SEBI recently changed some norms pertaining to a POA between an investor and stock broker.
The Securities and Exchange Board of India (SEBI) has recently standardised the norms for power of attorney (POA) between a stock broker and a client to protect the investor's interest. The new provisions will restrict access to trading, demat and bank accounts, and prevent them from being misused. The new norms have been applicable for new clients since May 31, 2010 and the deadline for investors who already had a trading account was September 1, 2010. Many brokers on their part have left it to the investors to change the POA.
What is a POA?
POA is an agreement that is normally executed between the client and the broker at the time of opening the account. It is a legal document executed by the client in favour of the broker and depository participant to authorise the broker to operate the client's demat account and bank account to facilitate delivery of shares and pay-in and pay-out of funds.
Two types of POAs
There are two types of POAs - specific and general. A general POA enables the broker to perform all activities that the client could have performed including opening and closing accounts, and buy and sell shares, without his consent, thereby giving the broker wide-ranging powers.
A specific or a limited POA, on the other hand, gives a single or limited power to the broker. The SEBI wants all investors and traders to have a specific POA with the broker rather than a general one thereby reducing the possibility of misuse.
New POA
POA is an instrument that facilitates easy pay-in and pay-out of funds and delivery of shares. Under the new rules, no broker can make it mandatory. The broking house is punishable by SEBI if it denies services to clients if the client does not execute a POA in their favour.
The new POA should be limited to transfer of securities to settle margin/delivery, including settlement obligations that arise due to trades executed by the broker. The POA can be extended to subscribing mutual funds, IPOs, debentures and right issues on instructions from the client. It should have a list of the client's and broker's bank and demat accounts (client-related) to ensure the securities and funds are moved only between these accounts.
The new POA should also have list of accounts to which you can make market transfers. This ensures offmarket transfers are done between the related parties mentioned in the POA.
These POAs are revocable at anytime without notice. This revocation, however, is not applicable to any outstanding settlement obligation arising out of trading done by the client before the revocation of the POA. If there is shortfall in margin or failure to make payment by the client, the POA holder can exercise his authority under the POA to the limited extent to recover his dues. So, the stock broker will be in a position to dispose off the securities to the extent of recovery of money due from the client.
Not applicable to Internet-based trading
The new norms are not applicable to Internet-based trading platforms. Here, the broker needs the necessary authorisations to provide seamless trading facility. A POA enables automatic collecting of margins, settlement of securities and funds that makes trading so easy and hassle-free nowadays.
What should Internet-based investors do?
In case you have an Internet-based trading platform, ensure the POA executed by you is in favour of the SEBI-recognised broker and not in favour of employees and associates. Give a POA for a limited period only and not an open-ended one. It should give you a choice of renewal. Confirm the existence of a revocation clause. Take up any discrepancies in your account immediately.
Further, make sure your POA does not authorise transfer of funds and securities to any other account, other than that of the pool account of the broker and pool account of client margin account. Having given the POA, make sure you receive your transaction information like contract notes margin statements and ledger statements. Monitor your bank account and demat account regularly.
Last but not the least, collect your copy of the POA from the broker.
