Brokers blatantly ignore SEBI instructions on Power of Attorney

While ostensibly towing the line on SEBI regulations, broking firms do not clearly outline alternative options to potential customers, leading them to believe that signing a general PoA is the only way to trade

Yesterday, Moneylife discussed the procedure for opening a trading account and how there is a contradiction between a company’s official stance and what their customer service executives tell potential clients.
(see: http://www.moneylife.in/article/8/5436.html).

While the earlier article was concerned with 3-in-1 bank accounts, this article concentrates on the issue of Power of Attorney (PoA).

PoA gives brokers the power to debit and credit an account and sell or buy shares in the account holder’s name without their express approval. While the firms claim that it is just a precautionary measure so that they can automatically debit or credit an account or sell shares if the client buys them without having the necessary funds, it is possible for them to trade their clients’ shares lying in demat accounts without their permission to take advantage of movement in stock prices, use the client’s money to fund the margin obligation of another, or run up large number of trades to generate higher commissions.

While the Securities and Exchange Board of India (SEBI) has concrete rules on the matter that state that PoAs cover specific areas only, most brokers get clients to sign general PoAs, giving wide powers to access shares and funds of their clients.

Moneylife decided to do a survey of ten top broking firms, all of whom offered online accounts (ICICIDirect, ShareKhan, Geojit BNP Paribas, Kotak Securities, HDFC Securities, HSBC InvestDirect, Prabhudas Liladhar, SMC, Angel Broking and Indiabulls) to see which of them would let us open a trading account—either online or offline—without signing a PoA.

Online trading allows you to log on to your account from your home or office and trade shares, which automatically reflect in a bank account that is linked to the trading account and shares are deposited or taken out of a similarly linked demat account.

Offline trading involves contacting the broker or their agent, either directly through a branch or on the phone, where you have to sign an authorisation or instruction slip for each trade. It therefore cannot be misused by the broker.

However, the main problem with this type of trading is that it lacks the features offered in the online accounts such as performance trackers and real-time quotes. It is also a more cumbersome process and poses problems for people who live in remote areas where contacting the broker is an issue.

Brokerage for offline trading may be marginally higher as in the case of Geojit as the process is slightly more complicated than online trading.

Though SEBI has made it clear that brokers cannot refuse services to clients who do not sign PoAs in their favour, all the companies that Moneylife approached refused to open an online account without signing a PoA, the only option being to open an offline account. The only exception was Angel Broking, who informed us that we did not need to sign a PoA to open an online account.

While the issue of signing a PoA for an online account is debatable itself, our main concern was that we were only informed of the offline account after much prodding and arguing, with some companies not even informing us of it until we brought it up ourselves.

“A customer is free to open a bank account without a PoA. However, PoA is a regulatory requirement for online broking services,” said a spokesperson from ICICIDirect. While this statement is in tandem with SEBI guidelines, the option of an offline account is never highlighted unless aggressively pushed for by the customer, and the PoA signed for the online account is usually a general one.

The issue of general versus specific PoAs was explicitly highlighted in a SEBI circular issued on 22 April 2010 where the market watchdog took a firm stand stating several conditions and restrictions on PoAs made in favour of stockbrokers.

Among the activities that the circular prohibited were transfers of securities for off-market trades, transfer of funds from the bank account of the clients for trades executed by the clients through another stock broker, executing trades in the client’s name without their consent, and specifically, merging of a client’s balances to cover a debit in another client’s account.

While all these terms and conditions look good on paper, they can only be effective if they are enforced correctly, something which is lacking mainly due to the simple fact that investors often do not even bother to fully read the documents that they are signing.

Until investors become more aware of their rights and SEBI cracks the whip on errant brokers, no amount of circulars and notices can stop investors from being taken for a ride.

User

COMMENTS

agarwal mukesh

6 years ago

Practically all the broking firms/companies refuse to open even offline account without you agreeing to open a Demat account with them and a POA given in their favour which is so wider that they can do everything with not just the demat/saving account linked with that trading account but with any demat/saving/current account held by you or sometimes even any shares - even physical ;held by you.If you object to any of the clauses of POA,Broking account opening form etc or you don't want to sign even the optional clauses/forms;you will be told verbally that these are standard forms and you can't delete/change anything and you will be forced to sign even optional clauses/forms viz: form for maintaining a running account etc and if you don't agree then they will not open your account.
I am telling this from my personal experiences.They even charge hefty interest & debit other charges from your account without any of your fault and if you try to complain ;they will stop executing your orders causing you irrepairable losses and since practically all of them are doing the same thing and you can not trade/invest in the stock market without going through them;you can not do anything.
Why SEBI can't do away with stock bokers?At least for online transactions,it can be done because in online transactions,everything - money as well as share transfer;is online and no need of brokers is there.
If the same is done then may be the brokers will learn the lesson;otherwise;SEBI can do one thing: SEBI can make standard forms which protects the investors interests and make a law-either by itself or through Parliament that only the clauses/forms which are mandated by SEBI will be binding on clients and anything beyond that even if signed by the clients because of their ignorance or because of pressure from the broker;will not be binding on the clients and will be illegal.
If SEBI takes the abovesaid measures then only its circulars will have any meaning;otherwise;all the measures taken by SEBI won't serve any purpose.Is SEBI listening?

Shantilal Hajeri

7 years ago

I totally agree with your experience. Most of the companies have bulky agreements running to hundreds of pages. All the clauses are unilaterally drafted in favour of the brokers. They need over hundred signatures. Hence, I did not open a demat and trading account with any of them because the terms were not acceptable to me.
But as an end result I could not participate in the stock market.
When I ca invest in stock market through a mututal fund with just two page application and one signature, why should the investors tie their hands with the brokers by opening d'mat and trading account.
Recenly I pened a 3in1 account with ICICIDirect. Are there any clasues detrimental tot he interest of investors in the agreements of ICICIDirect?

Vaidya D V

7 years ago

Where can I see the fully copy of the circular mentioned in the article. (web address ? )
The issue of general versus specific PoAs was explicitly highlighted in a SEBI circular issued on 22 April 2010 where the market watchdog took a firm stand stating several conditions and restrictions on PoAs made in favour of stockbrokers.


parackal thomas

7 years ago

One way to check on and spot broker's purchase/sale without clients consent is to make it MANDATORY THROGH SEBI that all Brokers MUST provide a link fo the customer to see their accounts with the Broker in REAL TIME Market action like what you see on SIFY Finance for NSE and BSE.
This will enable people in rural areas or ABROAD to monitor their investment 24 hours of the day.

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