How to Avoid Misuse of Power of Attorney by Brokers

When you sign a Power of Attorney (PoA) with a Portfolio Management Service (PMS), you give them the full authority to manage your funds and finances. This service can be of great use if you do not have the time to track your investments on a daily basis. However, it would not be prudent to completely rely on your PMS executives as there is a possibility of misuse of the PoA for their commissions etc.  

What is Power of Attorney?    

The Power of Attorney is a legal document where you give your broker the opportunity to access your demat and other bank accounts for all your trading requirements and procedures. This way, the transactions become easier as you do not need to be present for approvals and signatures for every trade undertaken.  However, the disadvantage of this practice is that it gives the broker a chance to trade in your account without your knowledge. Your broker can easily sell your shares to offset a loss and you, as a client, will have no idea until you get your returns. 

The new laws

In the wake of these malpractices, the stock market regulator, Securities and Exchange Board of India has made some changes in the rules of PoA. Under the new rules, PoA is limited and the brokers can only use the client’s demat and bank account for security and fund transfers. This has limited the misuse and has reduced the concerns for investors.

What brokers can still do

Brokers do not have the same kind of powers but they can still use your accounts for transactions. They can invest in shares and can sell them under your name. They can still sell your assets in the name of due recovery. However, under the new rules and regulations, they cannot sell more than the amount due.

What you should do

  • After signing the PoA with a broker, keep an eye on your accounts.

  • Regularly check your account statements and always record every transaction.

  • If you ever find any discrepancy, contact the supervisor of the PMS. Accordingly, necessary action will be taken against your broker.        

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