How to safeguard against demat account fraud

Potential for demat account frauds is low today but investors need to remain vigilant as unscrupulous brokers intent on cheating do find ways to subvert the system.

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It is critical to verify the details every time you transact.
For years investors have associated demat accounts with convenience, as they allow seamless transfer of securities and funds. However, instances of fraud have soured the experience for some. A few weeks ago, a Dalmia Bharat Group company complained that its broker had unauthorisedly transferred `344 crore worth of mutual fund units from demat accounts of its subsidiaries. The broker had transferred the units for use as collateral to make up for margin requirement on trades of its associated firms. The incident raised concerns about the safety of demat accounts. What recourse does the investor have if holdings go missing? Can units that vanish be traced? What precautions can one take to guard against such fraud?

Potential for frauds is low today, particularly after Sebi standardised the norms for drafting Power of Attorney (PoA) agreements. Under the fresh guidelines, brokers can now get a limited purpose PoA from the client instead of the general purpose agreement earlier. The broker’s authority is limited to the transfer of securities and funds for the purpose of settlement. The holdings can still be sold, but only to the extent of recovery amount due. The broker cannot transfer securities for off-market trades and execute trades in the client’s name without written consent.

With Sebi’s guidelines on enhanced supervision of brokers, frauds related to misuse of funds lying in an investor’s account or transfer of shares to third party accounts have been reined in, says Nithin Kamath, Founder & CEO, Zerodha. After purchase of shares, for instance, it was earlier possible for a broker to not transfer the shares to the client’s account, keep them in the common pool account and utilise them to fulfil margin requirements of other customers. Besides, under the electronic demat system, it is impossible to transact without leaving an audit trail behind. So, even if shares or units are fraudulently transferred, they can be tracked.


“There are checks and balances in place to prevent frauds,” says B. Gopkumar, ED & CIO, Reliance Securities. “Except for a forgery, it is not possible for a broker to transfer securities to a third party account,” says Jimeet Modi, CEO, Samco Securities. In the Dalmia Bharat case, the broker forged the signature of the company’s authorised signatory to transfer the units.

However, investors still need to remain vigilant, as unscrupulous brokers intent on cheating do find ways to subvert the system. Often, brokers who overleverage themselves and end up with trading losses, resort to such doings. Alok Churiwala, MD, Churiwala Securities, says absence of deterrence leaves the system open for misuse. “While honest brokers are bearing the costs of compliance, recalcitrant brokers often get away with fraud,” he adds.

How to safeguard against fraud
  • Make sure mobile number and email ID records are updated with the depository
  • Check SMS or email statements sent by depository after every transaction in demat account
  • Check holding statement issued by broker every month
  • In case of fraud or inaction by broker, make timely complaint to the depository
  • Avoid keeping excess money in broking account; transfer money from savings account only at time of purchase
  • Avoid keeping signed delivery instruction slip with broker for offline trades

The onus is on the investor to remain vigilant and keep tabs on the movement of shares and mutual fund units. Both the broker and the depository (CDSL or NSDL) send SMS alerts or email statements for all transactions in a demat account. It is critical to verify the details every time you transact. “Correctly map your mobile number and email ID with the demat account and update records with the depository,” insists Modi.

Keep tabs on the holding statement issued every month by the broker, listing all securities in the account. Your broker is required to issue a transaction statement within 15 days and a holding statement within a month of any activity in your account (quarterly if no activity). If you find that you have been defrauded, take it up with the depository immediately, seeking restoration of your shares. Timely action is critical. While transferred shares or units can be traced, if the same are redeemed and sold by the third party or broker, it may be difficult to get back the shares or money. Do not keep excess money in your brokerage account. Transfer money from your savings account to your brokerage account only before making a purchase.

The PoA is often a bone of contention when opening a demat account. The brokerage can’t force you to sign one. However, given the convenience, it is beneficial for the investor to give the PoA, say experts. It allows the broker to access your demat account to release shares when they are sold. It also facilitates easy receipt and payments. Without the PoA, the customer would have to sign a delivery instruction slip that has to be physically submitted to the broker on time for release of shares. The PoA can be revoked any time without notice. However, this revocation is not applicable in case of outstanding dues or settlement obligations from trades carried out by the client before the revocation.
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