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Trading and Demat Account Safety Guidelines

Published on Saturday, December 3, 2011 by Chittorgarh.com Team | Modified on Wednesday, May 6, 2020

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Clients put a lot of faith in brokers when they put the money in trading accounts and keep the shares with the demat account (which may have a limited Power of Attorney (PoA) with the broker).

Despite a wide range of regulations by SEBI, stock exchanges and depositories, some brokers still find ways to misuse the customer funds and shares. The common frauds involve:

Getting a Power of Attorney from the investor and misuse it to indulge in massive over-trading of F&Os.
The broker helps themselves to customers' shares, having run up huge losses while trading on their account (prop trading).
Relationship managers push customers towards aggressive trading in high-risk products (i.e. F&O) to meet their targets.

But it's easy to safeguard yourself from the fraud by the broker. With a little caution, you could make sure that the money and shares are safe in your demat account.

10 Steps to safeguard trading and demat account

Ensure that the pay-out of funds or shares is received in your account within 1 working day from the date of pay-out.
Ensure that you receive contract notes within 24 hours of your trades.
Ensure that all the shares you buy are deposited in your demat account in T+2 days where T is the day of trading.
Do not keep funds idle with the stock broker. Move them to your bank account.
Open Demat Account without PoA
Many online brokers (Zerodha, 5paisa and Edelweiss) now offer online trading and demat account without PoA. You just have to re-enter the password to authorize the debit of shares from your demat account while placing the sale order. Your authorization is valid for 1 day.

In case the broker doesn't allow you to sell shares without signing a PoA, be careful while executing the PoA by reading the causes. Note that PoA is not a mandatory requirement as per SEBI / Exchanges.
Note that securities provided by the customer towards the margin are not permitted to be pledged by the stock broker for raising funds.
Ensure that the stock broker settles your account regularly and in any case not later than 90 days. This means the stock broker has to transfer any unused funds in the trading account to the linked bank account on the day of settlement.
Regularly login into your account to verify balances and verify the demat statement received from depositories for correctness. Keep your contact details i.e. phone number and email address updated with the stock broker.
Check messages sent by exchanges every month regarding funds and securities balances.
If you observe any discrepancies in your account or settlements, immediately take it up with your stock broker and if the stock broker does not respond, with the Exchange/Depositories

Conclusion:

While SEBI, exchanges and depositories are responsible for investor protection in general, it is the customer's responsibility too to safeguard his investments from any fraudulent activity of the broker or its relationship managers.

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Frequently Asked Questions

1. How to save a demat account?
Demat account in India is used to hold Shares, Mutual Funds, Bonds, ETD, etc. in electronic format for short to long term. Demat Account Safety is one of the major concerns of investors. But with a few simple steps, you can save your demat account from any fraudulent activity of the broker or its relationship managers.

Steps for safe demat account
1. Remove the demat Power of Attorney (PoA). Many brokers now allow you to sell your demat holding without PoA. This is done by re-entering the password and authorizing the broker to withdraw shares from your demat account while placing the sell order online. The authorization is valid for 1 day.
2. Make sure that the shares you bought are credited in your demat account on T+2 days where T is the day of trading.
3. Keep your phone number and email address updated with the stockbroker.
4. Check SMS and emails from the depository for demat transactions.
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2. Can a broker withdraw money from my linked bank account?
No, if you have a 2-in-1 account (Trading +Demat) with the stockbroker. While your bank account is linked to your trading and demat accounts, your broker cannot withdraw funds from the linked bank account. The linked bank account is used for a few purposes:
1. Dividends are directly deposited in your linked bank account.
2. The withdrawal of funds from trading to a bank account can only be done in the linked account.
3. You can transfer funds from a bank account to a trading account only using a linked bank account.
Brokers like Zerodha, Upstox, Sharekhan, Motilal Oswal, Groww, Paytm, ProStocks offer 2-in-1 accounts.

3-in-1 Account

Yes, your broker (bank) can withdraw funds from your bank account if you have a 3-in-1 account with your bank. The 3-in-1 account is a combination of bank + trading + demat account. All of these accounts are connected seamlessly for smooth transactions.

Banks like ICICI, HDFC, SBI, PNB, and Kotak offers 3-in-1 account.
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