The Karvy Stock Broking scandal disclosed the misinterpretation and misuse of the Power of Attorney (POA). The clients initially issued it in favor of their market regulator Securities and Exchange Board of India (SEBI), and Stockbroker, which had issued norms on 25th February 2020.
Therefore, the guidelines consigned rules about the use of POA and margin payments via pledging and re-pledging of securities. However, such regulations have been enacted from 1st June 2020. On the other hand, your stockbroker will never tell you if you need POA or the power of attorney while opening a Demat account.
A lot of baffling situations happened previously about this dreaded document called POA. So, in today’s article, we will try to eliminate your doubts and explain everything related to POA. Also, we will let you know the significant precautionary steps, which traders can take if he/she chooses to execute the POA while creating a Demat account.
What is POA in Share Market?
The POA (Power of Attorney) is a legalized document offering legal authority to another person to manage your account as per the given instructions in the POA form. To put it simply, you are providing the broker a seamless authority to execute trades on your behalf.
However, following the terminologies, at first glance, it looks so daunting that we are providing full-fledged control to somebody to manage two accounts simultaneously. On the other hand, almost all the major big or small investors give a minimal POA to the broker after opening a trading and Demat account for delivery-based trading.
Therefore, it’s a streamlined practice to offer POA to your share market broker, who can perform a trade over the phone. Moreover, they can also square off positions in your account on your behalf if there are minor requirements for the margins.
However, there will be no chance to be online without a POA. So, every Indian online broker would need you to submit a POA to them.
Types of Power of Attorney (POA)
Although it has mentioned “full” control, various types of POA are available in the stock market. However, there are two specific types of POA are there in India, which are:
General Power of Attorney (POA)
This General Power of Attorney approves the person to execute all the generic activities in the name of the valid holder. For the main objectives of dealing in the securities market, you must not provide a general POA.
However, the general POA holders possess a wide array of powers. Being the most intimidating and abused type of POA, one shouldn’t perform such a type of POA for Demat account.
Specific Power of Attorney
Limited or Specific POA could give immense authority to someone for a constrained range of powers. However, in case of the share market, it is highly beneficial for trade settlements. It generally gets over at a time given in the POA document.
Always make sure your broker must be registered with SEBI while giving a POA to them. It would help if you never gave a POA on behalf of any employees, dealers, and associates. The clients generally give this specific POA to your stockbroker.
It is a limited type where the stockbroker has definite rights like transferring the securities to the stock exchange. Hence, you can sell pledges or share the securities with the stockbroker for a specified timeframe.
Purposes of POA for Demat Account?
You need these two accounts with a broker for equity delivery trading:
- Demat Account
- Trading Account
Trading account is mainly for placing orders during buying and selling shares. Such shares you purchased utilizing the trading accounts will be delivered to your Demat account electronically. During the share selling process, you may withdraw the shares from that Demat account and deliver them to the buyer with the help of your stockbroker.
The broker requires shares for delivering these to the buyers to sell orders. Therefore, it is pretty hassle-free to buy orders where the broker charges money to purchase shares from the sellers in the share market.
In the case of selling orders, the shares can seamlessly be delivered to the brokers in 2 facile ways:
- Giving the POA to your broker for quick and automatic withdrawal of the share when you want to sell them.
- By sending the shares to the broker’s personal Demat account manually.
[N.B: By providing POA to the stockbroker, you allow him to withdraw the shares in your name from the Demat account. However, POA isn’t mandatory. So, it’s up to you if you are willing to give it or not! No broker can ever force you to give POA.]
Therefore, if you don’t wish to give a POA to your stockbroker, you will become the sole operator of your Demat account. Hence, it is the safest option available!
Otherwise, if you choose an offline or conventional method, all you need to do is send the DIS or delivery instruction slip to your broker’s office. Once that stockbroker receives the slip from your end, he will debit your Demat account. However, some of the challenges of this method are shown below:
Risk of Auction
If the slip is unable to reach in the stipulated time, you will be penalized for this, i.e., risk of auction penalty.
Expensive
As such slips need to be delivered physically, transportation charges are also involved. Hence, the process becomes expensive.
[N.B: Nowadays, with online broking, the aforementioned challenges are no longer available. POA was directly purchased for seamless operation of the Demat account.]
Facts About Demat POA in Share Market
- The Demat POA is legitimate until you revoke it or shut down the Demat account
- Demat POA is mainly voluntary
- No such POA charges are there
- POA is mainly required for selling orders
- Brokers can send alerts anytime for any transactions in your Demat account
- Demat POA is not at all required for F&O trading
Conclusion
Nowadays, the maximum extent of POA misuse is highly reduced due to the top-notch regulatory steps enacted by SEBI. As mentioned earlier, it is not at all compulsory to give a POA to your stockbroker.
In short, today’s era of online trading becomes much more hassle-free and beneficial to execute POA while following the outlined norms. To conclude, you should provide the specific POA and not the general one. Therefore, always make sure to give POA to any SEBI-registered broker.
Hope this article allows you to gain mandatory information regarding what POA is. Do you like this article? Don’t forget to like, share, and subscribe! If any confusion persists, let us know by commenting below!