Power of Attorney and its role and importance related to Demat accounts is highly misunderstood by many retail investors. Towards understanding the role and importance of power of attorney in a Demat account, we need to understand the following:
What is a Demat Account?
A dematerialised account, which is also referred to as a Demat account is a type of account utilised for holding, trading and transaction of securities, shares and other financial instruments in the electronic form. When a person trades in securities, stocks, share and other financial instruments online, these securities, stocks, share and other financial instruments are bought and held in an electronic account which is known as the Demat Account. Hence, a Demat account facilitates ease in trading for users and investors. A Demat account can be used for holding a wide array of financial instruments and investment securities such as stocks and shares, bonds, government securities, mutual funds etc., in a single account. Due to the increase of popularity of dematerialisation of shares, stocks and financial instruments, many depository participants and commercial banks offer investors an option of Online Demat Account Opening.
What is a Power Of Attorney?
Power of Attorney is a legal document which allows your stockbroker to operate the Demat account of a customer as per their instructions. When an investor wishes to sell their shares, power of attorney is used by the stockbroker to debit those share from the Demat account of the investor and provide the shares to the exchange. A power of attorney is also utilised to debit shares from an investor’s Demat account while pledging shares towards obtaining collateral margin to trade in futures and options.
Is Power of Attorney Mandatory?
It is not mandatory for an investor to issue a Power of Attorney to their stockbroker and it is to be issued completely at the discretion of the Demat account holder. However, Power of Attorney enables the smooth functioning of an investor’s Demat account.
An investor not wanting to issue a Power of Attorney can transact on their Demat accounts using Depository instruction Slips or a DIS. A DIS is similar to issuing a cheque. However, undertaking transactions using DIS can be very tedious and time consuming for the investor. Hence it is advised the investors issue a Power of Attorney to their stockbroker towards ensuring smooth functioning of their Demat Account. Investors should ensure issuing the Power of Attorney only to a stockbroking firm and not an individual for acting on their behalf. The investor can have an open-ended Power of Attorney or a limited-time framed one. An open-ended Power of Attorney should be specific to the Demat account only and should clearly specify the powers and limitations. Limited time-frame Power of attorneys is usually not advisable as it can limit the ability of the stockbrokers and service providers to provide a streamlined and hassle-free experience.
Powers provided by a Power of Attorney
- When an investor wishes to sell or transfer their shares held in their Demat accounts, a Power of Attorney allows the appointed party to execute the request on the same day and ensure the buying party takes the delivery on the same day.
- Allows holder of PoA to pledge shares towards obtaining margin requirements for their client’s transactional requirements.
- Allows the holder of PoA for applying for a wide array of financial products such as mutual funds, rights, the offer of shares, public issues upon the instruction of the client.
- Allows the holder of the PoA to recover dues which might arise due to the trading and transaction activities are undertaken by the client.
- Recover of dues and payments in the form of charges for services provided
Types of Power of Attorney
- General Power of Attorney – The holder of a General Power of Attorney can perform all forms and various activities on behalf of the issuer of the Demat account. It is not advisable for Demat account holders to issue General Power of Attorney to their stockbroker or any other authorised person/firm towards operating their Demat account as a General Power of Attorney provides the holder beyond operations of the Demat accounts.
- Specific/Limited Power of Attorney – A Specific or Limited Power of Attorney provides the holder of the PoA specific or limited powers for undertaking tasks on behalf of the issuer of the PoA, such as operations of Demat Accounts.
Features of Power of Attorney for Demat Account
- Holders of the PoA are not allowed to make investment decisions on behalf of the Demat account holder.
- Holders of the PoA are not allowed to place orders with the consent of the Demat account holder.
- Holders of the PoA are not allowed cannot transfer shares and securities, funds except for the trading members pool accounts, margin account or another other account mentioned in the PoA.
- Family members cannot give instructions on behalf of the Demat account holder.
- The Demat account holder can revoke a power of attorney as and when they desire.
- Even post issuing a Power of Attorney, Demat account holder is allowed to undertake and execute transactions by themselves.
Tracking Demat Account Activities
- With the aid of contract notes which are sent by email at the end of each day.
- By Analysis of Statement of Account.
- By Verification of Quarterly Settlement Statements.
Although many people might have the misconception that their Power of Attorneys can be misused by their stockbroker or Depository Participant, the limited or specific power of attorney are prepared and executed for Demat account opening. Thet clearly specifies the authorisation of the holder of the PoA will be restricted only to the operations of the Demat account only, and most transactions will require consent from the holder of the Demat account. Brokers can in no manner operate or transact on their client’s Demat account at their own whims and fancies, and hence it is safe for Demat account holders to issue a Power of Attorney to their brokers.