Sucheta Dalal :POA investigations
Sucheta Dalal

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POA investigations  

Jan 15, 2006

In the last few weeks, the Securities and Exchange Board of India (Sebi) and the stock exchanges have been investigating investor complaints alleging losses and vanished investments although they had not operated their trading accounts. The suspicion is that brokers, armed with a Power of Attorney (POA) signed by investors, had misused these accounts for speculation. If the trades went bad, the losses were dumped into clients’ books, knowing full well that an arbitration proceeding would go against investors who had signed a POA in favour of their stockbroker. Regulators had unearthed heavy transactions in several cases involving investor complaints and are trying to analyse transaction trails for signs of deliberate abuse. Meanwhile, the mere fact that the regulators were conducting a detailed investigation has had several large brokers scampering to settle investor complaints all over the country. Among these is Indiabulls, the high-profile brokerage firm whose dealings were reported in these columns. Although claims have been settled all the way from Mumbai to Ghaziabad, most investors report that they have settled for just a return of their original investment, with no appreciation whatsoever. Interestingly, most settled claims are under Rs 1 lakh each. A Chennai investor was offered Rs 2.5 lakh when the market value of his holding would be above Rs 10 lakh. Those with bigger claims have received no settlement offers.


Statutory Warning


Investors who are slowly waking up to the danger of empowering brokers to operate their bank and depository accounts through a POA may be in for more shocks. Vadodara-based investor JS Talaulikar helped us discover that a POA is a pre-requisite to opening an Internet Trading Account. The CEO of a top brokerage firm told us that brokers have no option but to seek a POA, because the T+2 settlement system leaves them vulnerable if the investor delays delivery instructions or payments even by a day. On the other hand, signing a POA leaves the investor even more vulnerable, since they do not have the financial muscle or clout of a large brokerage firm. The regulators seem to have no answers either. The National Stock Exchange told us that it is ‘‘examining the issue’’, while Sebi has yet to respond. Internet trading is relatively hassle free, hence volumes in this segment are growing at the rate of 25 per cent plus and it is soon expected to account for 10 per cent of the total market volume. Since, most of this growth has occurred during the powerful bull run of 2005, there are negligible complaints about abuse or irregularity. But the situation can change dramatically in a down-turn or even a deep correction. Given the danger, the regulator must consider emulating the tobacco industry and ask that account opening forms must carry a bold warning that says, ‘‘signing a POA in favour of the broker leaves investors vulnerable’’. After all, most brokerage firms are aggressively promoting Net trading.


Need standards


Since regulators have yet to pay attention to the potential problems of POAs, they have also not bothered to analyse these documents to check how much they expose investors to the risk of fraud and mischief. Every broker has a standard POA format which investors have sign in order to access Net Trading facilities. JS Talaulikar’s search for ways to reduce his vulnerability while continuing to trade through the Net, led to the discovery that POAs mandated by ICICI Bank and Indian Infoline only seek control over one designated bank account of the client, while others such as Kotak Securities seek sweeping control over all of the client’s bank accounts. It is time the two leading stock exchanges pay some attention to this aspect of investor protection, since they are responsible for broker inspection at the first level. At the least, they need to come up with a standard POA document and a grievance redressal mechanism.


Shotgun wedding


The Reserve Bank of India’s (RBI) attempt to arrange a shotgun wedding for the private-sector Ganesh Bank, which was put under moratorium on January 7, has angered bank unions. The AIBEA has questioned RBI’s haste and objects to the fact that the suitor—Federal Bank—is not a public sector entity. Pertinently, the unions point out that Federal Bank has neither held a board meeting not taken shareholders’ permission to merge with Ganesh Bank. A listed entity has to follow certain rules of good governance, before it yields to the central bank’s diktat as OBC did when asked to absorb Global Trust Bank. The unions point out that Ganesh Bank is the 19th private bank to fail in the last decade, and want an inquiry into the cause of such repeated failures. However, they must also remember that a few large PSU banks would have failed too, if the government had not kept them afloat.


-- Sucheta Dalal