How to avoid a misuse of PoA by the broker

Stock Market | admin | August 30, 2011 at 9:22 am

When Bangalore-based Ranjith Pillai (name changed), signed a power of attorney (PoA) agreement with a leading brokerage house, he was looking to ease his transaction travails. Instead, his problems peaked within a year-and-a-half, when Pillai discovered he had lost capital worth Rs 5 lakh.

The brokerage had misused the agreement to transact recklessly while operating the PMS (portfolio management services) account on his behalf. "It seemed that successive relationship managers were only concerned with showing large commission earnings," says

Pillai. When he approached Sebi, the brokerage claimed that he had signed a broker-client agreement, which concealed the papers pertaining to PMS. The signed agreement papers had not been furnished to Pillai despite numerous requests. Although he has recovered Rs 1.2 lakh, the rest of his money is still locked up in a court case.

Does this mean that one should not sign the PoA agreement while opening an account with a broker? If you don't want to, the brokerage cannot force you to sign one while opening an account, but given the advantages it offers, it would be wiser to have such a pact and be cautious while operating it.

What is a PoA?

The sheer drudgery of opening an account with a broker and signing a 50-page booklet is enough to deter one from going through the fine print, but in doing so you could overlook the crucial PoA segment. If misused, it can not only jeopardise your investments but also subject you to unnecessary mental agony.

What exactly is a PoA? It is a legal document executed by a client in favour of a stock
broker. The broker has the authority to trade through the client's demat and bank accounts on his behalf for easy delivery of shares and settlement of funds. It also enables automatic collection of margin payments.

The client benefits because he can transact through his bank account seamlessly,
facilitating easy receipt and payment of funds along with the transfer of securities. He
does not have to submit the delivery instruction slip in person to the broker in case of a
sell transaction. Problems in transactions like non-delivery of shares to the clearing
member's account in time and penalty payment to the stock exchange can also be avoided."A PoA provides ease in execution of transactions that one cannot do without, particularly if one is travelling," says Rajesh Jha, CEO, Jain Investments.

Sebi guidelines

"The PoA makes life simpler but can also be easily abused," warns Alok Churiwala, managing director, Churiwala Securities. There have been several instances of brokers trading through the clients' account without their consent. Shares have vanished from investors' demat accounts as brokers have sold these to prevent losses if the client failed to meet margin calls.

Source: Economic Times