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Karvy case: How you can safeguard your stock and MF holdings from brokers’ shenanigans

The regulator’s portal and social media help in finding out which broker has least complaints.

November 26, 2019 / 09:17 AM IST

The investment community woke up to a rude shock last Friday. The capital market regulator, the Securities Exchange Board of India (SEBI), banned Karvy Stock Broking (KSB). Acting upon a recently-concluded audit by the National Stock Exchange, SEBI found that Karvy Stock Broking had fraudulently pledged the shares of some of its clients – after transferring the shares from their demat accounts without informing them – and raised funds, which were transferred to one of its sister firms, Karvy Realty Pvt Ltd.

The SEBI order stated that KSB transferred roughly Rs 1100 crore to its group company, Karvy Realty, between April 1, 2016 and October 19, 2019.

The order further states that Karvy Stock Broking transferred securities worth Rs 27.8 crore in off-market deals from demat accounts of 156 clients, who had not executed even a single trade with them. Additionally, securities worth Rs 116.3 crore were transferred from 291 clients who hadn’t traded with Karvy since June 1, 2019.

Note how Karvy Stock Broking moved shares from dormant demat accounts. That puts many investors, especially senior citizens, at risk and those who do not buy or sell shares frequently.

Even so, you can still take steps to secure yourself from such frauds and make your demat account safer.

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Can I get alerts on all transactions relating to my account?

You can definitely use technology to help yourself better. Update your email address and telephone number with your broker and depository participant. When a trade is executed or when a security is transferred, the investor receives an alert. “Trade confirmation, ledger balances, stock statements need to be communicated to the investor from time to time,” says Prakash Gagdani, chief executive officer of 5 Paisa.com, a discount broking firm. Failure to do so is a serious compliance lapse, he added. If you have registered your contact details, you will get all the information about the transactions in your account. Keep a track of such text messages and emails; don’t delete such messages without looking.

Every time you buy or sell a stock, the stock exchanges also send out trade confirmation messages to the investors. Make sure you reconcile the information given out by the exchange with the information provided by the broker. If there are discrepancies, you should dig deeper.

How long can my cash lie in the broker’s account?

Brokers are expected to pay-out the cash balance of investors lying with them at least once in 90 days. If the broker is not doing that or fails to inform you about the ledger balance or the stock statements, you may be at risk. Ask the broker to furnish this information on a regular basis.

What details must I keep tabs on?

The number of shares is an important piece of data to check for possible ‘leaks’ in your demat account. First, make sure you keep a check on the number of shares you bought of every company in your portfolio. Your demat account statement has this information. Check the latest month’s statement details with the previous month’s. The value of your holdings may keep going up or down, depending on market movements, but if you have not bought or sold anything, the number of shares should remain the same. The two depositories, NSDL and CDSL, send monthly consolidated statements to investors. These statements capture all the stocks, bonds and other securities held in your demat account, as well as the units of mutual funds. It also gives details of transactions that took place during the month.

You need not rely on just what your broker tells you.

Where can I get a single-point view of all my holdings?

You can register yourself on the portals of either of the central securities depositories – NSDL or CDSL – depending on which entity your DP (depositary participant) is registered with. After registering, you can get all details related to your holdings from the portals of these depositories or using their mobile applications. For example, CDSL offers an ‘Easy’ facility to view the demat holdings and transactions and an ‘Easiest’ option to view and transact in your demat account.

We say this again: Keep an eye on the number of shares.

“Though the depositories can help you keep track of your investments, to register for the online facilities and to keep getting alerts, you need register your mobile number and email ID through your broker. If you have not, do it now,” said a stock market professional on condition of anonymity.

Some experts say that as an additional precaution, investors can separately maintain their own inventory of stocks that they hold, buy and sell. Stocks received through bonus can be recorded in a similar fashion.

Is giving power of attorney dangerous?

A power of attorney (POA) is given to allow some other person to transact on your behalf. It can be misused. The power of attorney given to the broker while opening an account is a ‘limited-purpose POA,’ as it allows specific transactions such as transferring shares that are sold through the broker on an exchange. It also excludes certain transactions such as off-market transfer of shares.

A general POA, however, empowers the POA holder to act as if she is in full control of the investment account, unless otherwise stated. “Giving POA to financial intermediary should be avoided. But if it is really necessary to do so, then give the POA in the name of a particular person (to fix responsibility) and specify a time limit of, say, six months or a year,” said Makarand Joshi, partner, MMJC and Associates, a corporate compliance firm. A POA can have restrictive clauses. For example, you may give POA for a limited amount. You may also allow only purchase of shares, specifically exclude off market transactions, prohibit creation or pledge or lien, Joshi added.

When should I change brokers?

Though demat accounts save you from a lot of paperwork and make investing seamless, you should keep track of your holdings. If your broker does not follow the best industry practices, it is time to move to a better provider. Opt for a broking outfit with strong financials and few complaints against it. The regulator’s portal and social media help in finding out which broker has least complaints.
Nikhil Walavalkar
first published: Nov 26, 2019 08:40 am

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