Demat accounts have been a game changer in India’s financial markets. Dematerialised trading eliminated both the possibility of fake share certificates and counterparty risk. This has worked as a confidence booster and over a period of time, has attracted many investors to the stock markets. However, no system is foolproof. Despite all efforts to strengthen the system, criminal elements in various forms exploit loopholes and take inexperienced investors for a ride.
Incidences have been reported of brokerages transferring their clients’ shares from the latters’ demat accounts to other accounts. In a few cases, mutual fund units held in a demat account were transferred to another account as the broker was keen to use it as margin. These developments make many investors nervous about their demat account holdings. Though demat account frauds cannot be ruled out completely, there are certain ways you can safeguard your hard-earned money from demat fraud. We will look at this, but first, we need to understand how the demat system works.
All about Demat accounts
Investors open a demat account with one of India’s two depositories--the National Securities Depositories Limited or the Central Securities Depositories Limited. These two hold shares of investors. But they do not deal with investors directly. Brokers and institutions apply to become a depository participant with these two companies. Once granted a license, brokerages can act as depository participants. This way even if a broker leaves or terminates his or her services with you, your shares held by NSDL and CDSL are safe.
Do note, that while a stock broker can be both, a stock broker with a stock exchange and a depository participant with NSDL and CDSL; every depository participant need not be a stock broker. Depository participants only have conditional access to demat accounts and investors can control the same effectively by taking following steps:
Update your E-mail and mobile records
Updating your e-mail and mobile in the records of the depository participant at the time of account opening is the first step to safeguarding your shares from any fraud related to demat account. Though it sounds basic, it is a very useful tool. Both the depository participant and the stock exchange communicate with investors about any transactions in their demat accounts using email or mobile. Do keep a track of the transaction Short Message Service (SMS) and E-mails. If there is a discrepancy, then alert your broker.
If you stop getting these updates suddenly, consider it a red alert. Get in touch with your depository participant or broker immediately.
Passwords
Many investors tend to share their passwords with others. Sometimes, passwords are kept very basic. Some investors also access their broking account from cyber cafes or using shared networks. Avoid these practices. Ensure you have a strong password and do not share it. A weak password is an invitation to fraudsters.
Letting others trade
Often, investors allow relationship managers or advisors to trade on their behalf, expecting to earn profits. This can be an extremely dangerous thing to do. The relationship managers or other staff are not authorised to trade. They may not have the necessary skills. Worse, sometimes they may fraudulently rob you of your money. Avoid doing this at any cost. Even if you have subscribed to services of some advisor or some research services, ensure execution control rests with you.
Delayed credits
When you buy shares, they should be credited to your demat account within two days after you execute the trade. This is termed as T+2 settlement in the stock broking industry. While this is the norm, we may soon migrate to a T+1 settlement cycle. For the time being, however, if a broker does not credit shares you have bought within the T+2 cycle, check with them on the delay.
Sometimes, some brokers ask their clients to leave their shares in the broker’s pool. This is then used by brokers as margin for trades. This too, has been often misused. Brokers have been known to sell off margin stocks. Ensure that your shares are not used for such actions.
Delivery Instructions
You have to be careful with the physical delivery instructions given to you. These are like the cheque book to your bank account. They are used to transfer demat shares from one demat account to another. Do not leave these unattended. Do not sign them off in advance. Do not give them to your broker’s staff. Such Delivery Instructions (DI) can be misused, leading to a big fraud.
Power of attorney
While granting a power of attorney, choose to sign a specific purpose power of attorney. Avoid assenting to a general purpose power of attorney. This ensures the broker or depository participant seeks your consent before each action.
Reconciliation
You may not be an active trader but do keep track of the monthly holding statement and transaction statement sent by the depository participant. NSDL and CDSL also send you consolidated statements on your email every month. These need to be checked thoroughly. A holding statement lists the names and quantity of shares held as on that date. A transaction statement lists all transactions. Do check if these match with your trade data. Do ask your broker to send contract notes by email. Stock exchanges also confirm trade details on emails. All these things need to reconcile with each other.
If you see any other trades or a variance in quantities traded then you should raise it with your broker or depository participant.
Sleep mode
There are times you choose not to trade. For instance, many traders do not trade during the Pitru Paksha period or in the month of Mahalaya. Some others prefer to take a voluntary yearly break of a fortnight or a month. If a fraudster figures this out, then there is a chance you could be skimmed around these times.
If you are going overseas where you may not have access to email or SMS, then it further adds to your disadvantage. In such cases you can write to your depository participant and freeze your demat account. This ensures that the demat account cannot be debited. However, all corporate actions such as bonus, rights, and dividends will continue to be credited to your demat (and bank) account.
EASI (electronic access to securities information) facility by CDSL or the IdeAS facility by NSDL can also be used to view and access your demat account. It effectively puts you in control of your demat account.
Thus, while you can’t completely eliminate demat fraud, you can guard against it. Deal through brokers backed by large institutions and keep track of all activity in your account to prevent any possibility of a demat account fraud.