Sebi to issue norms on power of attorney

In a move to protect the interest of investors, the Securities and Exchange Board of India (Sebi) has asked a high-level committee to suggest guidelines for the power of attorney (PoA) that investors issue in favour of their brokers. The agreements that are signed between brokers and investors are also up for review.

The committee consists of representatives from stock exchnages, depositories, investors’ associations and Sebi representatives.

The regulator has said that there should be a standard PoA and that it will amend the broker-client agreements based on the committee’s recommendations. Sebi and the stock exchanges have received numerous complaints from investors regarding the misuse of the PoA by their brokers. Investors have been saying that they have signed the client and KYC forms without properly knowing/reading them.

Clients generally issue PoA in favour of brokers who can debit demat accounts without waiting for specific delivery instruction. PoAs should be specific, but brokers get their clients to sign general PoAs, and in most cases clients don’t know about this, a source close to the development said.

A general PoA allows brokers to sell shares meant for investments and credit in the cash segment to pay mark-to-market margins for derivatives. There were cases where brokers have prematurely recovered finances provided against the shares without investors’ permission.

After the January 2008 crash, the National Stock Exchange through its arbitration department has received thousands of complaints related to the derivatives segments. About 1,700 complaints are still pending.

In many cases, brokers, involving some well-known names, have sold cash market holdings of clients without their knowledge for paying deficiency in MTM required for derivatives transactions.

The source said that the regulator has issued a proposal to ensure that PoAs are issued separately and are specific and not general in nature.