Stiff Sebi curbs on brokers

Broking firms barred from taking power of attorney from investors

The guidelines, to which brokerage firms have to comply by September 1, would also bar the brokers from asking investors to give a notice, which is generally for a period of 15 days to one month, for termination of these power of attorney.

At the same time, brokers have also been asked that they cannot refuse services if a client is not willing to sign the Power of Attorney at all, a senior official said. The Securities & Exchange Board of India’s move follows complaints that many brokers were getting power of attorney signed from their clients containing clauses that could be misused against the investor.

A Power of Attorney is executed by a client in favour of a stock broker to authorise the broker to operate the client’s demat account and bank account to facilitate the delivery of shares and payment of funds.

Trading services

PoAs are generally required for internet-based trading services, but almost all the brokers insist on clients signing a PoA even for non-internet services.

Concerned over the prevailing misuse of PoAs, the Secondary Market Advisory Committee of Sebi decided to overhaul the way these agreements are being framed by the brokerage firms, a senior official said. After consultations with various stakeholders, Sebi has asked the brokers to comply to its new guidelines and revoke all the non-compliant clauses from existing PoAs by September 1.

In a circular issued to the brokers and other market players such as stock exchanges, Sebi said: “It has come to Sebi’s notice that the clients are compelled to give irrevocable power of attorney to manage client’s demat account and bank account so that the client is able to pay funds or deliver shares to its broker on time.

“In some cases, the PoA even allows a broker to open and close accounts on behalf of the client and to trade on client’s account without the consent of the client,” Sebi said. Sebi has also told the brokers that PoAs cannot be mandatory for availing broking services and it is “merely an option available to the client” to facilitate delivery of shares and funds.

“No stock broker or depository participant shall deny services to the client if the client refuses to execute a PoA in their favour,” Sebi said.

Client consent

At the same time, the brokers cannot get any PoA for transfer of securities for off-market trades, transfer of funds from clients’ bank accounts for trades executed by the investor through other broker and execute trades in the client’s name without the consent of the client.

Besides, the PoA cannot prohibit the client from operating the account directly and brokers cannot merge the balances or dues in different accounts to nullify the debit in one account.

While Sebi had first asked the brokers to implement the new guidelines way back in April 2010, with a direction to adopt the new rules by May 31 for new clients, the brokers have been lobbying hard against these directions.

However, with just a few days left for the deadline of September 1 for existing PoAs, the brokers are now working overtime to get the PoAs revised from their clients.

The revised PoA would also bar the brokers from retaining any security they might have received erroneously.

Besides, the broker would need to provide the clients a consolidated statement of market dealings on a daily basis through SMS or e-mail.