Client Consent for Off-Market Transfers — The OTP Validation Requirement Explained
SEBI mandates that all off-market transfers of securities from a client's demat account require the client's consent through One Time Password (OTP) validation. The Depositories shall also put in place a system of obtaining client's consent through One Time Password (OTP) for such off-market transfer of securities from client's demat account. This article explains the OTP requirement, the exceptions for erroneous transfers, and the mechanism for reversal without OTP.
The Regulatory Basis
SEBI, vide circular no. SEBI/HO/MIRSD/MIRSD-PoD-1/P/CIR/2023/71 dated May 17, 2023, titled "Master Circular for Stock Brokers", specified that all off-market transfer of securities shall be permitted by the Depositories only by execution of Physical Delivery Instruction Slip (DIS) duly signed by the client himself or by way of electronic DIS. The Depositories shall also put in place a system of obtaining client's consent through One Time Password (OTP) for such off-market transfer of securities from client's demat account.
What Are Off-Market Transfers?
Off-market transfers are transfers of securities that take place outside the stock exchange trading system. These include transfers between demat accounts that are not settlement of trades executed on the exchange. Examples include:
- Gift transfers.
- Inheritance transfers.
- Transfers between family members.
- Transfers pursuant to court orders.
- Any other transfer not executed on the exchange trading platform.
The OTP Validation Requirement
How It Works
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Initiation of Transfer. The transferor (client) initiates an off-market transfer instruction through their Depository Participant (DP) using physical Delivery Instruction Slip (DIS) or electronic DIS.
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OTP Generation. The Depository generates an OTP and sends it to the client's registered mobile number and/or email ID.
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Client Consent. The client must enter the OTP to validate and confirm the transfer instruction.
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Execution of Transfer. Only upon successful OTP validation, the Depository executes the off-market transfer.
Effective Date
The OTP requirement for off-market transfers came into effect from November 1, 2020.
Exemption for Erroneous Transfers
The Challenge
Depositories faced challenges with regard to obtaining OTP in case of reversal of erroneous transfers in demat accounts.
The Solution
Considering the challenges involved and in order to facilitate the reversal of erroneous transfers, SEBI decided that a well-balanced and operational mechanism for exemption from OTP may be provided for reversal of such erroneous transfers in the demat accounts.
Mechanism for Reversal Without OTP
1. Internal Committee
Depositories shall constitute an internal and a joint committee for examining the intra-depository and inter-depository erroneous transfers respectively. Such committee shall be headed by a Public Interest Director of Depository and have a minimum of 3 members including the head.
2. Examination of Erroneous Transfers
The depositories shall place before the committee all such instances of erroneous transfers pending for reversal. The committee shall examine such erroneous transfers and provide an opportunity of hearing to both the parties in the interest of principles of natural justice.
3. Decision Making
The committee shall, based on the documentary evidence and the hearing, take a decision on the basis of reasons to be recorded in writing.
4. Implementation
Depositories shall subsequently act based on the decision of the committee and shall send an email to the registered email ID of the transferee, informing about the decision of the committee.
Prevention of Erroneous Transfers
To minimize such erroneous transfers, Depositories shall provide a facility for the investors and DPs to add and verify the beneficiaries before execution of off-market transfers including inter-depository transfers. This facility ensures that the beneficiary details are verified before any transfer is initiated.
How We Help
At Anuj Desai & Associates, we help stock brokers and clients understand the OTP validation requirement for off-market transfers, implement the necessary systems, and ensure compliance with SEBI's requirements. If you need assistance with off-market transfer compliance, reach out to our regulatory compliance desk.