Author: Aurum Capital

This article written by Niteen S Dharmawat, co-founder of Aurum Capital, has appeared in Moneylife magazine. You may find this of use.

Recently, the Securities and Exchange Board of India (SEBI) found that Karvy Broking had illegally diverted nearly Rs2,000 crore of clients’ shares to its own accounts. Equity brokers have defaulted in the past as well, but this is surely one of the largest cases. Also, remember that there is never a single cockroach in the kitchen; we might have more such cases. So what should you, as an investor, do to protect your interest?

Power of Attorney (PoA): Brokers insist on PoA which allows them to operate your demat account. This is a necessary evil. Without PoA, the trade settlement becomes highly risky for the broker. What if you do not deliver the shares you have sold? However, with PoA, brokers have a route to misuse your stocks. The PoA should be limited only to market trades and, as per the latest SEBI rules, brokers need to call you before they execute any trades on your behalf. These calls are recorded. If you receive calls from a mobile phone, do not entertain them. Also, keep a recording on your files.

Delivery Instruction Slips (DIS): DIS is an alternative to PoA for trade settlement. But it is cumbersome for many in the era of the Internet. There is an alternative to DIS that is also elaborated below.

Download the Mobile Apps of CDSL/NSDL: Depending on where your demat account is, download and configure the app for your demat account. You would need your demat account number, PAN (permanent account number) and your date of birth, to register. The demat account has a 16-digit numeric character (in case of CDSL), whereas in case of NSDL, the demat account number starts with ‘IN’ followed by a 14-digit numeric code. An example of a demat account number with CDSL can be 01234567890987654; a demat account number with NSDL can be IN01234567890987.

Verify DP Holding with Broker Holding: Once your DP app is set up, you can see your holdings in the DP account. Never forget to verify your DP holding at least once a month and crosscheck it with what you see in the broker’s holding. It will not take more than five minutes (unless you have hundreds of stocks).

Verify Pledging of Your Stocks: Whenever you get the details of your stocks with the DP, also check if any stocks have been pledged without your knowledge. This can be another route to misuse your holding.

Transfer the Cash: Preferably transfer the cash lying with the broker to your bank account. It does not earn anything; the cash remains idle with the broker and is open to misuse.

Active vs Dormant Account: People do invest for the long term and, as they say, buy and forget. Please do not do that in India, at least. Keep your account active. If you have a sizeable holding in your account and if your account is not active, it could become the target of a rouge broker. It can happen not only with stocks but also with the bank account. Yours truly is a victim of such a fraud in one of the leading banks where my wife’s dormant bank account was compromised. So be careful and keep it active, maybe by way of logging into the account to verify the details/once a month trade, etc.

Check Client Master: The client master has critical information related to your address and mobile number. Keep it up-to-date and verify it from time to time.

Full-service Brokers vs Discount Brokers: I got messages from the worried investors about their holdings with discount brokers. I also read articles that discount brokers will suffer the most after the Karvy scandal and investors will move to the full-service brokers. It is important to note that Karvy was not a discount broker. It was a full-service broker. Frauds can happen anywhere.

People have recommended many full-service brokers on various social media platforms instead of discount brokers. There is nothing wrong with full-service brokers or, for that matter, with discount brokers. The choice is with the individual.

I would suggest that you go with a broker who is large in size, has execution capabilities and provides uninterrupted services with a stable platform (especially during periods of high volatility). One can also select a combination of full-service and discount brokers.

Some Other Preventive Measures

• Use CDSL’s ‘easiest’ or NSDL’s ‘speede’. These are Internet-based facilities that permit clearing members of beneficial owner (clients) to submit off-market, on-market, inter-depository and early pay-in debit instructions from their demat account.
• When you register for easiest/speede, the broker loses the PoA over your demat account; this would mean that you cannot sell shares from your holdings using your trading platform because the broker will no longer be able to debit your shares from the demat account. You will now have the power over your demat account as a result of which you will be able to transfer shares using easiest/speede.
• Separate your broker from the DP. For example, your DP for the holding can be a prominent broker while your broker for the trading purpose could be a small/discount broker who charges less.

Do these steps and best practices guarantee that fraud will not happen? No, it does not; because fraudsters are always there to find new gaps in the system. But these practices will surely help in the early detection of fraud/misuse of funds/securities. If there are any new ways/gaps, they should be followed with newer practices.

Trust this helps. As always, we look forward to your feedback.

Happy Investing.