Sebi Proposes New Rules for Associations of Persons to Open Demat Accounts for Securities

The Securities and Exchange Board of India (Sebi) has put forward a proposal to permit Associations of Persons (AOPs) to open demat accounts in their own names. This would allow them to hold specific securities, excluding equity shares. The initiative aims to simplify business operations and promote the transition from physical to electronic securities holdings.

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In its consultation paper, Sebi suggested amending existing regulations to facilitate this change. AOPs would be required to provide their Permanent Account Number (PAN) details when opening these accounts. They must also ensure that only authorised securities are held, explicitly excluding equity shares.

Public Feedback and Legal Considerations

Sebi has invited public feedback on this proposal, with comments due by November 5. The suggestion emerged after Sebi received recommendations to allow partnership firms, AOPs, and unregistered trusts to open demat accounts under their own names, rather than solely in the names of partners, members, or trustees.

Currently, these entities face restrictions on holding company shares unless recognised as separate legal entities. Although the law clearly prohibits them from becoming company members, there is ambiguity regarding their ability to hold other financial assets like corporate bonds, government securities, or mutual fund units in demat form.

Challenges in Legal Interpretation

A review of legal provisions revealed difficulties in forming a definitive stance on whether partnership firms and unregistered trusts can hold mutual fund units, corporate bonds, or government securities. Consequently, no changes are currently planned for these entities.

The proposal reflects Sebi's efforts to address these complexities and streamline processes for non-corporate entities. By allowing AOPs to open demat accounts directly in their names, Sebi aims to enhance transparency and efficiency in the securities market.

This move could potentially pave the way for similar considerations for other non-corporate entities in the future. However, for now, the focus remains on AOPs and ensuring compliance with existing regulations while facilitating easier access to electronic securities holdings.