Rescuing investors from a growing problem

Sebi’s proposal of a restricted power of attorney will reduce misuse of broking accounts.

Six months after opening a trading and dematerialised account, Pawan Seth was surprised to find 60 per cent of the money in his account missing. He inquired and discovered the sub-broker was trading on his behalf and had made losses.

When he launched a complaint with the broker, he was informed the sub-broker had the power of attorney (PoA) and could operate the account without permission. This was part of the 60-page document (broker-client agreement) he had signed.

“This is a common practice these days that franchisee and sub-brokers follow. They get commission based on the amount of brokerage they generate. So, they operate the customers’ account and trade regularly – many times without their knowledge,” said an executive with a brokerage account.

This is why stock exchanges and the Securities and Exchange Board of India (Sebi) are flooded with numerous disputes between brokers and clients, arising due to misuse of power of attorney. In the past, the market watchdog had asked the stock exchanges to declare investor-broker disputes on their websites. The total number of complaints from clients listed on the Bombay Stock Exchange and National Stock Exchange was 5,681 between March and October-end.

And so, yesterday, Sebi proposed the PoA be restricted to only a few things. These include, transfer of shares and money to the broker with whom the client has the account. The broker cannot transfer the money or shares to another group company. Sebi also suggested brokers should send SMS messages for every transaction that takes place in the client’s broking, demat and banking account. Brokers are also supposed to send either the original PoA documents or a certified copy to the client, said Sebi. But these are just at the proposal stage; the market regulator has sought opinions from all interested parties.

“There were no existing guidelines because such regulations would be a part of the commercial practice. This is the first time Sebi has tried to standardise the norms brokers should follow while getting into a PoA,” said R Mohan, chief compliance officer at India Infoline.

The Bombay Stock Exchange, on its part, recently came out with an advertisement where it said clients should make sure the PoA is given for a limited purpose, regarding only the movement of funds and securities for exchange-related settlements and margin obligations.

But the problem goes deeper. Many are not even aware that they are signing on a PoA. “With some brokers, clients may even need to make over 60 signatures while getting a trading and demat account,” said Praveen Malik, head of compliance at Centrum Broking.

Due to the lack of any regulation, every brokerages have their own set of PoA regulations, that favoured them. In some cases, the PoA even allows a broker to open and close accounts on behalf of the client and to trade.

There are few a things a person can do to avoid getting in a dispute with the broker. For one, investors should remember the PoA is not a compulsory document. “Presently, clients are not legally bounded to get into a PoA agreement,” said Mohan. But, a broker may not process the application till the customer signs on the PoA. Also, clauses in the client-broker agreement still give brokers the right to freeze accounts in case of delayed payments.

It is necessary that you read through the clauses to see if the broker can operate your account. Also, do not leave the space blank that ask you to authorise a person to operate your account. Cross it out in case you don’t want anyone specific to trade.

In case you authorise the broker, sub-broker or the franchisee to operate on your behalf, make sure you mention the bank and trading account these intermediaries can operate. And, once you have filled your forms, keep a photocopy. Also, get a certified true copy or the original PoA agreement from your broker.

Some brokers even pledge clients’ shares, in case of delayed payment. If Sebi’s proposal comes into force, this will not be possible. But till then, ensure that the broker has not included such a clause in either the PoA or client-broker agreement.