Just when the market was falling, Pankaj Nikam, an avid investor, started looking at his broking account statement closely. He, like many other investors, who had examined their notes when the losses started to mount, saw many trades that he had not instructed and were unknown to him. He made a complaint to the exchanges and was told that there was not much they could do towards his complaint as he had written a power of attorney (PoA) document allowing the brokerage the power to deal on his behalf and that they were within the laws.
Nikam is one of the many investors, who want to make use of the opportunity that the equity market has to offer and yet time and again are disappointed when left with a feeling of being gypped. While it has also got to do with the blind faith that people put in the intermediaries when the markets are rushing ahead and wake up and question systems when the going is tough, it has also a lot to do with the prevalent systems.
When approaching a broker to open an account, investors need to fill up a load of papers and submit several documents. In this mad rush to get the documents filled, they also end up filling the PoA in favour of the broker or the depository participants. And herein lies a systemic chink that many unscrupulous brokers and sub-brokers have taken advantage of.
C J George, MD, Geojit BNP Paribas Financial Services, one of the fastest growing brokerages says, “Due to the cumbersome procedure in opening a demat and trading account, most of the ordinary investors never bother to read through each clauses of the contract.
Certain investors mentioned that they were literally coerced to fill in the PoA. “Our relationship manager said that if we did not fill in the PoA, we would have to submit a delivery instruction slip (DIP) physically to the broker and this would be inconvenient and also would mean that the trading opportunity was lost in case there were quick inconvenient price changes. So we trusted them and complied,” says Abhinav Rathi, another investor.
And, many times, it has been noticed that this trust is breached. There have been umpteen cases where the sub-broker has overtraded the account to gain transaction fees as their commission is based on the volumes of trades and they have targets to meet. This is the most common practice. There have been a number of allegations where client’s shares have been sold without his knowledge by the relationship managers of the broking firm where he has given the PoA. Then there are times when the account of a client with extra margin available is used for somebody who does not have.
The new proposed guidelines are expected to curb such rampant misuse of the PoA. Firstly, the document will have to contain prescribed clauses as mentioned in the guidelines that are currently in the form of a discussion paper and are available on the Sebi website. And, the PoA will have to be executed in favour of brokerage or depository and not in favour of sub-broker or employees. This will keep the pressure on the brokerage to steer clear of malpractices as it calls for direct accountability on the parent firm. And the brokerage will also have to furnish an original copy or a true certified copy to the client which will elucidate the details of the arrangement.
“In this sense some of the proposals mentioned in the Sebi’s discussion paper would definitely help raise investors confidence and trust. This will also help the broking house as investors will feel more comfortable and safe about their demat custody,” says George.
The Secondary Market Advisory Committee (SMAC) of the Sebi has already discussed the proposed clauses in PoA in the context of possible risks for the clients in this. These have been finalised as per the discussions held between the representatives of stock exchanges, depositories, brokers, investor associations and the deliberations in the meeting of SMAC.
Now, Sebi has laid down clear terms what the PoA should contain. Apart from the details of the banks and the exchanges on which the PoA will be applicable, the document will also have to provide the particulars of the beneficial owner accounts and the bank accounts of the clients that the stock broker is entitled to operate.
The PoA should be executed and stamped as per the rules and law prevailing in the place where the PoA is executed or the place where the PoA is kept as a record, as applicable. The PoA should provide for a clause for settlement of disputes arising out of the operations of the PoA. Broking disputes will have to be settled under the bye-laws of the stock exchange concerned where the trades have been executed and depository related issues under the bye-laws of the depository concerned, where the beneficiary owner’s demat account is held.
“This will smoothen the arbitration process as investors found it difficult to manage their grievances as many big brokers have centralised arbitration mechanisms and investors from non-Mumbai-based places were inconvenienced,” says a leading lawyer in Mumbai.
Moreover, the PoA would be a restricted one, in which the brokerages will have to specify terms and conditions of recovering margin money and delivery obligations out of trades. Earlier, generic PoA were filled up arbitrarily and would mean that the brokers had unrestricted freedom in carrying out trades. Now, the moments will be restricted.
According to Nirav Gandhi, vice-president operations, KR Choksey Securities, reckons that the PoA can be made finer in terms of its execution. According to him, “A clause that broker can use the client’s shares to meet the selling obligation to the exchange only against the sales order given by the investor himself and not by the broker.”
In a similar move earlier, Sebi had proposed a clause in a running account authorisation for settlement of funds and securities by both client and brokers at the end of every month. Further, the broker is required to send all the clients a monthly statement to that effect. The proposal also makes it mandatory for the broker to duly explain in the statement of funds and securities that has been retained to meet the clients outstanding positions or transactions in the cash and derivatives market so that misuse of client’s account by the broker can be plugged off.
Overall, the PoA shall authorise the broker or depository participant to send SMS alerts regarding broking transactions and debits to the beneficial owner accounts of the client. Sebi has now asked for comments are invited from the public on the proposal by November 30, 2009.
So as the guidelines in the discussion paper get implemented, the unscrupulous brokers will have to tighten their operations and get transparent. This could have an impact on their operational costs. However, according to a senior broker, the major brokerage houses have already put systems in place and offer transparent services. It is the sub-brokers, especially in non-metros, who often indulge in malpractices. All this is expected to protect investor interests and grow the equity investing movement in India.