The demat account plays a key role in share trading. Use the account to invest on your own or employ a broker to invest on your behalf. Just make sure to take precautions when choosing the latter option. There have been instances of unscrupulous brokers eroding the capital base of the client. Some brokers misuse the agreements and their authority. They may transact recklessly, without informing or seeking the permission of the investor. This can be a deterrent to amateur investors. But there are ways to keep your demat account safe from fraud.
Power of Attorney (PoA): Know what you’re getting into
When you authorise a broker to operate your demat and trading accounts, you hand them a PoA. This document forms a part of the account opening paperwork for a demat account.
The PoA gives the broker the authority to deliver shares, settle funds, and automatically collect margin payments. This enables seamless transfer of securities as well as the payment and receipt of funds. The client’s explicit permissions are not required before every sell order. However, although it ensures ease of operations, the PoA also promotes unfair practices.
Be aware of the SEBI guidelines
The Securities and Exchange Board of India (SEBI) issues guidelines to prevent fraudulent practices in the stock market. For instance, in 2010, SEBI modified the guidelines for drafting PoA agreements. Brokers must now get a limited-purpose PoA from their customers. This replaces the general-purpose agreement in use earlier.
The limited-purpose PoA restricts the broker’s authority. They can only transfer funds and securities from the client’s demat and bank accounts. The broker is still able to sell shares but only to the extent of the recovery of dues. Transfers for off-market trades are no longer permitted. Furthermore, the broker must get the customer’s written consent before carrying out any trades.
Earlier, brokers would sometimes refuse to open accounts if the client did not issue a PoA. But SEBI states that brokers cannot refuse services if the client is unwilling to sign a PoA. The agreement can also be revoked by the client without notice.
How to safeguard your demat account?
The rules and restrictions certainly help. But unscrupulous brokers could still misuse your account. So, it helps to be aware of the do’s and don’ts.
- Don’t sign the PoA if you don’t need the service. If services are refused, remind the broker that this is a punishable offence.
- Remain aware of your account activity. Check in detail every account-related notification that you receive.
- Check the holding statements to see whether your holdings are in order. Brokers issue transaction statements within 15 days and holding statements within a month of activity. The statement may be delivered once every quarter if there is no activity in your account.
- Avoid leaving signed delivery instruction slips with the broker. These are like blank cheques.
- Read the fine print to know whether the PoA is revocable.
- Transfer money from your bank account to your trading account only when making a purchase. Don’t keep money there otherwise.
If you want to know how to open a demat account, it is advisable to go through a reliable institution like Kotak Securities. You could look at customised demat options to suit your trading needs. Plus, having an account with a reputed and trustworthy brokerage firm assures you of transaction security. It may protect you from fraudulent practices to a considerable extent.