Various instances of fraud associated with demat accounts have been reported in the past decade. There have been cases where the broker has transferred mutual fund units to use as collateral to make up for margin requirement on trades without seeking consent from the investors. This could be a cause of worry for the large number of Indian investors that rely on demat accounts for convenience of transferring funds and securities.
The new SEBI (Securities and Exchange Board of India) guidelines have standardized the rules for drafting Power of Attorney (PoA) agreements which have reduced the potential for demat frauds in India.
The guidelines now allow the brokers to seek a limited purpose PoA from their clients rather than a general purpose agreement used earlier.
This limited purpose PoA keeps the broker's authority merely to transfer of securities and funds for the purpose of settlement. While holdings can still be sold, the sale is restricted to the extent of recovery amount due only. Securities cannot be transferred by the broker for off-market trades and trades cannot be executed in the client's name without written consent.
How has it changed?
Earlier, it was possible for a broker to not transfer shares to the client's account after a purchase and instead keep them in the common pool account to utilise them to fulfill margin requirements of other customers.
This cannot be happen anymore as the electronic demat system does not allow a transaction without a possibility of leaving audit trail behind. If a fraudulent transfer is made, it can now now be tracked.
PoA is important in terms of convenience. While it is not compulsory to give one to the broker, the customer will have to sign a delivery instruction slip and physically submit it to the broker on time for release of shares. With a PoA agreement, the broker gets access to the demat account to release the shares when they are sold.
The PoA can be revoked at any given time without notice except in the case of outstanding dues.
What can you do to protect your demat account from fraud?
Despite the rules and guidelines, frauds could take place and it is ultimately the investor who holds the risk of losing the money. It is therefore wise for the investor to remain aware of their account activity.
- Check every SMS or email notification you receive from your broker as well as the depository (CDSL or NSDL). Make sure to check every detail of the transaction completed.
- Make sure your mobile number and email is rightly registered with the broker as well as the depository.
- Read the monthly holding statements issued by your broker to see if all the securities you hold are correctly listed. Brokers are required to issue a transaction statement within 15 days and a holding statement within a month of activity in a demat account (quarterly if no activity).
- If you notice a fraudulent activity on your account, file a complaint with the depository as soon as possible. If you delay in taking action, the shares could be sold by the broker or third party and it will be difficult to recall them or the money.
- Do not keep excess money in your trading account and only transfer money from your savings account to it when you decide to make a purchase.