Frozen demat accounts to lose shares on PAN default

Economic Times in an article has reported that the government is set to act on a proposal to attach securities lying in frozen demat accounts of lakhs of investors if they do not furnish details of their Permanent Account Number (PAN) within a new deadline.

Even though quoting PAN is mandatory since 2007 for operating demat accounts, lakhs of investors have failed to comply with the directives. This had forced the depositories — which hold securities in the electronic form — to freeze the demat accounts of several investors. The failure of many investors to comply with this directive could also be due to the fact that some of these demat accounts were benami or illegal. The unique identity number, which is what the PAN is meant to be, can help taxmen establish a trail.

The government has now decided to impose a fresh deadline for those who have not fulfilled this requirement despite repeated reminders. If investors do not comply with identification norms, the Central Board of Direct Taxes (CBDT) plans to invoke the provisions of the Income-Tax Act to provisionally attach the securities in the frozen accounts.

At last count, frozen demat accounts were estimated to be over 20 lakh and the value of securities held by investors in such accounts at at least over Rs 1,00,000 crore, which is over 2% of the market capitalisation of companies listed on the BSE. India’s major depository, NSDL, alone has over 77 lakh active demat accounts with the custody value of securities in these accounts valued at over Rs 48,00,000 crore.

The finance ministry has already been provided with information relating to these frozen accounts by the two depositories — NSDL and CSDL. Officiails said the CBDT would write to investors whose demat accounts have been frozen warning them about the consequences of their failure to comply with the norms.

The securities in frozen accounts are mainly shares bought by investors either from the primary or secondary market. After the IPO price manipulation scam of 2006, Sebi made it mandatory for depository participants — and later investors — to quote PAN for operating demat accounts. Yet thousands of investors have ignored the deadline leading to freezing of their accounts. But that has not prevented some of them from receiving substantial credits in their accounts in the form of allotment of shares in Initial Public Offerings (IPOs).

The Income-Tax Act has provisions which enable tax officials to provisionally attach and appropriate the proceeds of tax assesses even when there is no demand which is sought to be raised. Over the last couple of years, tax compliance has been on the rise and officials say that the unique identification number has helped considerably on that front. The number of PAN cards issued now exceed 5.5 crore — far in excess of the number of taxpayers in the country. In fact on an average over 10 lakh PAN cards are being issued by the providers approved by the revenue department.

The finance minister P Chidambaram has mentioned in this year’s budget that the PAN is now the sole identification number for all participants in the securities market. Chidambaram had proposed in the budget that he would extend the requirement of PAN to all transactions in the financial market subject to certain threshold limits.