There goes a saying that “You should never ask a barber whether you need a Haircut”!. You can not ever expect your Stock Broker to tell if it is mandatory to give Power Of Attorney. There is lot of confusion and apprehension in India regarding this dreaded document. In this article, we will try to clear some of the doubts and explain the precautionary steps that traders can take if he/she decides to execute the POA.
Before year 2010, numerous instances of misuse of Power of Attorney by the brokers were reported by retail as well as HNI Investors of India. Brokers simply used POA as blanket to cover up their misdeeds. Armed with POA, franchisees and sub-brokers simply behaved like Jim Carrey below and traded in their client’s account with the sole purpose of generating more and more brokerage and meet their target.
What is Power Of Attorney (POA)?
Simply put Power Of Attorney is a legal document executed by Traders/Investors in the favor of the Stock Broker authorizing him to trade through demat account and access the funds in bank account of the Client(Trader) on Client’s behalf.
Going by the terminologies, at first instance it looks so horrifying that we are giving full control to somebody to manage not only one but two accounts simultaneously, isn’t it?!
Types of Power of Attorney:
Don’t worry, even though we mentioned “full” control, there are different types of POA’s using which one can limit the control handed over. Basically there are two types of Power Of Attorney executed in India
- General Power Of Attorney:
It is the most dangerous and highly abused Power Of Attorney and hence one should never execute this type of POA, not only for Demat account but also for any other things in life unless it is warranted. With this, the POA holder (Stock Broker) can perform all the activities that the original person (the Client) can do.
- Specific Power Of Attorney:
With this, you are restricting the POA holder to perform only certain activities which you feel will not harm you to a greater extent. Which are the “activities” that we are talking about? We will see it soon.
~*End Of Advertisement*~
Why your Broker is insisting to Execute Power Of Attorney?
If you don’t know this already, let us tell you that your demat account is highly secure and regulated account similar to your bank account. Anybody can deposit the securities(shares) to your demat account but cannot debit them without your consent. You can provide your consent by issuing the Delivery Instruction Slip(DIS) which you can think as bank’s cheque leaf that you’ll issue whenever you want to sell shares or want to transfer shares from one demat account to another demat account.
But with the advent of Online Trading, it is not viable to issue the DIS to broker every time you want to sell shares. If your broker is not located in your city, then there is additional overhead of courier charges and risk of loosing DIS. So for all these reasons, POA is generally issued in favor of the broker so that he can debit the shares from your demat account without DIS when you sell them online. Remember that without POA or DIS he cannot sell your shares.
Is Power Of Attorney applicable to all sorts of Accounts?
Also remember that POA is applicable to only Demat account. Question of executing POA for trading account to do trade in Futures and Options (F&O) does not arise at all. If your Brokers insisting you to sign POA for trading account, you know what to do, simply run away from that Broker!!
Now the Big Question, Is it Mandatory to Execute Power Of Attorney?
Absolutely NOT!. It is not compulsory to sign Power Of Attorney and no broker can deny services to you if you wish not to give Power Of Attorney. Earlier to year 2010, Stock Brokers used to compel their customers to sign POA and even refused to open the account if they didn’t sign. As an Investor, you have the choice of deciding whether to give or not to give POA.
Then, why should I even consider giving POA?
As mentioned previously, there are numerous advantages of executing POA. Apart from smooth and hassle free operation of the demat account you as a client will get many benefits such as
- Trader can pledge shares in his portfolio to get margin to trade in F&O etc
- Direct Pay in and Pay out of Securities is possible and hence chances of them going into auction is avoided
OK I have decided to sign POA, but is it SAFE to give Power Of Attorney?
Off-course it is safe, SEBI has strict guidelines about POA and bars the POA holder from following activities
- Broker can not open email account on the behalf of client to receive information about statutory transactions
- Broker can not execute trades without client’s consent
- Broker can not open account with any other broker on client’s behalf
- Broker cannot transfer securities for off market trades
- Broker can not transfer funds from client’s bank account for the trades executed by client through another stock broker
- Broker can not merge the balance of the client’s account to clear the debit in another account of the same client.
I have already given POA, can I Revoke it?
Yes, you can revoke the POA at any time by giving in writing to the Broker
What Precaution Should I take when giving the Power Of Attorney:
Following are the Do’s and Don’t regarding Power Of Attorney
- Give only Specific type of POA and not the General POA
- Confirm the existence of revocable clause in the POA
- Give POA only to a SEBI registered Broker and not in the name of any particular person
- Make sure that you are receiving your transaction information such as contract notes, margin statements and statements of funds and securities
- Make sure that POA does not have any clause ti transfer the rights in favor of any assignees
- Review your Bank and demat account statement regularly about the movement of funds and securities
- In case you notice any discrepancy, immediately take up the issue with your broker in writing and if it persists, escalate it to the exchanges
- Do not authorise opening and closing of accounts using POA
- Do not authorise off market transactions other than for margin purpose
- Do not authorise transfer of securities or funds to accounts other than Brokers pool account
Because of the regulatory steps taken by SEBI, extent of damage because of misuse of Power Of Attorney is greatly reduced. Technically speaking it is not compulsory to give Power Of Attorney to the broker, however in today’s era of online trading it is more advantageous to execute POA provided the outlined guidelines are followed. Hope you liked this post, you can find more such interesting and informative articles at our Archives page. You can also subscribe to our blog post below to receive the next post at your Inbox.
And oh yes!, please encourage by sharing this article through the social buttons on your left/below.