There have been certain media reports wherein there are discussions on banning of Limited Power of Authority Attorney (POA) given by customers to brokers for Depository accounts.
The need for the same had arisen due to the following commercial exigencies:
- The rolling settlement introduced in 2001 necessitated quick action on part of the customer to give instruction slip to the DP for transfer of sold shares in favour of their broker. The time limit was too short to physically reach the broker.
- Customers are not in habit of paying advance consideration for their purchases hence full funds are not available at the time of pay in. Broker funds the gap and POA minimises risk for the broker, since he can liquidate the stocks for the shortage if any
- POA is not compulsory. Customers do have a facility with Depository to make online transfers to Brokers, but they rarely use it since POA payin gives lot of convenience and they also do not want to pay for such services.
- General inertia and lack of knowledge in being careful with the financial custody of they Depository assets makes POA a convenient tool.
We suggest the following to reduce misuse of POA.
- Technology has progressed a lot in past decade. The changes made in the software systems of the exchanges for data strings being sent to trading platforms carry a wealth of information. The most important information being PAN number of each UCC client which is sending the trade into the system.
- For all On market trades all that needs to be done is compare the PAN number of delivering customer in the Depository delivery file ( early Payin and On market) for each day.
- If no transaction is present and the delivery is made, brokers should be asked to give an explanation. This mis-match file should be downloaded to the broker’s terminal on daily basis and reasons for mismatch can be given on weekly basis online. This can be investigated by Depository.
- Over a period of time, the system will evolve and participants will stop making mistakes. There is also a genuine reason for mismatch wherein the customer may move the stock in early payin and not sell or software mishaps could result in such uploading of incorrect delivery file. Strict audit trail should be in place to return the unsold stock to investors.
- In case of Off market transactions all deliveries that are being made to designated accounts such as Margin / Pledge may be monitored in event of sale, in same manner as on market transaction. I.e. In event of sale of margin stock the proceeds should be credited to the investor only. In case of transfer by relatives the details of relatives must be maintained in the Depository systems, presently it is maintained in back office of Depository Participants. If there is mis-match the Depository system should alert the beneficially account holder.
We urge not to disturb a well set system. Just because one or two participant mis-use a well established system should not be done away with. Enough technology & data is now available in our systems which give early warning for possible aberrations.
Deena A. Mehta
Asit C. Mehta Investment Interrmediates Ltd.