How brokerages misuse clients’ power of attorneys & how can investors protect themselves

By Sandeep Shah

The hornet’s nest has been stirred again!

The news about a reputed stockbroking firm misusing power of attorneys (POA) given by clients in its favour to pledge the shares for its own benefit and the consequential losses suffered by the client due to the inability of the broker to return the shares has made the capital market jittery.

The shock wave is not limited to such clients alone, but also to the lending community.

Way back in 2010, Sebi had realised that diverse practices were prevalent in the area of obtaining power of attorneys from clients, which gave brokers and/or brokers-cum-depositary participants unfettered powers.

During a study of such market practices, Sebi had observed that clients were compelled to issue irrevocable PoAs, which gave broker/s the right to open and close accounts and trade on client’s accounts without consent. In most cases, brokers were not even offering services unless clients gave PoAs.

Sebi then constituted a discussion group to analyse the practices and thereafter come up with guidelines to protect the interests of investors in securities and to promote the development of, and to regulate, the securities markets.

Accordingly, in April 2010, Sebi issued guidelines mandating that –

1. In case of existing clients, brokers amend the PoA by September 2010 in case the powers given were inconsistent with the guidelines,


2. In case of new clients acquired after May 2010, brokers have a PoA, whose clauses would consistent with the guidelines.

While the guidelines listed the dos and donts pertaining to the PoA, it also clarified that giving such PoA is not essential/ mandatory. The guidelines specified that the PoA should be limited in terms of

(a) transfer of securities towards stock exchange-related margins

(b) delivery of securities in case of trades executed by the client through the broker and trade is done on floor of stock exchange and

(c) pledge the securities in favour of stock broker for the limited purpose of meeting the margin requirements for trades executed on the floor of the stock exchange through the same stockbroker.

Over the years, the capital market has become a darling of many investors, who have come to realise its potential to deliver superior returns. However, a wide gap in financial literacy remains a problem.

More often than not, clients do not read what they are signing on or even if they read, they do not fully comprehend the risks associated with the powers they are giving to their brokers. Many a time, a PoA is a standard document accompanying the account opening form and clients feel this is a standard requirement for opening a broking/demat account. It is an irony that clients will blindly give such a power of attorney in favour of the brokers, but will probably think twice before giving such a PoA in favour of their own family members!

So, what should you, as an investor, do to safeguard yourself? Some of the actionable points will be:

(a) Look for a copy of the PoA you had issued in favour of your broker.

(b) Review the powers given under the PoA with the help of an expert in the field.

(c) In case you can’t locate a copy of the PoA, ask the broker in writing if you have given a PoA in its favour, and if so, ask for a copy of it and review the powers. Post the review, take the necessary action, if any, including cancelling and/or issuing of a fresh PoA.

(d) Review the demat statement to see if any share pledge has been recorded, which was not authorised by you. If any such unauthorised pledges have been made, ask your broker to remove it and also take legal recourse, including lodging a complaint with the stock exchanges.

(e ) Review the balance in the demat statement with the books to ensure that no unauthorized transfer has been made from the account, or if the securities which should have been credited to the demat statement have not been credited yet.

(f ) Check that the email ID and contact number mentioned are yours, and not that of the broker or its representative.

Similarly, you also need to review the power of attorney (PoA) in case you have given one for operating your bank account.

It is of utmost importance to undertake a periodic review of your financial affairs with the help of experts in the field and one must make efforts to attend the investor education and awareness camps conducted by stock exchanges like BSE to keep yourself updated about such issues and potential risks.

The key to safeguarding your finances is in your hands!

(Sandeep Shah is Managing Partner at NA Shah Associates LLP. Views are his own)


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