The Securities and Exchange Board of India proposed a new set of norms to minimise misuse of powers of attorney (PoA) that clients execute.
In a discussion paper released for public comments, the regulator said it wanted to put restrictions on a franchisee or a representative of the broker to use a client's account. Sebi said the PoA would be executed only in the name of a brokerage and not in favour of a sub-broker or an employee.
To ensure that the customer was aware of the terms of the PoA, Sebi has suggested that brokers and depository participants either send the original agreement or a certified copy to the client. The regulator also said that brokers and depository participants would need to send SMS alerts regarding transactions of shares and transfer of money.
Besides, Sebi wanted the PoA document to also include a clause for settling disputes arising out of the operations of the document. Also, PoAs should be specific to recover money related to margin or delivery obligations out of trades executed by the client, the discussion paper proposed. Such PoAs are called restricted PoAs. According to market sources, brokers get their clients to sign general PoAs (also called full PoA).
A general agreement allows brokers to sell shares in the open market and transfer cash in the trading account to pay mark-to-market margins for derivatives. Further, in the event of a merger or demerger of a stock broker or a depository participant, the new entity would need a written confirmation from the client to continue using the PoA.
Sebi received several complaints about franchisee or sub-brokers using clients' account without their permission, sources said. "The client only gets to know when he sees the losses," said an executive at a brokerage.
Franchisees and sub-brokers earn commission based on the number of trades. To meet the targets, these intermediaries often used clients' accounts.
Most of the investors were not even aware that they had signed on a paper that authorised broker or the franchisees to trade on their behalf.
"While opening an account, a person is required to sign on at least 50 different papers. In some cases it can be as high as 75," said Praveen Malik, head of compliance at Centrum, a brokerage firm. Often, investors signed without reading.
