Depositories do not offer adequate protection against fraudulent debits, but you can take preventive steps.
Can the Con: The market is vibrant with investors who have made huge profits in this Bull Run. In the cacophony of ringing cash registers, very few hear the plaintive voices of those who have been defrauded of their shares.
Cases of fraudulent debits in investors' demat accounts are rising, though the two depositories NSDL (National Securities Depository) and CDSL (Central Depository Services) -- do not make public the number and nature of complaints it receives from investors against depository participants (DPs). The data was not provided even when we specifically asked for it.
Conned men: High-value equity portfolios mean more motivation for thieves. And this means that your demat account is more vulnerable now than ever before. Some of this you already know; we've already told you about the case of Edelweiss Securities, where shares were fraudulently taken from the demat accounts of about 60 investors from Anand (in Gujarat) in July last year.
More recent is the case of UTI Securities, where some 20 investors from Guntur (in Andhra Pradesh) discovered fraudulent debits in their demat accounts early this year.
NSDL's and CDSL's rules, regulations and byelaws are supposed to protect you. Unfortunately, they don't, so it's up to you to save your shares. Here's how.
Say freeze: The best prevention is to use the freeze feature offered by both depositories. You can freeze select stocks or entire demat account. A freeze blocks activity in a selected stock or in the entire account. For a whole account freeze, you can even choose between freeze on only debit, or only on credit, or both.
Says Aunali Rupani, sub-broker, Motilal Oswal Securities: "Freezing can be used based on a need, for instance on shares that are part of a family heritage and unlikely to be sold." However, Rupani says his clients are completely unaware of this measure.
Try to evaluate your needs and use the freeze facility. The procedure is simple: Submit a freeze instruction form to your DP specifying the kind of freeze you want. In the form, you can even specify an expiry date, when the freeze will automatically be lifted. Or you can submit a defreeze instruction whenever you want to operate your account again. (See below: DOs and DON'Ts)
Check transaction statements: The fact that your DP as well as the depository has an electronic record of your transactions and holdings in your demat account makes you the legal owner of those shares. But what is the proof? That's the transaction-cum-holding statement that your DP is supposed to provide you.
The victims in the Edelweiss Securities and UTI Securities fraud will never forget this: check whether transaction statements are coming in regularly (monthly if there is any transaction or quarterly if none), and that they are sent directly from the DP's head office, printed on official letterhead.
Do not ever be content with a statement from the DP's franchisee. Investors of Edelweiss got infrequent statements from the DP's Anand branch and some of these were later found to have been rigged.
Many DPs are lax in this regard; often their franchisees and officials exploit such opportunities. But neither depository seems to be taking action against the defaulting DPs. So it is up to you to complain to the depository if your DP delays or does not send transaction statements. Give the depository your account number and ask it to courier you a transaction statement for any period of your choosing.
Some DPs let you check your demat transactions online and will email you the transaction statement if you opt for it. Adds D. Balasundaram, chairman, Coimbatore Capital, a NSDL DP: "We send out SMS alerts to those investors who opt for it; it can help prevent fraudulent debits."
Slippery slips: Your demat account can be debited only when you authorise your DP to do so through a debit instruction slip (DIS).
The legality of your authorisation is based on your signature on the instruction slip. Your DP will execute the instruction only if the signature in the slip matches that in its records (at the time of account opening, two specimen signatures are taken). The risk is in someone forging your signature and using it on a DIS to take out your shares through off-market transfers, sell the shares and vanish.
This is what happened to the investors
The DIS comes in a booklet similar to a cheque book; each DIS in the book is supposed to have a unique serial number and your account number pre-stamped in the client ID column (where your account number has to be entered). A DP is supposed to mark these serial numbers in its system as assigned against your account number.
But there's nothing to prevent a DP from claiming that a debit, which may be fraudulent, has come from a debit slip with a serial number allocated to you. There is no clause in the rules, regulations, byelaws and circulars of either depository that imposes on a DP an obligation to take an acknowledgement from the investor when the DIS booklet is issued.
Without this you can't establish that a DIS (through which a fraudulent debit takes place), which was never issued to you, was really not. And an unethical DP can fiddle with its system and claim that no fraud took place. We asked the depositories about this lacuna but got no response.
Redressal mechanism: What happens if all your preventive measures fail and shares are found missing? Complain immediately in writing to your DP, stating explicitly that you haven't authorised certain debit transactions and that the DP should show you the slips based on which those debits took place and an acknowledgement (with your signature on it) of the issue of the DIS book to you. Demand immediate restoration of the shares in your demat account.
If your DP doesn't believe in customer care, you may not to get a reply. But let a week or two go by to give the DP the chance to reply. If you don't get any acknowledgement that a fraud was committed, lodge a formal arbitration case (not merely a complaint letter), against your DP with the depository seeking restoration of your vanished shares.
The depository will then be duty bound to appoint one or more arbitrators who will hear both sides and issue a judgement.
Ensure that you follow the procedures laid down in the arbitration mechanism (details of which can be had from the depositories' Web sites).
If the depository or the DP dilly-dallies or tries to persuade you to take up an alternative option of reconciliation, refuse it. Reconciliation is a process where the DP and the investor arrive at some sort of agreement without the depository being involved, a kind of 'out of court' settlement.
But more often than not, a reconciliation agreement is heavily skewed against you and you don't get the full value of the shares missing.
In the Edelweiss Securities case, when at least two affected investors wrote to CDSL last year, the depository took the DP's line that signatures on the debits slips matched those of the investors, without providing copies of the debit slips used in the fraudulent debits and a proof of the DIS book issued to the investors.
Arbitration, on the other hand, forces a resolution of the case, which is decided not by depository officials but by depository-appointed arbitrators. If the arbitrator's award goes against you and you still feel there is a miscarriage of justice, you can still appeal against it in the civil courts.
DOs and DON'Ts
DOs
DON'Ts: