Demat account without PoA to broker for large investments

[Trinv]

A little bit of context:

I have a large amount of money invested in mutual funds bought online through ICICI and HDFC bank accounts. I also have several small trading and demat accounts with several online brokers that I use to experiment with short-term trading (cash & fno).

As you know, the annual expenses of equity mutual funds (discarding the index funds) range between 2-3%, which is a rather large part of the returns over many years. So I have been looking at moving my mutual fund investments into my own diversified list of stocks to save on these recurring fund expenses. The list of stocks and their quantities may be periodically adjusted, but there won't be too much churn.

The problem is, I don't want to give PoA on my demat account to the broker. I want to keep my demat account with a safe DP and use a different broker to buy/sell equities. After searching the net on this issue, it looks like it is possible to do the following:

1. Link (but no POA) the demat account to the broker, so the shares purchased through the broker automatically get credited to my demat account.

2. For selling stocks, use SPEED-e to transfer shares from demat account to broker's pool account.

I have looked at the charges of many DPs and they range from 0.2% to 0.6% for debit. This is also a considerable expense when the amount involved is large. I finally found one DP (Federal Bank) that charges a flat Rs. 25 for debit and also provides SPEED-e and IDeAS facilities (according to their website). So, I am thinking of opening a new demat account with Federal Bank and use discount brokers like Zerodha or RKSV to buy and sell shares, without giving PoA to anyone.

I have the following questions:

1. Did anybody use Federal Bank demat account? If you used it, how is your experience? Do you recommend it for the above scenario?

2. When shares are transferred from demat account to the broker's pool account (using SPEED-e) at the time of selling, what is the link between the client-id and the transferred shares? If the transfer is done after the sale, I suppose settlement number can be used to link them. But do brokers like Zerodha & RKSV allow sales without having the shares already transferred to their pool account? If they don't, then how do they associate client's account with the transferred shares?

3. Any other ideas?

Thanks.

 

[ethan hunt]

Online transfer facility charges are expensive, there are expensive annual fees for the facility. Anyways, u can transfer shares from fedbank demat to zerodha poa linked demat before selling. I've no experience with online transfer of shares to from demat. No exp of fedbank.

 

[Trinv]

The debit transfer charges are high with most DPs (0.2% to 0.6%), but with Federal Bank it is flat Rs. 25 only and that is the reason I am looking at this option. SPEED-e charges are also quite low: Rs. 30 per quarter. So, transferring out of Federal Bank demat account is cheap.

I think the following setup should work:

Open 2 demat accounts with Federal Bank. Give PoA on one of the accounts to the discount broker. The other one would be for long term holding of shares. Shares would be transferred to/from PoA linked account when selling/buying.

 

[puneetsinghania1980]

I think the most simple way is to open a demat account with a broker who is a DP also... Don't give POA but take speed e facility... Sell shares through that broker and give payin... However u will be asked to keep margin for such sales....

 

[puneetsinghania1980]

By the way dear Trinv... U need not worry even if u have to give POA... The reason is that the new POA now a days gives limited powers to broker... Poa can be invoked only in case of margin or pay in obligations.. Plus these days u get SMS whenever there is transaction from nsdl itself.... So there are many safeguards... I would not like to promote my firm here.. But we open 100% accounts with such Poa and there isn't a single complaint... I am sire others also do it...trust this helps

 

[Trinv]

@puneetsinghania1980, thanks for your response. Looking at your previous posts, I assume that you represent mastertrust. Does your firm offer SPEED-e? Does it charge on percentage basis, or a flat fee for transferring out shares (debit)? How much?

A differerent question: does your firm offer NEST API for interfacing with OMS? I am not interested in an AmiBroker plugin, but would be interested in using NEST API for trade automation. Omnesys lists this product, but they didn't respond to queries.

 

[puneetsinghania1980]

@puneetsinghania1980, thanks for your response. Looking at your previous posts, I assume that you represent mastertrust. Does your firm offer SPEED-e? Does it charge on percentage basis, or a flat fee for transferring out shares (debit)? How much?

A differerent question: does your firm offer NEST API for interfacing with OMS? I am not interested in an AmiBroker plugin, but would be interested in using NEST API for trade automation. Omnesys lists this product, but they didn't respond to queries.

Yes Trinv, my firm is master trust. We do not charge anything for speed e as such and we offer it.

The charges are flat..I think 25 per transaction for outside dp and 15 for inside dp.. I think there is some charge of 100 per quarter on taking some facility along with speed e ...not clear on that as it is very typical...needless to say it isn't much.

We do offer nest api with oms interface... We offer to build custom algo also of u have any requirement instead of going through the entire application building process.

 

[Trinv]

@puneetsinghania1980, these charges are OK, but brokerage is percentage based, which is a deal breaker. Thanks.

 

[puneetsinghania1980]

@puneetsinghania1980, these charges are OK, but brokerage is percentage based, which is a deal breaker. Thanks.

Never offered anything.. Like I said before commenting that I am not here to promote my firm... Simply gave a feedback..cheers

 

[Yogesh_Sane]

Trinv,

I am trying to do exactly what you are trying to do to keep trade and custody separate. Giving POA to a broker just so that selling those shares is easier is not worth the risk one is taking leaving your assets with a broker. It's like leaving your gold in your jewelers vault just because it is easy to sell that way.

Here is what I found so far.

1. the primary solution for this is to use a custodian. You open a custodian account and get a CP code. Give the code to your broker. Your broker will specify the CP code while sending order to exchange. Exchange will assign settlement obligation to the custodian. Your custodian will settle the trade on your behalf. You will have to give a POA to the custodian (instead of POA to the broker). This is how all large institutions settle their trade. You can use any broker who is willing to work with a custodian.

Advantages of this approach

1. No POA to broker.
2. Custodians are registered with SEBI and generally do not have a conflict of interest as the same entity is not a trading member of the exchange.
3. Custodians have better checks and balances than a broker to ensure that your assets are safe.
4. Custodians use NSDL/CDSL as their depositories just like DPs.

There are several limitations also.

1. You still have to give a POA to the custodian.
2. Exchanges are not issuing CP code to individuals anymore, only to institutions or some SEBI registered entity. Investment advisors or portfolio managers registered with SEBI can obtain a CP code.
3. Custody services are expensive. Minimum monthly fees are Rs 15,000 plus transaction fees which are reasonable.
4. Brokers including discount brokers are likely to charge you more if you are using a custodian as they have to make sure custodian will settle the trade before they accept the order. If custodian refuses to settle the trade, exchange will assign settlement obligation to trading member (broker) and broker most likely will not have a way to settle the trade for you.


2. Another approach that I found that works well for individuals. This is similar to what you have proposed earlier with some minor differences.

2.1). Open a trading account and a demat account with a discount broker and give broker a POA for the demat acccount. Let's call this a selling-demat account.
2.2) Open another demat account with a large too-big-to-fail bank like ICICI or HDFC which has better internal control systems. DO NOT GIVE POA FOR THIS DEMAT ACCOUNT TO ANYONE. Let's call it a quasi-custody account.
2.3) Your discount broker credits this quasi-custody account for all your buy orders.
2.4) When you are ready to sell, use the home-grown portal of these banks (ICICI has one) to transfer shares from quasi-custody account to your own demat account with discount broker. You can also use EASIEST/SPEED-e if the bank offers one. but you are transferring shares to your own demat account with the broker and not to the pool account of the broker.
2.5) Sell using discount broker.


Advantages
1. No POA for your quasi-demat account. You only have to give POA to your selling-demat account but it will be empty most of the time.

Disadvantages
1. ICICI or HDFC will charge you for off-market transfer from quasi-custody demat to selling-demat. Current charges are 0.04% which are high but I wouldn't want to go with an unknown or lesser known bank for safekeeing of my assets just to save on this cost.
2. You have to plan your sell in advance. It will take a day or two before your shares are transferred from quasi-custody demat to your selling-demat. Cut-off is 4 PM so you have to initiate transfer before 4 PM to be able to sell next day.
3. Your broker should be able to map your quasi-custody demat account for delivering all Buy orders and your selling demat account for debiting all sell orders.
4. You may have to explain your off-market transfers to taxman in case you get audited. Off market transfers are not illegal but have been used in the past for money-laundering activities.