On 2 December, NSE suspended the trading licence of Karvy Stock Broking Ltd for non-compliance of regulatory provisions.
The suspension is on trading in the capital market, futures & options, currency derivatives, debt and commodity derivatives segments. BSE and MCX have also applied these restrictions.
What went wrong?
Karvy Stock Broking had allegedly used securities worth around Rs 2,800 crores of over 95,000 clients by pledging them to borrow over Rs 600 crore from banks. These shares belonged to the clients and as the stockbroker, it does not have the right to pledge them. However, Karvy misused the power of attorney (PoA) given by its clients.
Thus as investors, you need to understand the execution of PoA and your rights.
What is a Power of Attorney?
PoA is a legal document that gives legal authority to a person to operate your account on your behalf as per instructions mentioned in the document.
Is PoA a mandatory requirement?
As per SEBI or any stock exchange, PoA is not a mandatory requirement. However, many brokerage houses insist on it as it makes transactions convenient and hassle-free.
The choice to give (to whatever extent) or withdraw PoA rests in your hands as an investor.
You can revoke or cancel a PoA at any time, however, you may be required to serve a notice period.
Types of PoA
Specific PoA: This gives single or limited range of powers to the person to whom the PoA has been granted. NSE advices investors to give specific PoA to stockbrokers (if you decide to give) which is limited to the usage of the PoA to transfer securities for margin purposes or for settlement of trades done through a recognised stock exchange.
General PoA: It authorises the PoA holder to perform all activities. NSE advices against this for purposes of dealing in the securities market.
In whose favour should the PoA be given?
If you do choose to give PoA for convenience, make sure it is in the name of a SEBI registered stockbroker only and not in the name of an employee, dealer, associate entities, etc.
What should the period of PoA be?
PoA should be issued for a limited period and should never be left open-ended in the hand of your broker or member. The period of PoA must be clearly mentioned. The choice of renewal or otherwise should remain in your hands based on your review of the manner in which PoA has been put to use.
Make sure that the right for cancellation is clearly stated in the PoA.
Specific PoA Dos and Don'ts
As per NSE's booklet on PoAs:
- Give only specific PoA.
- Specify the period for which PoA is given.
- Confirm existence of revocation clause.
- Retain control by insisting that you receive Contract notes, statement of account, demat transaction statement at your address.
- Do not authorise opening or closing of accounts using PoA.
- Do not authorise off-market transactions other than for margin purposes.
- Do not authorise investment decisions and placing of orders using PoA.
- Do not authorise transfer of securities/funds account other than that of Trading members' Pool Account of Client Margin Account.
Should the account only be operated by PoA holder?
You hold the complete right to operate your account and the PoA is just an authorisation given by you to operate your account on your behalf.
In a PoA to a stock broker, take special care that:
- you have retained the powers to make your investment decisions on when you wish to purchase or sell securities and not authorise this to the PoA holder.
- You have retained the rights to receive all information relating to transactions and account directly. Make sure the right to such information does not just lie with the PoA holder.
- You have agreed to use securities and your funds for your use only and not permitted the broker to use it for their monetary needs or for the purposes of their other clients.
- You have retained the right to open or close account solely with you.
- The PoA is in the name of the SEBI registered stockbroker and not in the name of an individual or another entity.
Things to know
- You are required to receive a copy of executed PoA after completion of KYC procedure from your broker.
- All account holders in a joint account are required to execute the PoA.
- PoA can only be given by the account holder and not a family member.
- You can register for online applications via Speed-e, provided by depositories (NSDL and CSDL) for online delivery of securities as an alternative to PoA.
- Ensure that you receive Contract Notes within 24 hours of your trades and Statement of Account at least once in a quarter from your Stock Broker.
- Securities provided by you towards margin are not permitted to be pledged by your Stock Broker for raising funds.
- If you have opted for running account, please ensure that the stockbroker settles your account regularly and in any case not later than 90 days (or 30 days if you have opted for 30 days settlement).
- Running account authorisation is required by broker to hold funds in investor's trading account so that broker can hold funds for a set amount of time, say, a month or a quarter. If an investor doesn't sign this document then the investor has to pay the entire amount on purchase and will be paid the entire amount on sale.
- Do not keep funds and securities idle with the Stock Broker.
- Regularly login into your account to verify balances and verify the demat statement received from depositories.
- The users of SPEED-e can also check latest balances and transactions in their demat accounts through a facility called Internet-based Demat Account Statement (IDEAS) and monitor the status of execution of instructions.
- Check messages sent by Exchanges on a monthly basis in respect of funds and securities balances reported by the trading member and immediately raise a concern if you notice a discrepancy.
- Always keep your contact details i.e. Mobile Number / Email ID updated with the stockbroker. You may take up the matter with Stock Broker / Exchange if you are not receiving the messages from Exchange / Depositories regularly.
- If you observe any discrepancies in your account or settlements, immediately contact your stockbroker and if the Stock Broker does not respond, contact Exchange/Depositories.
- When there is a shortfall in the margin or failure of payment by you, the PoA holder (stockbroker) is permitted to excise authority under PoA to dispose securities to the limited extent of the money due from you.