How many of us read all the lines of the booklet our stock broker give to sign before opening a demat or trading account? Including me very few do in-depth reading and understanding what are the exact clauses and rules. Simply we do sign around 20 signatures and give him all the necessary documents. But do you know what power you are giving him by blindly signing all the documents?
So let us talk one of the power what you are giving your broker i.e. Power of Attorney. Before proceeding further let us understand what is the Power Of Attorney. Simply to say, you are giving in writing the power to another person to do something either specific or generic.
So there are two basic types of Power Of Attorney.
1) General Power Of Attorney-Here the POA holder can perform all activities on behalf of the original holder. Hence, before going for such generic POA you must do take care of the after effect also. It gives more power to POA holder.
2) Specific Power Of Attorney-Here POA holder perform only specific activities on behalf of the original holder which are specified in POA document. This simply restricts POA holder. So this seems to besomewhat secured than General Power Of Attorney.
Within above two basic POAs there are again two more sub categories of POA.
1) Revocable POA-Where you can revoke the rights you have given in POA.
2) Irrevocable POA-Where you can’t revoke the rights you have given in POA.
The two big questions one faces while giving Power Of Attorney to broker for opening demat and trading account are-Whether it is mandatory? If so what type of POA will one can give? After going through the SEBI Circular dated April 23rd 2010 and aftermath clarification about few doubts on the said circular dated Dec 30th 2010 indicates that POA is mandatory only for online accounts but not to offline accounts.
Now what is online and offline account? Online means you login to your account either from your home or office and do trading online by using your stock broker platform. Offline means you specifically instruct your broker to execute the trade by the way of instruction slips for each trade.
So which POA one can give to his broker? Going by SEBI guidelines one must give Specific Power Of Attorney with Revocable Power Of Attorney type. Because it is specifically mentioned that POA you are giving is to act specific transactions on behalf of client and it must be revocable at any time but after clearing your obligations which you owe before cancelling this POA. Stock broker must issue true certified/duplicate copy of POA to client. In case of merger or demerger of any stock broker or depository participant then one month prior notice should be given to client ask for continue or not with new entity.
Below are the few actions what your broker can do on behalf of you.
- Transfer of securities towards stock exchange which arise due to trades executed by client on stock exchanges from the same broker.
- To pledge the securities in favor of stock broker for limited period to meet the marginrequirement of the trade executed by client.
- To apply for various products like Mutual Funds, Public Issues, rights, offer of shares etc. based on the client instructions which also includes redemption.
2) Funds-Transfer of funds from client’s bank account in the following cases.
- For meeting settlement obligations and margin requirements for the trade executed by client on stock exchange from the same stock broker.
- For recovering outstanding dues arising out of the client’s trading activity on the stock exchange from the same stock broker.
- For meeting other obligations of client’s subscription to products such as mutual funds, public issues, rights or offer of shares etc.
- For any dues pending as a fee or charges towards maintaining trading account and DP account.
Few important SHALL NOT points to be noted related to POA.
1) Transfer securities for off market trades but other than the parties mentioned in POA.
2) Transfer of the fund from the client’s bank account for the trades executed by client through another stock broker.
3) Opening a trading account with any stock broker or opening depository account with any other depository.
4) Executing trades without client’s consent.
5) Prohibiting issue of delivery instruction slips to beneficial owners.
6) Prohibiting clients from the operating account.
7) Merging balances from other accounts to nullify debit in any other account.
8) Open an email account on behalf of the client to receive statutory transactions.
9) Renouncing from liability arising out of instruction provided by stock broker to block the client’s bank account.
Hope this cleared the doubts of POA related to demat and trading accounts.