Misuse of Power of Attorney: SEBI Issues Guidelines for Execution of DDPI and Securities Transfer

Moneylife Digital Team 05 April 2022

Investor Interest

Following the debacle at Karvy Stock Broking Ltd, where investors' power of attorney (PoA) was misused to transfer shares and funds, the Securities and Exchange Board of India (SEBI) has now issued guidelines on the execution of 'demat debit and pledge instruction' (DDPI) for transfer of securities towards deliveries and settlement obligations and pledging or re-pledging of securities.

In a circular, the market regulator says, "...under DDPI, the clients shall explicitly agree to authorize the stockbroker and depository participant to access their beneficial owner (BO) account for the limited purpose of meeting pay-in obligations for settlement of trades executed by them. The DDPI shall serve the same purpose of PoA and significantly mitigate the misuse of PoA."

The use of DDPI should be limited only for two purposes, SEBI says. One for transfer of securities held in the beneficial owner account of the client towards stock exchange related deliveries or settlement obligations arising out of trades executed by such a client on the stock exchange through the same stockbroker and the second for pledging or re-pledging of securities in favour of the trading member (TM) or clearing member (CM) for meeting margin requirements of the client in connection with the trades executed by such a client on the stock exchange.

According to SEBI, the client may use the DDPI or opt to complete the settlement by issuing a physical delivery instruction slip (DIS) or electronic delivery instruction slip (eDIS) themselves. "With the implementation of this circular, PoA shall no longer be executed for the conditions specified above."

Further, the market regulator says the DDPI should be indexed as part of the voluntary documents of SEBI circular no. CIR/MIRSD/16/2011 dated 22 August 2011 and should be executed only if the client provides his or her explicit consent, including internet-based trading. "The DDPI shall also be adequately stamped. The DDPI can be digitally signed by the clients," it added.

Earlier, on 27 August 2020, SEBI clarified that PoA is optional and should not be insisted upon by the stock broker or stock broker depository participant to open the client account.

However, the market regulator says that after its new guidelines, existing PoAs would continue to remain valid until the time the client revokes the same.

"Thus, the stockbroker and depository participant shall not directly or indirectly compel the clients to execute the DDPI or deny services to the client if the client refuses to execute the DDPI. Also, PoA is optional and should not be insisted upon by the stockbroker or depository participant to open the client account," it added.

With the new changes, SEBI says its 22 August 2011 circular stands amended, with the new changes on PoA being optional and not mandatory.

"Securities transferred on the basis of the DDPI provided by the client shall be credited only to the client's trading member pool account. The DDPI provided by the client shall be registered in the demat account of the client by TM or CM. Stock exchanges and depositories shall ensure that stockbroker and depository participant providing DDPI facility, has enabled its clients to revoke or cancel the DDPI provided by them," the market regulator added.

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