Power of Attorney given to stock brokers: What’s changing from June 1, 2020?

In the aftermath of the Karvy Stock Broking scandal which revealed misuse of Power of Attorney (PoA) issued by clients in favour of their stock broker, market regulator Securities and Exchange Board of India (SEBI) had issued guidelines on February 25, 2020, that sought to plug its misuse. The guidelines laid down rules regarding use of PoA and margin payments through pledging and re-pledging of securities. These rules were to become effective from June 1, 2020.

But due to the disruptions created by the ongoing Covid-19 pandemic through a circular issued on May 25, the regulator pushed the implementation of the February 25 circular to August 1, 2020, with one exception.

One of the rules in the February circular ― that brokers cannot consider securities lying in client demat accounts, for which PoA has been obtained from clients, as trading margin ― will come into effect from June 1, 2020.

What has changed?

The PoA given by clients to brokers will continue to be relevant, but SEBI intends to reduce the uses of this facility in a gradual manner. As per the existing regulatory guidelines, clients can give POA in favour of their stock brokers for the following purposes:

a) For transferring securities from their individual demat account to broker’s demat account for the purpose of meeting their pay-in or margin obligation.

b) Members can also pledge the securities lying in the client's DP account in their favour, using the PoA, for meeting the margin obligation.

c) Additionally, free and unencumbered securities lying in the individual demat account of the client were also considered towards margin if the client has given a POA to the broker who is also the DP.

The SEBI circular issued on May 25, 2020, has barred the practice of considering the securities lying in the client's demat account, as margin, using the POA, from June 1, 2020.

But it appears as if, until July 31, 2020, the PoA can still be used for transferring the securities to the member’s demat account (pool or client collateral account) in order to meet the pay-in or margin obligation of the respective client, or pledging the securities in the member’s favour for meeting margin obligation, in accordance with SEBI circulars issued in April and August 2010.

However, from August 1, 2020, POA can only be used for transferring securities for meeting the client’s pay-in obligation or pledging the securities lying in the client’s DP account in favour of brokers, clearing members or clearing corporations for collateral/margin purpose.

SEBI also intends to implement the pledge and re-pledge mechanism from this August, through which the securities of the client will remain in the client’s demat account and the entire trail of the securities utilised for margin purposes shall be available. Once this is operationalised, misuse of clients’ securities by trading members can be minimised.