SEBI Allows Associations of Persons to Open Demat Accounts for Financial Instruments

Opening Demat Accounts for Associations of Persons: SEBI Circular Overview

The Securities and Exchange Board of India (SEBI) has recently issued a circular that allows Associations of Persons (AoPs) to open demat accounts. This initiative responds to stakeholder requests and aims to simplify business operations. In the past, AoPs could only hold demat accounts registered in the names of individual persons. With the new provisions, AoPs are able to hold various financial instruments—such as mutual fund units, corporate bonds, and government securities—in dematerialized form, subject to certain conditions.

Key Provisions of the Circular

1. Compliance Requirements:

   • AoPs must ensure adherence to the legal statutes that govern their formation when subscribing to securities.
   • The Permanent Account Number (PAN) details for both the AoP and its Principal Officer—a key administrative or managerial individual—must be submitted.

2. Restrictions on Use:

   • The demat account cannot be utilized for subscribing to or holding equity shares.
   • In disputes, the Principal Officer will represent the AoP legally, while all members are jointly and severally liable.

3. Implementation by Depositories:

   • Depositories are instructed to update their systems, revise applicable rules, and inform market participants regarding these changes.

Effective Date and Availability

The circular, which outlines these provisions, takes effect on June 2, 2025. It can be found on SEBI’s official website under the “Legal Circulars” section.

1. SEBI has received requests to allow the opening of demat accounts in the name of AoPs.

2. After careful consideration of relevant legal provisions and discussions with stakeholders to facilitate ease of business, the decision has been made to permit AoPs to open demat accounts for holding:

   • Mutual fund units
   • Corporate bonds
   • Government securities

3. Amendment to the Master Circular: A new section, 1.2.6.A, titled "Opening of Demat Account in the name of Association of Persons (AoP)", will be inserted after section 1.2.6 of the Master Circular for Depositories dated December 3, 2024:

   • 1.2.6.A An AoP may open a demat account for the aforementioned securities under these conditions:
     • 1.2.6.A.1: The AoP must ensure compliance with governing statutes when subscribing to financial instruments.
     • 1.2.6.A.2: PAN details of the AoP and its Principal Officer must be provided.
       • Explanation: The term "Principal Officer" refers to individuals like secretaries, treasurers, managers, or anyone associated with the AoP’s administration.
     • 1.2.6.A.3: Depository Participants must confirm:
       • 1.2.6.A.3.1: The AoP only holds permissible securities in dematerialized form.
       • 1.2.6.A.3.2: The demat account cannot be used for equity shares.
     • 1.2.6.A.4: In disputes, the Principal Officer will act as the AoP's legal representative.
     • 1.2.6.A.5: Members of the AoP are jointly and severally liable.

4. Actions for Depositories:

   • 4.1: Implement necessary systems for execution of these provisions.
   • 4.2: Revise relevant bye-laws and regulations accordingly.
   • 4.3: Notify market participants (including investors) and publish updates on respective websites.

5. Effective Date: These provisions will be enforced from June 2, 2025.

6. This circular is issued under the powers granted by Section 11(1) of the Securities and Exchange Board of India Act, 1992, in conjunction with Section 26(3) of the Depositories Act, 1996, and Regulations 59 and 97 of the SEBI (Depositories and Participants) Regulations, 2018.