The Securities and Exchange Board of India’s (SEBI) decision to standardise some aspects of the Power of Attorney (PoA) signed by investors is an excellent move that is, at least, five years overdue. The introduction of compulsory dematerialisation of securities for secondary market transactions was a blessing and a curse. It allowed us to eliminate the ills of physical delivery and settlement and become a modern capital market that attracted global investment. But it drove retail investors out of the market until the investor population has dwindled to eight million (now officially acknowledged in government reports). For investors, the risks were too high, since it was almost impossible to open a brokerage or demat account without a PoA that authorised sale and purchase of shares or transfer of funds and securities, in or out of investors’ accounts. SEBI did nothing, probably for good reason.
Three years ago, a SEBI official told me “the T+2 rolling settlement system was pure fiction (trade settled two days after the transaction) and it only appeared to function smoothly because brokers completed the pay-in on behalf of investors and collected the money later.” Now that banks can transfer funds instantly through RTGS (real time gross settlement), SEBI is in a position to initiate steps to stop the widespread abuse of PoAs.
Since 2005, we have been drawing the regulator’s attention to PoA abuse. We pointed out the wide variations in PoA documents and suggested standardisation, but former SEBI chairman, M Damodaran, said he did not want to create a SEBI-prescribed PoA lest investors hold the regulator responsible for abuse of power by brokers. But, in November 2009, SEBI released a discussion paper which proposes standard clauses in PoAs and proposes to make it mandatory for brokers to provide the original and attested true copy to clients. This only underlines the extent of abuse and acknowledges what has been Moneylife’s contention all along: investors are unaware of having signed PoAs that were slipped into bulky account-opening forms.
The discussion paper makes the following important suggestions: brokers and DPs (depository participants) must execute a ‘specific PoA’ to facilitate transfer of shares for stock exchange-related margin/delivery obligations for trades on the stock exchange through the same broker; bank accounts and beneficial owner accounts to be operated by the broker must be clearly identified and transfer of securities must be restricted to the clearing member-pool account or client-margin account of the stockbroker only; the PoA cannot be executed in the name of any employee or representative of the stockbroker/depository participant, but only in the name of the entity concerned; SMS alerts must be provided for transactions executed in investors’ accounts; PoAs must include a mandatory clause specifying the “settlement of disputes arising out of the operations of the PoA” and settlement of disputes must be under the by-laws of the stock exchange or depository under which they have been executed.
Finally, the guidelines clarify that in case of a merger/demerger of the DP or the brokerage firm, the rights under a client's PoA cannot devolve automatically to the assignees, nominees or transferees without specific confirmation by the investor. All these are important first steps in protecting investors and it is shocking that it took five years of bitter complaints and litigation to get the regulator to recognise the harassment. Three years ago, we wrote: “SEBI must realise that systemic deficiencies cannot be corrected by disciplinary action.” The SEBI chairman is now talking about systemic solutions to investor grievances. This only acknowledges that the regulator failed to put in place a system of studying and collating complaints to flag recurring issues that need systemic solutions. Hopefully, this is what SEBI is now proposing.