May We Help You? : The how and why of PoA

When opening a trading account should one compulsorily sign a power of attorney (PoA) in favour of the stock broker? No, not necessarily. But then, it has become a common exercise in this age of on-line investing. With the Securities Exchange Board of India introducing a set of guidelines last year standardising the norms that brokers to need to follow when obtaining PoA, the risk of the broker misusing his power is limited now!

PoA is only an option available and no stock broker or depository participant can deny service to you simply because you refused to execute a PoA in his favour.

To our many readers including Mr Gautam and Mr T Arun, who wrote to us on their doubts about PoA, here is our answer:

Why is PoA required?

Power of Attorney is giving someone a legal authority to act on your behalf. When you sign a PoA in favour of the broker, the broker will take care of delivery of shares and fund settlement on your behalf.

In normal situations, it is the client who has to make sure that shares are delivered to the broker before the pay-in deadline (the broker acts as the Clearing Member too and settles the trade). Every time the client sells a stock he has to sign and send the delivery instruction slip to the depository participant (with whom he has the demat account) to debit his holdings and give shares for delivery to the Clearing Member. If the stock doesn't reach the clearing member's account in time, the trade by the client will be considered a short sale and the stock will go for auction. In the auction if the Clearing Corporation is able to buy the stock only at a price higher than at which the client actually sold the stock, the client would end making loss in that trade!!

A PoA given in favour of the broker could avoid situations similar to the above. However, SEBI has said that it is not mandatory for clients to give a PoA to their brokers.

Can it be misused?

The Securities Exchange Board of India had in April last year, come up with a set of standard norms under which the PoA has to be drafted following complaints from several investors.

The guidelines here state that the broker can use his power under PoA to only transfer securities from the client's account to meet delivery obligations (and pledging of stock for margin requirements of the client) and transfer funds from the client's bank account to meet settlement obligations (and towards fees due to the broker for using his service).

SEBI has further stated that the broker is not entitled to do the below on the basis of the PoA he has taken from the client (check this link for more information: http://www.cdslindia.com/whatsnew/SEBI-Circular-dated-23042010.pdf)

Transfer of securities off market

Execute trades in the name of the client without the client's consent

Refuse to issue delivery instruction slip to the client

Prohibit clients from operating the account

Finally, if you sign a PoA with your broker, see to it that he gives you a copy of the deed. Also remember that the power of attorney you give the broker can be revoked any time you desire. Knowing your rights and provisions of the law and choosing a stock broker who has a good compliance history will give you a peaceful trading experience.

Need any other investment-related help? Feel free to write to us at >younginvestor@thehindu.co.in

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