Power of attorney given to securities brokers: what changes from June 1, 2020?

Following the Karvy Stock Broking scandal which exposed the misuse of a power of attorney issued by clients in favor of their stockbroker, the market regulator Securities and Exchange Board of India (SEBI) had issued guidelines on February 25, 2020, according to which sought to plug his abuse. The guidelines established rules regarding the use of PoA and margin payments through the pledging and renunciation of securities. These rules were to come into effect 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 back the implementation of the circular from February 25 to August 1, 2020, with one exception.

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

What changed?

The PoA given by clients to brokers will continue to be relevant, but SEBI intends to gradually reduce the uses of this facility. In accordance with existing regulatory guidelines, clients may grant power of attorney in favor of their investment dealers for the following purposes:

a) To transfer securities from their individual demat account to the broker’s demat account for the purpose of meeting their payment or margin obligation.

b) Members may also pledge the securities in the client’s DP account in their favour, using the PoA, to meet the margin requirement.

c) In addition, free and unencumbered securities in the individual demat account of the client have also been taken into account in the margin if the client has given a POA to the broker who is also the DP.

The SEBI circular published on May 25, 2020 prohibited the practice of considering securities in the client’s demat account, as margin, using the POA, from June 1, 2020.

But it seems that, until July 31, 2020, the PoA can still be used to transfer the securities to the member’s demat account (pool or client collateral account) in order to meet the payment or margin obligation of the respective client. , or the pledging of securities in favor of the member to meet the margin requirement, in accordance with the SEBI circulars issued in April and August 2010.

However, from August 1, 2020, the POA can only be used to transfer securities to meet the customer’s payment obligation or to pledge the securities in the customer’s DP account in favor of brokers, clearing members or clearing companies for collateral/margin purposes.

SEBI also intends to implement the pledge and re-pledge mechanism from this August whereby the client’s securities will remain in the client’s demat account and the full trail of the securities used for margin purposes will be available. Once this is operationalized, the misuse of client titles by trading members can be minimized.

Dolores W. Simon