SEBI has issued clarifications on the order regarding execution of power of attorney (PoA) by the client in favour of the stockbroker or stockbroker-cum-depository participant passed on April 23. The regulator stated that no broker could deny services to a client, if the client does not sign the POA. This is exempt for Internet based trading.
SEBI said that transfer of securities towards settlement obligations also falls under this ambit in addition to margin/delivery obligations.
Market players are positive that this move would prevent misuse of POA.
Mr Prakash Diwan, Head –Institutional Equity, Networth Stock Broking said: “The tendency of brokers to misuse by overleveraging in F&O trades and sending e contract notes which many clients rarely saw was fine when things were OK. But when things went wrong, clients did not find time to protest against any particular transaction done on his behalf by a broker within the stipulated 24 hours and this caused a lot of heart burn. What ever the regulation, the only solution to this is proper compliance of KYC norms. This would ensure better comfort levels in client broker relationships. The market cannot take another scam pertaining to the retail investor, with markets near all time highs and a host of good PSU IPOs/FPOs in line.”
Redemptions would also be included within the scope of PoA.
For updating demat and bank account details a fresh PoA is not required. Instead, SEBI has allowed written communication to be used as annexure to an existing power of attorney.
Copies of these communications can be attached to the power of attorney for verification. Request for revocation of PoA is not allowed for trades that have occurred prior to the request. Brokers have been advised to ensure that the power of attorney revocation request should be dated and timed so that a proper audit trail can be maintained.
Clients with credit balances are miffed at misuse. Mr Kishor Ostwal, CMD, CNI Research, said “Investors started feeling the heat when brokers misused the POA to use credit balances in clients’ accounts to access stocks and sell them to honour their obligation under a margin call, thanks to a significant correction. There are more than 1,000 such cases pending before the exchanges and SEBI and it is a welcome move by SEBI given the fact that a margin call gives only a half-an-hour leeway to replenish one’s margin account.”
Finally, the PoA cannot be misused to facilitate off-market trades between parties other than the ones mentioned in the PoA.
CIR/MRD/DMS/28/2010 , August 31, 2010
Sub: Execution of Power of Attorney (PoA) by the Client in favour of the Stock Broker/ Stock Broker and Depository Participant – Clarifications
Encl: Clarification to Guidelines for execution of Power of Attorney by Clients favouring Stock Brokers / Stock Broker and Depository Participants (2 Pages)
Clarification to Guidelines for execution of Power of Attorney by Clients favouring Stock Brokers / Stock Broker and Depository Participants
|Sl No||Clauses/ Provisions of the PoA
|1||Standardizing the norms for PoA must not be construed as making the PoA a condition precedent or mandatory for availing broking or depository participant services. PoA is merely an option available to the client for instructing his broker or depository participant to facilitate the delivery of shares and pay- in/pay-out of funds etc. No stock broker or depository participant shall deny services to the client if the client refuses to execute a PoA in their favour.||Only internet based trading exempted.|
|2||The Stock Brokers shall take necessary steps to implement this circular latest by May 31, 2010 for the new clients and ensure to take necessary steps latest by September 01, 2010 to revoke those authorizations given by the existing clients to the stock brokers/ stock broker and depository participants through PoA that are inconsistent with the present guidelines.||Stock Broker/ DP may revoke those authorizations that are inconsistent with the present guidelines by communicating the inconsistent clauses to the existing clients. In the event, the deleted clauses are not accepted by the client, Stock Broker/ DP may be required to either obtain fresh PoA or close the account. In case of any addition to the existing PoA, Stock Broker / DP shall be required to obtain a new PoA from clients.|
|3||PoA executed in favour of a Stock Broker by the client should be limited to the following:
“(i) Transfer of securities held in the beneficial owner account(s) of the client(s) towards stock exchange related margin / delivery obligations arising out of trades executed by the Client(s) on the stock exchange through the same Stock Broker.”
|Margin / Delivery obligations shall also include settlement obligations, if any.|
|4||PoA executed in favour of a Stock Broker by the client should be limited to the following:
“(iii) To apply for various products like Mutual Funds, Public Issues (shares as well as debentures), rights, offer of shares, tendering shares in open offers etc. pursuant to the instructions of the Client(s). However, a proper audit trail should be maintained by the Stock Broker to prove that the necessary application/act was made /done pursuant to receipt of instruction from Client.”
|Redemptions are also included in PoA pursuant to client’s instructions.|
|5||PoA executed in favour of a Stock Broker and Depository Participant by the client should provide the list of clients’ & brokers’ Bank accounts & demat accounts where funds and securities can be moved. Such bank & demat accounts should be accounts of related party only.||The list of clients’ & brokers’ Bank accounts & demat accounts may be updated / amended by proper communication without executing a new PoA every time. Copies of such communications may be preserved as annexure to the PoA.|
|6||PoA executed in favour of a Stock Broker and Depository Participant by the client should be revocable at any time, without notice.||PoA executed in favour of a Stock Broker / Stock Broker and Depository Participant by the client should be revocable at any time. However, such revocation shall not be applicable for any outstanding settlement obligation arising out of the trades carried out prior to receiving request for revocation of PoA. Further, the PoA revocation requests should be dated and time stamped by the brokers for ensuring proper audit trail.|
|7||The POA shall not facilitate the stock broker to do the following:
“12. Transfer of securities for off market trades”
|The PoA Shall not facilitate off-market trades between parties other than the related parties as mentioned in the PoA.|