Beware - Your Shares Can Be Stolen Too!

Discussion in 'Brokers & Trading Platforms' started by Sanjay123, Dec 2, 2010.

  1. Sanjay123

    Sanjay123 Member

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    Conclusion :

    1. With running account authorization, all your shares are in the hands of your broker, not you.

    2. With power of attorney given(as in case of 99.9999% cases), your broker can sell your shares in their custody by the power of running account authorization, then keep the money with them and not paying you a dime + they can even withdraw money from your bank account at their own wish if your bank account is linked to your trading account with them.



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    HERE IS THE OUTLOOK INDIA ARTICLE
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    Samrat Mehta (name changed) and some 20 other investors in Anand (Gujarat) were quite happy trading through the local branch of Edelweiss Securities, a depository participant with Central Depository Services and a broker with theBSE. They, like thousands of others in the country, assumed that they could, with some savvy investing, make a packet in this bull run. But on 11 July this year (a Monday), Mehta and his fellow investors were shocked to find the Edelweiss branch office closed. Frantic, they called the DP’s headquarters inMumbai. Mehta says: "Edelweiss officials from Mumbai came to Anand late that night. On opening the branch they found that the depository workstation computer hard disks had been removed."

    The sorry truth came to light: shares had apparently been fraudulently withdrawn from several demat accounts (including Mehta’s) and credited to the personal demat accounts of three other clients of the DP who had fled by then. These three clients were partners in Laxmi Investment, a company registered as a remissier for Edelweiss’ BSE operations and whose premises in Anand were leased to Edelweiss.

    Of the over 30 stocks in Mehta’s account (valued at severallakhs), over 15 had vanished. He lodged a formal complaint with the DP as well as withCDSL.

    Shocking? Yes. Unexpected? Not quite. It’s a fact that past patterns repeat themselves in the stock market–whether fundamentals, market movement, or, unfortunately, market irregularities. While market manipulation and shady deals are bad news in any kind of market, they seem particularly unnecessary in a bull market, where everyone gains anyway. But human nature being what it is, and greed being a very big human failing, such things do happen. It’s up to us as investors to watch out for any signs of hanky-panky. We take a look here at some of the prevalent abuses of the stock market systems, and suggest steps that you can take to play safe.

    The Abuses
    Debit slips. We asked Edelweiss Securities about Mehta and other investors’ claims of having been defrauded. An Edelweiss official said that except for five cases (excludingMehta), there had been no fraud. The debits in the demat accounts, he said, were backed by debit slips executed by the investors. In five cases, he said, Edelweiss restored the shares, as those debits were not backed by instruction slips.

    So, what about Mehta and his fellow investors? Edelweiss has disclosed the serial numbers of the instruction slips, but has not yet provided photocopies of these slips to the aggrieved investors. "These slip numbers do not belong to the instruction slip book that was provided to me," saysMehta. "I have never got an instruction slip book containing the serial numbers that Edelweiss claims I have used to debit my account."

    A DP, under the rules of both depositories, must issue debit instruction slip books with pre-printed serial numbers and take the investor’s acknowledgment every time a book is issued. But Edelweiss claims that the acknowledgments of the receipts of the slip books are untraceable.

    Edelweiss maintains that its officials were not involved in the fraud. But how could it have ignored signs of several off-market credits in Laxmi Investment’s–and its partners’–demat accounts (its own clients) from more than 50 of its other demat accounts? When it was Rooshnil Securities, Edelweiss had given Laxmi Investment’s name as a ‘c/o’ for its Anand branch address. Even as Edelweiss claims its branch was run was by two of its own employed officials, it does not explain how the hard disks were removed from its computers under their watch. SaysMehta: "There was no Edelweiss official in Anand before July 16 on which date we first met their branch manager Prakash Dave."

    Power of attorney. Many brokers ask you to sign an all-encompassing power of attorney(PoA) authorisation, which allows them to operate your demat and bank accounts for any purpose connected or unconnected with your trading activity. With thePoA, the broker can submit your debit slip to your DP on your behalf, so that you can meet the stringent T+1 deadline for delivering shares in the current T+2 rolling settlement. It’s a good idea in theory, but nearly all PoAs do not include a specific clause that prevents brokers from making off-market transactions. SatishMenon, COO, Geojit Financial, an NSE and BSE member and also an NSDL depository participant, says: "A power of attorney has to be only for the reason of settlement facilitation and not for blanket unspecified purposes."

    Indiabulls Securities (an NSE and BSE member) was recently hauled up for insisting that its investor-clients sign a comprehensive power of attorney that gave Indiabulls the permission to do whatever it wanted with investors’ demat accounts. It was also forcing its demat accountholders to open a trading account with it. SaysC.B. Bhave, NSDL managing director: "Another pernicious clause in Indiabulls’ client-DP agreement said that it will not issue any delivery instruction slip book to the investors." NSDL is soon going to impose a monetary penalty on the DP.

    Running account. When you buy and sell shares, you pay your broker and deliver shares within 24 hours of the trade. Within 24 hours of the settlement on T+2 day, you have the right to receive the shares towards your purchase and funds towards your sale. However, many brokers incorporate a clause in the client-broker agreement that states that you should make a specific request in order to receive money against your sales; it is not given to you automatically.

    The reason behind this is to facilitate a ‘running account’–something that only those who trade daily will find useful or necessary. Investors who trade less frequently only stand to lose if they sign an agreement with this clause. Funds and shares have to come to you automatically from your broker after every purchase and sale. But brokers come up with all kinds of justification like this one by JaideepArora, director, S.S. Kantilal Ishwarlal Securities, which offers online trading throughSharekhan.com: "No client has told us yet that they have a problem with this arrangement." But if you have a problem then they should give you the option to receive shares and funds automatically, which Sharekhan.com and others do not give you.

    The Safeguards
    It’s a cliche, but like most cliches, it makes solid sense: prevention is better than cure. Make that your guiding principle when trading and operating demat accounts, and you stand little chance of getting burnt.

    Account statements. Your DP must send you demat account statements regularly (once every month if there are debits or credits; once a quarter otherwise). Check the balances of shares carefully to see that it reflects all your holdings. As an added precaution against falsified demat account statements, write to NSDL or CDSL (where your DP has membership), asking for a transaction statement of your account. All demat accounts records are with NSDL and CDSL and statements coming from them will show the real activity in your account. Also, opt for a DP that offers you Internet-based access to your account statement; visit the web site regularly to check your balance.

    Avoid franchisees. Try and deal directly with the DP, and as far as possible avoid dealing with franchisees. If you have no option but to deal through one, ensure that you get the transaction statement directly from the main DP. And if you are not going to be active for many weeks, freeze a part or the whole of your demat account. It is better to keep your shares frozen on a continuous basis and de-freeze them as and when you want to sell.

    Avoid a running account advance payments. Don’t keep your shares or funds with your broker for long without executing your trades. If your broker defaults between the time he took the advance funds or shares from you and the time your buy or sell order is executed, you’ll be in hot water. In April 2002, Home Trade, the high-profile online brokerage, went bust. Its client-investors had to transfer money or shares to Home Trade before they bought or sold through the online trading portal. Those who had shares or funds lying with Home Trade without corresponding purchases or sales were left high and dry.

    Ensure that there is automatic receipt of funds when you sell and of shares when you buy. You have the regulators on your side. In a Sebi adjudication order passed on November 20 imposing a monetary penalty of Rs 2 lakh on Karvy Stock Broking for various violations committed in February 2002 one was on making delayed payments and shares to some of its clients. Earlier, a NSE inspection of the same broker had revealed 21 instances where the broker withdrew money from the investors’ account for invalid purposes. So keep in mind that the broker can not force you to keep a running account if you don’t want to and further give you a default option of receiving shares and funds immediately after settlement. Your broker needs to take a consent letter from you if you want a running account.

    Check share movement. When you receive the shares you’ve bought in your demat account, check where they are coming from. They should come from your brokers’ clearing demat account and not a general demat account. Similarly, when you deliver shares against your sales you should transfer it to your broker’s clearing demat account and not anywhere else. There are many brokers who do trading on their own account(See Sideshow: Beware of The Broker) and there is a risk of your shares and funds being misused by them.

    In NSDL’s inspection of Indiabulls, for instance, it found that in its capacity as a broker, Indiabulls was moving shares from its clearing account to two of its general demat accounts before transferring them to investors’ accounts. This is not allowed under stock exchange rules, as it removes all audit trails of the transactions. The NSE has issued a show cause notice to Indiabulls and disciplinary process is underway.

    Read agreements. Depository participants are not within their rights to force investor-clients to sign comprehensive powers of attorney. But often these clauses are slipped in, and you may sign if you don’t read the agreement carefully. For instance, Indiabulls has been ordered to remove the ‘no instruction slip book to be issued’ clause in its agreement. As an investor, you should check your copy of your agreement with your DP and see whether you are in a similar trap. If you are, tell your DP to cancel your old agreement and make a new one. If it does not listen to you, complain to NSDL or take your shares to some other DP.

    Complain immediately. If, in spite of your precautions, human ingenuity still manages to work against you and you find shares vanishing, complain to NSDL or CDSL at once. Take full advantage of the existing arbitration mechanisms if complaints fail.

    In May-June 2001, when shares of seven index stocks vanished from Jaykant Sangani’s demat account with an Ahmedabad branch of ICICI Bank (an NSDL DP), he immediately took the matter up withNSDL. On finding that the debits were carried out on instruction slips that had no pre-printed serial numbers (and executed in collusion with a bank official), NSDL directed the DP to restore the shares toSangani. By mid-August, Sangani had all his shares back.

    However, in the three-month gap, record dates for dividends had passed and Sangani lost Rs 13,000 in dividends. He was determined not to accept this loss and ensured that ICICI Bank reimbursed him. Now, that’s the way to go for allinvestors.

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    Thanks to Outlook India for the real service to society through liberal truthful articles and reporting.

    Reference : http://money.outlookindia.com/article.aspx?89239
     
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  2. Sanjay123

    Sanjay123 Member

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    SEBI'S GUIDELINES FOR BROKERS with regards to RUNNING ACCOUNT AUTHORIZATION :

    http://www.sebi.gov.in/commreport/clientreg.pdf

    It says :

    The ‘running account authorisation’ should be dated and also contain a clause
    that the client can revoke the authorization at any time. There should be a clause
    in the authorisation mentioning that actual settlement of funds and securities
    should be done by both the parties, on the last day of every calendar month.
    However, some clients may be having outstanding transactions/positions in
    cash/derivative segment on the running account settlement date. In such cases,
    the broker may make due adjustment by retaining the requisite securities/funds
    from the running account towards such obligations of clients and may also retain
    the funds expected to be required to meet margin obligations for next 5 working
    days by which time the client would replenish/supplement the funds with the
    broker.
    In addition to the settlement of the running account, the broker should send all
    the clients a monthly statement to that effect. The retention of funds/securities, if
    any, by the broker (in the case as stated above) should be duly explained in the
    statement. In case of any dispute arising out of the settlement so made, the client
    should bring it to the notice of the broker within 7 working days of receiving the
    statement. The broker/client may decide not to take any fresh position pending
    the dispute.
    Further, if the client requests for return of securities/funds lying to his credit
    with the broker, at any time in the interim period, the same shall be transferred
    by the broker within one working day from the date of receipt of the client’s
    request. There shall be no inter-client adjustments for the purpose of settlement
    of the running account.

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