sufficient unless the change has been carried out in the KYC records available with the KRA. In case of other financial products and services, the change in address has to be intimated to the provider for updation in the records. Banks follow a system of periodic updation of account holder records. In case of POSB accounts and savings certificates, a change of address may involve a transfer request to a new post office in which case documents to establish the new address has to be provided at the new post office. If encashment of certificate is requested at a post office other than the one at which it was purchased, the present address is verified before the payment is made. Investors in the NPS have to use form S2 prescribed by the CRA to record the change in address in their account. Insurance policy holders need to inform the insurance company of the change in address. In all cases of change of address, it is essential to provide self-attested documentary proof of the new address such as passport, current utilities bill, and ration card. 17.6.2 Change in Name Investors may request a change of name in their investment records or folio. For instance, women investors may like to change their maiden name to married name. The letter requesting the change in name should be supported by the name change certificate issued by a regulatory authority, an official gazette copy announcing the new name and a copy of marriage certificate, if applicable. There may be a form specified for this purpose, such as the form S2 prescribed by the NPS or the KYC details change form specified by KRAs or a form specified by the concerned bank, insurance company or other intermediaries, to request a change in name. 347 17.6.3 Change in Status Investors who undergo a change in status from resident to non-resident or vice versa have to inform the change of status to the investment companies and financial service providers. This is because a change in status will imply a change in the type of bank accounts from which payments can be made and received, a change in the tax implications of investments and a change in the address recorded under the KYC process. A change in status can be recorded with the capital market companies and intermediaries by using the KYC details change form to register these changes in the records of the KRA. The change will be intimated to all the capital market participants with whom the investor has transactions. Insurance companies have to be intimated of the change and the new address and mode of premium payment details provided in an NRI questionnaire that is prescribed by the company. Bank accounts held as resident should be re-designated to NRO account through an application signed by all the holders. If there is a change of address, then the new address should be provided supported with documentary proof. If a trading account is linked to the account, then it should be delinked. A new demat account and trading account will be opened which will reflect the NRI status of the investor and will be linked to the NRO/NRE bank account. All securities held in the resident demat account will be transferred into this new account and will be non-repatriable. New bank account details have to be provided to all investment providers such as asset management companies, depository participants and brokers. Existing investments in small savings schemes can continue and maturity values will be credited to the NRO account of the investor. Similarly, a change in status from NRI to resident has to be intimated and necessary action taken to reflect the changed status. 17.6.4 Marking a Lien Investors may pledge their investments such as shares and bonds, mutual fund units, bank deposits, small savings schemes and others as collateral to borrow money from scheduled banks, financial institutions, or non-banking finance companies (NBFCs). A loan can also be taken against a life insurance policy by assigning the policy to the lender or to the insurance company itself if the loan is taken from the company. The lender will create a lien or charge on the securities pledged with them. The investor cannot redeem the securities under lien. If they fail to pay the loan amount the lender can sell the securities and recover their dues. 348 The investor and the lender must inform the investment provider, such as the mutual fund, bank, insurance company, depository participant or insurance company of the lien through a letter. In some cases, such as assignment in an insurance policy or for savings certificates, there may be a specified form for the purpose. Typically, the information that requires to be provided in creating a charge includes: *The folio number, account number, certificate number, FDR number, demat account number, insurance policy details of the investments offered as security. * The scheme / plan / option if applicable * The number of units/securities pledged with ISIN as applicable *The details of the bank account of the financier or lien holder. *The demat account details of the lien holder or pledgee if shares in a demat account are being pledged. The lien or pledge is recorded by the investment or service provider in the investor records. In case of mutual funds, the R&T agent records the lien against the securities and informs the investor of the lien through the account statement. The lien appears as a transaction in the account statement. Lien can be for all or part of the securities in a folio. An investor cannot redeem or transfer the securities under lien until the lien holder provides a written authorisation to revoke the lien or pledge. The investor can conduct transactions such as change in address or bank details, unless specifically denied by the lien holder. Once the investor repays the loan, the securities become free from lien and are unmarked. For unmarking of lien, the lien holder should send a written communication to the company. If the request for unmarking is sent by the pledger or the holder of the investments, then the application must also be signed by the pledgee or the lender. Dividends and other benefits from the securities under lien will go to the investor unless specifically barred by the lien holder. As long as securities are under lien, the lien holder can exercise or invoke the lien. Invoking the lien means redeeming or selling the pledged securities. The lien holder receives the proceeds by selling/redeeming the securities. There is no transfer of securities from the investor to the lien holder. The investor receives information about lien invocation through the account statement. If the lien or charge is created on a bank fixed deposit, then the bank will undertake to pay the amount of FDR to the lien holder in the event they exercise the lien. Similarly, any payouts by the insurance company on a policy that has been assigned, will go to the assignee till the loan is repaid and the insurance company is so intimated. 349 17.6.5 Transmission Transmission means 'an act of passing on something'. In the context of investments, it refers to passing on the investments on the death of the investor to another person. To complete a transmission process, on receiving a claim with documents to support it, the name of the investor is removed from investment records and the investment is transferred to persons entitled to receive them. After the death of a person there may be several claimants to the investments made by the deceased security holder. The investment provider or their agent such as an R&T agent of a mutual fund, do not take responsibility for the equitable distribution of the investments among the heirs of the deceased investor. They follow the directions of the original investor or follow a prescribed process if there is no such instruction. There could be joint holders, nominees, legal heirs and other claimants. The eligibility of claimants to get the investments transmitted in their name on the death of the first holder will depend upon the way the investment account was held. Broadly, the process followed in transmission of investments may be as under:  If the investment account was held jointly and did not have nominations, then the investments are transmitted to the joint holders in the same order. The second holder will now become the first holder of the investments. In case of a bank account or fixed deposit, the account balance may be paid jointly to the heir of the deceased and the surviving holder. In the event the mode of operation of the account was specified as either or survivor, then it is passed on to the remaining holders.  If the folio was held jointly and had nominations, the right of the joint holders to transmission supersedes the right of the nominee.  If the investment account was held singly (only one holder) and had a nomination, then the investments will be transmitted to the nominee.  If the investment account was held singly and there was no nomination, then it would be transmitted to legal heirs or other claimants where there are documents to establish succession.  On the death of Karta of HUF, the investment will be transmitted to the new Karta on receipt of indemnity bond signed by all the remaining co-parceners. Companies take a sensitive approach to dealing with transmission cases. They explain the documentation correctly and completely to the claimants. In cases where the amount involved is not large, some of the requirements may also be waived. For example, DPs may not insist on documents such as a succession certificate or the probate or letter of administration, if the application for transmission is for securities whose value does not 350 exceed Rs. 50,00020 A copy of the death certificate, letter of indemnity and NOC from other legal heir is seen as adequate to process the transmission request. The threshold for simplified documentation for transmission incase of securities held in the physical form has been revised to Rs.5 lakhs and in case of dematerialised securities the limit is Rs.15 lakhs. The transmission of investments to the claimant is done on the assumption that if there is a dispute, the person holding the investment or redemption proceeds is only holding it in trust, pending final settlement. Payment to the nominee or claimant as per the processes, absolves the investment entity of its responsibilities. A request for transmission has to be made in the format, prescribed by the mutual fund, bank, depository or other investment provider as the case may be. The claimant may be required to sign an indemnity bond, indemnifying the bank, depository or AMC or others from any losses or disputes that may arise later. There are specific documents that support a transmission request. Documents submitted with a transmission request will have to be attested or notarised, and also verified with the originals. The following are the documents required for transmission depending upon the nature of the transmission request. * Death certificate has to be provided as evidence of death in all requests for transmission. * Probate of will to evidence validation of the will by the court as the last and final will of the deceased investor. However, it may be noted that probate is not always needed in all parts of India. * In the event of death without a will, the legal heirs obtain a succession certificate from court. This certificate gives details of persons who are ‘succeeding’ the deceased. * Documents establishing relationship with the deceased investor, such as birth certificate and marriage certificate, may have to be provided. * An indemnity Bond may be required for absolving the company from any future claims that may be made by other claimants, after the transmission is made. * No Objection Certificate (NoC) signed by the remaining legal heirs if the claim for transmission is made by one of them. * Bank account details of the new first holder supported by cancelled cheque bearing account holder’s name and account details. *KYC compliance documents of the person in whose name the investments are being transmitted. 17.6.6 Nomination and change in nomination Nomination is a facility provided to the holder of an investment to designate the person(s) who will be entitled to receive the benefits of the investments, in the event of the death of 20According to the depository bye-laws, if value of the securities in the deceased beneficial owner account is less than Rs. 5 lakhs then the successor need not provide either the succession certificate Probate of the will / Letter of administration. 351 the investor. The investor can make the nomination either at the time of making the investment or subsequently. Investors subscribing to mutual fund units on or after October 1, 2022 shall provide nomination in the prescribed format or opt out of nomination through a signed declaration.A nomination made in a folio or account will apply for all the investments held under it. While a demat account can have only one nominee, mutual funds, insurance policies, NPS, Post office savings deposits and schemes all allow multiple nominations. Nomination is optional. However, mutual funds are making nominations mandatory for folios held singly. Nominations can be made only by individual investors. Nomination can be changed or cancelled at any time. All the joint holders must sign to make the nomination, change it or cancel it. A power of Attorney holder cannot make or change a nomination in an account or folio. 17.6.7 Assignment especially in case of insurance policies Assignment means a transfer of an individual’s rights or property to some other person. An assignment can be done in several areas including investments, loans and even insurance. When it comes to an investment the best example is that of an option, where the option writer is assigned the option contract, then he has the obligation to complete the option contract. In case of a loan there might be a mortgage, which gives the lender interest in the property in return for the payments received. The lender might sell the mortgage to some other lender. In this case there would be an assignment document that clarifies the details of this sale and transfer. An insurance policy can involve the transfer of the rights in the policy to some other party who might be a lender or a relative. The assignment in this case can be conditional or absolute. An assignment to a lender is absolute and this cannot be changed. On the other hand, an assignment of a policy in case of an early death could be a conditional one. Here the condition is specified when the assignment would take place. The insurance policy can be assigned by either endorsement of the policy or by signing a deed of assignment and registering this with the insurance company. A form has to be filed in for this purpose and in case of a conditional assignment the condition also needs to be mentioned. 17.7 Change in Status of Special Investor Categories Minors, NRIs and investors investing through a constituted attorney constitute a special category of individual investors. Some of these investors do not make investments directly instead investments are made by designated entities on their behalf. These categories of 352 individual investors require additional documentation and process, due to their differential status with respect to taxation and mode of operation of investments or restrictions on certain components of investment activity. 17.7.1 Minors as Investors Minors are investors who are less than 18 years of age on the date of investment. Minors cannot enter into contracts on their own and if they, then such contracts are null and void by law. Therefore, the financial transactions of minors are conducted by adults on their behalf. Those transacting on behalf of the minor child are called guardians. Parents are the natural guardians of their minor children. If the application form identifies the status of the investor as a minor, then the date of birth of the minor investor becomes mandatory information that has to be provided along details of the guardian. When investments are made on behalf of minors some additional documents need to be submitted with the application form. These include: *The date of birth and proof of the same *Document to establish the relationship of the guardian with the minor *The PAN of the guardian who is investing on behalf of a minor An investment on behalf of a minor cannot have joint holders. Thus, investments can be held solely by the minor or jointly with the guardians, as allowed by the terms of the investment product. Minors have to be sole holders or first holders of the investment. Guardians have to provide all details and complete the Know Your Customer (KYC) formalities, as if they were investing themselves. Guardians also sign the application and payment instruments on behalf of minors. Minors may have a PAN card obtained by their guardian on their behalf. Depending on the requirements of the investment product, the PAN of the minor or of the guardian or both may have to be provided while making the investment. The guardian of a minor may change due to demise of the existing guardian, or through mutual consent. When there is a change in guardian, an application has to be made for registration of the new guardian. For this the new guardian has to send a request letter to the company along with prescribed documents. If the existing guardian is alive, a no objection letter or consent letter from existing guardian or a court order appointing the new guardian needs to be submitted. If the previous guardian is deceased, a copy of the death certificate, duly notarized or attested has to be submitted. Attestation may be done by a special executive magistrate or an authorized official of the Company, or manager of a scheduled bank. 353 The new guardian could be a natural guardian (mother or father), or a court appointed legal guardian. A court appointed legal guardian has to submit supporting documentary evidence. A natural guardian also has to submit documentation evidencing the relationship. The signature of the new guardian in the bank account of the minor attested by the bank as such needs to be submitted. The new guardian also needs to obtain KYC compliance and furnish evidence of the same to the asset management company. A petition can be filed in the High Court under the Guardians and Wards Act, 1890, or the Hindu Minority and Guardianship Act, 1956, by a person seeking to be a child’s guardian, for being appointed as the legal guardian. 17.7.2 Minor turned Major Once the minor become major, financial transactions are disallowed in their account. No debits or redemptions can be made in bank accounts; mutual funds folios or demat account of minors-turned-major. Minors are not eligible to sign documents, enter into contracts, or issue third party cheques. However, after a minor becomes major, they can conduct such transactions, only after their signature is attested by their banker. KYC: Minors attaining majority will have to complete all the KYC process by submitting proof of identity and address. Banks and depositories may also insist on personal verification of the minor-turned-major. It is important to plan for such verification if the child is away at a different location for higher studies. Bank Accounts: Holding details for minor’s investments will undergo change so that the account is operable by the minor-turned major. Banks will ask for proof of age and ask for an application to attest the signature of the minor-turned-major. PAN Card: The PAN issued to a minor will have to be resubmitted to the Income Tax authorities, for issuance of a new card, with the same number, but the new signature of the minor-turned-major. Demat Account: Since demat accounts of minors can be held only on single-name basis, the account opening process has to be redone for a minor-turned-major. This involves opening of a new demat account. Securities held in the old demat account with minor status are transferred to the new demat account. Depositories may waive transaction charges on such transfers. Mutual Fund Investments: In case of mutual fund investments, notification to the registrars, with a copy of the banker’s attestation of the signature is adequate. R&T agents make the 354 change in status, register the new signature and notify the investor. Minors can then operate the folio or investment account and the guardian will not have any rights to the mutual fund folio or demat account after this change has taken effect. Systematic Transactions (SIP, SWP, STP and others): Standing instructions like Systematic Investment Plans (SIP), Systematic Withdrawal Plans (SWP), Systematic Transfer Plans (STP) are registered in a minor folio only till the date of the minor attaining majority, even though the instructions may be for an extended period. When the minor is approaching the age of majority, AMCs usually send letters advising the guardian and the minor to submit the form along with prescribed documents to change the status of the account/folio to "major". All SIP, STP, SWP and any other standing instruction registered in the minor's account are suspended if the documents are not received by the date when the minor attains majority. The folio is frozen for operation by the guardian on the day the minor attains the age of majority and no transactions shall be permitted till the documents related to minor turned major are received. 17.7.3 NRI to Resident Indian (RI) If a person returns to India and forgoes the NRI status, he needs to carry out certain procedures with respect to his investments and bank accounts. Bank Account: Once an NRI becomes a RI, he cannot operate his NRO/NRE/FCNR (B) accounts. He needs to inform to the bank about the change of status to resident Indian and needs to open a Resident Rupee Account. Account opening documents such as address proof, identity proof, photographs need to be submitted. A Resident Foreign Currency (RFC) account may be opened by a returning Indian to transfer balances from NRE /FCNR (B) accounts. This account can hold foreign currency and continue to receive funds in foreign currency from investments abroad. Demat Account: Just like bank account, the returning NRI needs to inform change of status to the designated authorised dealer branch through which the investor had made investments in the Portfolio Investment Scheme, as well as the DP with whom he has opened a demat account. A new demat account with ‘Resident’ status needs to be opened. All the balances held in the NRI demat account shall be transferred to the new ‘Resident’ demat account. After transfer, the NRI demat account will get closed. Trading Account: If the NRI was operating an online trading account, the broker also needs to be informed about the change. The trading account with NRI status will get closed and a new trading account with resident status needs to be opened. Mutual Fund Investments: Respective AMC with whom the NRI holds mutual fund investments needs to be informed about the status change. KYC change form needs to be 355 sent to the KYC registration agency for change of status, address and bank details. An acknowledgement shall be issued by the KYC registration agency on submission of request and will carry out the necessary changes in its records. 17.7.4 Resident Indian to NRI Different rules apply fora Resident Indian when his status changes to a Non Resident Indian. On becoming an NRI, a person needs to carry out certain formalities with respect to his existing investments and bank accounts. Bank Account: Once a person changes his status from Resident Indian to NRI, he can no longer operate his Resident savings account. He needs to open a Non Resident External (NRE)/ Non Resident Ordinary (NRO) account with the Bank. Investments can be routed only through NRE/NRO account. Bank fixed deposits should also be converted to NRO fixed deposits and the original fixed deposit receipt has to be submitted and a new deposit confirmation advice with the applicable terms and conditions will be issued. Demat Account: A person may be holding securities in a demat account in the Resident status. On becoming NRI, a new depository account with NRI status needs to be opened. All the balances held in account with ‘Resident’ status should be transferred to the new account. Securities held under this account will be treated on non-repatriable basis. In case of physical securities held by the resident investor, a NRI needs to regularise his holdings to reflect NRI status. For this, NRI must submit a letter addressed to the issuing company along with the Demat Request Form stating change of status and giving details of foreign address. Trading Account: On becoming NRI, a new trading account needs to be opened for future investments. NRI trading accounts usually have higher brokerage rates compared to resident investors. NRI can continue to hold the securities that were purchased as a resident Indian, even after he becomes a non-resident Indian, on a non-repatriable basis. Mutual Fund Investments: The NRI needs to inform the relevant AMCs about the change of status, change of address and bank details with respect to mutual fund investments. KYC change form needs to be sent to the KYC registration agency for change of status, address and bank details. An acknowledgement shall be issued by the KYC registration agency on submission of request and will carry out the necessary changes in its records. Once the investor is flagged as an NRI, TDS will be deducted at source on gains made on sale/redemption of mutual fund investments by NRIs as applicable. 356 17.7.5 Addition or deletion of name in an account There might be one or more holders in an account and there would be situations wherein it might be required to either add or delete a name in the account. This will require some specific procedure to be followed Bank account : A name can be added or deleted from the bank account by following a simple procedure. There has to be an application made for the purpose of either the addition or the deletion. In case of addition the bank will collect the necessary documents from the person being added and the KYC will be completed. At the same time there is a specimen signature card where all the signatures of the account holders are maintained. This would have to be updated with the new account holders in the manner in which the account would be operated. Mutual Fund investment: Mutual funds do not usually allow for addition of a name because it amounts to transfer of the units being held. The solution that is offered is to open a new folio with the desired holdings and then get the units in that folio after closing out the existing holding. 17.7.6 Addition or deletion of a bank mandate The bank mandate which consists of the details of the bank account of an individual are linked to the various investments. These can be changed by either adding a new bank or removing an existing one. It can happen due to the bank account being closed or a new account being opened, which is used for the purpose of investments and so on. In case of a bank account that is linked to the trading and demat account the investor needs to fill in a form that has the particulars for change of the bank mandate. They would need to give a copy of a cancelled cheque for the confirmation of the details. In case of a trading account the broker could allow for multiple accounts being linked to the trading account. In this case too a form with the details of the bank account needs to be filled in so that the additional account can be added. However, there will be a main account to which the payout will be made in case of withdrawal of funds. Mutual funds have a clear process to be followed for the addition or deletion of a bank account. There is a form that is present for the bank accounts that have to be linked to a folio. These allow for multiple bank accounts to be linked because the payment for the mutual fund has to come from one of these accounts only. One of the accounts would be designated as the main account, where the payment of the dividends and the redemption amount would go. The investor can submit a copy of the cancelled cheque of account and fill up the form and add or delete the desired bank account. 357 17.8. Payment Instruments There are several accepted modes of payment for making investments. These include the following: * Local cheques and at par cheques * Demand drafts * Post-dated cheques, for SIP transactions in mutual funds * Electronic and digital payment modes such as Automated Clearing House (ACH),Real Time Gross Settlement (RTGS), National Electronic Funds Transfer (NEFT) * Standing Instructions where periodic payments have to be made as in the case of premium payments and mutual fund SIPs. * Cash is an accepted mode of payment for some investments such as post office savings schemes. Insurance premiums can also be paid in cash. For mutual funds, cash is accepted up to Rupees 50,000 per investor per mutual fund per year * Applications Supported by Blocked Amount (ASBA), for New Fund Offer and initial public offer purchases 17.8.1 Traditional modes of making payment All payments for transactions on the capital markets have to be routed through the first holder’s bank account. This includes payments due on stock market trading account and primary market investments. Payments can be made through cheques, demand drafts and electronic payment modes. In case of Mutual Funds, cheque payment is the most common mode of payment. Local cheques and At-Par cheques are accepted as payment but out-station cheques and post- dated cheques (except for SIPs) are not permitted mode for payment. The details of the cheque such as the cheque number, account number and type, bank and branch address have to be provided in the form. Demand draft is accepted as payment for applications from centres where the producer does not have an office or collection centre. Systematic Investment Plan (SIP) allows investors to accumulate a target investment sum through periodic recurring investments. The payment for purchase of units through an SIP can be through post- dated cheques or through an ACH mandate. The date on the cheque should match the date chosen for SIP instalments. 17.8.2 Digital Payment Systems In case of ACH, the investor has to submit the bank account details of the beneficiary such as name, bank, branch, account number, MICR codeof the destination bank branch, date on which credit is to be afforded to the beneficiaries and the amount. 21 Investors fill up the ACH 21MICR is an acronym for Magnetic Ink Character Recognition. This is a 9 digit code to identify the location of the bank branch; the first 3 characters represent the city, the next 3 the bank and the last 3 the branch. The MICR Code allotted to a bank branch is printed on the MICR band of cheques issued by bank branches. 358 mandate form and submit it with their application. ACH facility is available only in select cities as given by the AMC. The form should be signed by all bank account holders. The bank account has to be MICR-enabled. Applications Supported by Blocked Amount (ASBA), is a facility that has been extended to investors subscribing to securities. ASBA is an application containing an authorization to block the application money in the investor’s bank account for subscribing to a primary market issue. Application money is debited from the bank account only if the application is selected for allotment. The debit takes place only at the time of allotment. ASBA facility can be availed through banks specified in SEBI’s list. Payment through ASBA has two advantages. First, since the application money remains in the bank account, it continues to earn interest. Second, only funds to the extent required for allotment of units are debited from the bank account so the need for refunds is eliminated. Payment can be made electronically in several ways. If the investor has internet banking facility, direct transfer of funds can be done online from the investor’s account to that of the product or service provider. If the investor and the service provider have their account with the same bank, investors can provide instructions to their bank to transfer the money to the investment account as a direct transfer. The list of banks with whom they have tied up is provided by the service provider for such facility. Debit cards issued by selected banks can also be used to make payment. The investor can access this payment mode through the website of the service provider. Alternately, the investor could opt for electronic fund transfer modes such as NEFT/RTGS. The NEFT and RTGS systems of RBI allow transfer of funds electronically from the account of the remitter maintaining an account in one bank to a beneficiary in his account maintained with another bank/branch. These facilities benefit investors who do not have internet banking accounts with the designated banks specified. For a transfer to go through, both sending and receiving banks have to be RTGS/NEFT enabled. In order to perform a transaction using NEFT or RTGS, the Indian financial system code (IFSC) is necessary. IFSC is an eleven digit alphanumeric code and unique to each branch of a bank. The first four letters indicate the identity of the bank and remaining seven numerals indicate a branch. This code is provided on the cheque books. The RTGS system is for transactions of Rs. 2 lakhs and above, so the online system will not display the RTGS option for lower investment amounts. There is no minimum amount for NEFT transactions. In order to carry out a transfer of funds through NEFT or RTGS, the bank 359 account details of the beneficiary account holder including account number, bank and branch name and the IFSC code of the beneficiary bank branch have to be provided. NEFT transfer takes place in batches at times defined by the RBI. RTGS transactions are settled continuously as and when they are put through on a real time basis. The charges under NEFT range from Rs. 5 to Rs. 25 per transaction depending on the amount being transferred. In case of RTGS, the charges range from Rs. 5 to Rs. 55 per transaction. Goods and Services tax is applicable on these charges. Even if an investor does not have access to internet banking, he can opt for RTGS or NEFT by filling a request form and submitting at the bank branch with details of bank name, branch, account number and type of account, and IFSC code of the scheme, along with name and address of the fund. Once the request form is received, the bank will generate a unique transaction reference number. The bank’s acknowledgement for the transfer request has to be appended along with the application as proof of transfer. The account number mentioned in the transfer instruction copy provided as proof should have one of the account holders as the first holder. Other digital payments available to the individual include the Unified Payment Interface (UPI), Aadhaar Enabled Payment Service (AEPS), the National Unified USSD Platform, E wallets and others, that are primarily mobile-based applications that allow transfer of funds from bank accounts to meet payments and receive funds using the mobile phone number, Aadhaar number or other identification data registered with the bank. 17.8.3 Prevention of Money Laundering Act Since September 2012, SEBI has permitted cash investments in mutual funds to the extent of Rs. 50,000 per investor per mutual fund, per financial year. This was initiated in order to enhance the reach of mutual fund products amongst small investors, in particular those who do not have bank accounts. Such cash applications should be in compliance with Prevention of Money Laundering Act, 2002, Rules and Circulars issued by SEBI, from time to time. Additionally, the asset management company should have sufficient systems and procedures in place for accepting cash transactions. Though subscriptions in cash are allowed, repayment in the form of redemptions and dividends is only permitted through banking channels. Third party payments or payments made through an instrument issued from a bank account other than that of the investor mentioned as the first holder in the application form, will not be accepted for payment for investing in capital markets. In case of mutual fund investments, exceptions on the third party payment rule are made for grand-parents/parents making payments not exceeding Rs. 50,000 (per transaction) on behalf of a minor, employer making payments on behalf of employee through payroll deductions and custodians making 360 payments on behalf of FPIs. A third party declaration form in which the relationship with the beneficiary has to be stated and details of the bank account through which payment will be made has to be provided. This has to be attached to the application form. The person making the third party payment must be compliant with the PAN and KYC requirements. 17.8.4 Prevention of frauds A very important part of the investment process is to ensure that the amounts being invested are safe from fraud. There have been several instances when the investor gave cheques for investment in a fund and the cheques went into the account of some other person, who then encashed the amount and disappeared. This is why the amount that is being invested would have to come from the investors own account and not a third party. Similarly, there is a bank account that is linked with the investment and this is meant to ensure that the dividends and the redemption proceeds go to the right place. If this does not happen then the investor would have no idea where their money has gone. Initially the cheques used to come with the name printed but this could be deposited in any account, so then the account number was printed on them so they could not be deposited in some other account. Now the amount is credited directly into the investors bank account so this reduces the risk of the amount being stolen even further. Electronic modes of payment take away the physical handling of the money in some form or the other. This ensures that the element of fraud is brought down to the minimum. The various places where the investment is made also take the necessary precautions in the form of collection of various documents, matching the names of the investment holding and the bank accounts while processing the payment mode etc. All this goes on to reducing the element of fraud. 17.9 Documentation for Financial Advice The process of providing financial advice involves collecting information from the client, evaluating the investor’s situation, determining a realistic saving and investment plan that will help the client achieve their goals and executing the plan. The suitability and success of the plan will depend upon how effectively the information was captured, interpreted and acted upon. Clear documentation of the entire process will exclude chances of information being misinterpreted. From an investor protection point of view, the evaluation and advice process is expected to be documented so that unsuitable advice is not given. The SEBI (Investment Adviser) Regulations, 2013 prescribe

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