Now, brokers cannot use PoA to transfer client shares

Equity brokers may no longer be able to misuse client shares lying in demat accounts. From June 1, SEBI has discontinued the use of Power of Attorney (PoA) between a client and broker in the equity markets. This is the first major step that the regulator has taken after the multi-crore default by Karvy Stock Broking through misuse of PoA.

PoA is a legal document that confers a broker with the right to handle client shares. The document is collected by brokers when they open demat accounts for their clients. Brokers transfer client shares in their collateral pool account by using the PoA under the guise of collecting margins. Such shares are then re-pledged by Karvy and many other brokers to avail of loan from banks.

Brokers have been urging SEBI to disallow clients from giving them shares as margin for trading in derivatives. The regulator had said it was a global protocol. Now, the clients will themselves have to transfer shares to the margin account if they wish to pledge them.

Revisiting arrangements

Several PoA arrangements will have to be reversed and the entire process of margin placement of shares to brokers will have to be re-done, said Vijay Bhushan, broker NSE and BSE.

“Holding of a PoA by broker will not to be considered as equivalent to the collection of margin,” SEBI said in its circular.

In the derivative segment, brokers collected shares as margin from traders by using the PoA and there was no specific written communication involved. Now, clients will have to give specific instructions to brokers for transfer of shares for the sake of margin.

 So far, brokers did not require any specific client permission to transfer shares from client account for the purpose of margin. This was mainly as brokers held POA of clients that gave them certain rights. Clients can trade in derivative segment even by placing shares as margin. However, for the purpose of margin now, clients will have to specifically authorise brokers to trasnfer the shares and mere holding of POA will not be enough. Use of POA for the purpose of delivery of shares can continue and clients will not have to fill delivery slips for every sale transaction if they hold demat and trading account with the same broker. SEBI's new POA rules with regard to margin collection will be effective from June.  

"The circular, regarding holding of Power of Attorney by trading members / clearing member not to be considered as equivalent to the collection of margin in respect of securities held in the demat account of the client, shall be applicable from June 01, 2020," SEBI said in its circular.