Beware of trust & mistrust

Keep an eye on the transactions conducted in your demat account. Nothing should go out or flow into your account without your knowledge.

Let me today share a tale of trust, mistrust and fraud. Some time back an acquaintance usually used to narrate money-making stories in the share market and would always invite others around him to invest in the market. He would not even hesitate to give tips about the price movement of various stocks as if he was an investment expert. Actually, he was one among the breed of local (J&K) gullible investors who had boarded the equity market after getting lured to the wealth creation stories of the market and getting rich in the quickest time.

Basically he was a successful businessman dealing in arts and crafts till he fell to the success stories of the share market. A local share market broker guided him to the market and immediately created an investment portfolio containing a mix of shares from a few sectors for him. Within no time, he started day trading in shares. For some time, he, with the guidance of the local broker, booked profit almost every alternate day in trading the shares.

His statement still echoes in my ears when he said, “I don't need to waste my time on any other business activity now. I am earning Rs.3000 to Rs.5000 every day through trading of shares.”

After some time, he met me as the most depressed person. He narrated his tale of misfortune he had met in the share trading practice. He was losing his capital investment fast as the value of his investment portfolio was getting devalued every passing day. The worst part was that his broker, who had guided him to the market, had ‘ditched’ him to the tune of over Rs. 10 lakhs. He had given authority to the broker to conduct transactions in his demat account on his behalf and for this he had signed some blank documents which the broker had later misused. Even as he tried to catch hold of the wrongdoings of the broker and claim the damages, his signatures on certain transaction documents were going against his claim.

Precisely, he trusted the broker and gave him the authorization on blank papers (delivery instruction slips) to conduct transactions in his demat and trading accounts. The broker misused the authorization and caused him huge loss just to earn his brokerage. Simply, the broker committed a fraud while leaning on the back of the trust which my acquaintance had reposed in him.

However, my acquaintance is entirely to be blamed for his financial and allied miseries which he brought to himself and for his entire family. He lacked knowledge about the pros and cons of the share market when he boarded the market.

I am sure there are innumerable miserable stories of the likes of my acquaintance who have been victims of mistrust and fraud after falling to the tricky broker advice & showing over-trust on the broker.

What are the basic things one should take care of while selecting a broker or sub-broker to enter into the share market?

The first important thing is to check the market credibility of the broker or sub broker through which you are entering into the equity market. The best feedback you can get about the broker is from the existing customers. Don’t forget to look into the affairs of the broker like quality of management, historical performance etc.

After you decide about a broker, you have to execute some paperwork to enter into a business relationship. The execution of contract documents is the most vital part of your investment plan through the broker. I have come across several legal disputes between a broker and an investor where the latter disputed some transactions despite having signed the documents. If an investor has signed a transaction document, he cannot refuse to have conducted the transaction. Despite signatures in place, the transaction can be fraudulent.

Once you have chosen a broker, you have to fill up the contractual documents. It’s here where you show your carelessness. You simply sign the documents without filling the necessary columns and leave rest to the vendor. So you give him the freedom to fill all your details in the form without your knowledge.

It’s here brokers can breach your trust and misuse the blank documents signed by you. In case of dispute one might fill data in it without your knowledge and produce it as proof in future.

It’s not an uphill task to insulate yourself from this situation. Simply, read the documents and fill in the details yourself. Don't leave the documents blank. Strike blank spaces off if you don't wish to fill anything there.

Even after completing the paperwork, you have to remain watchful about the activities conducted in your account. Keep an eye on the transactions conducted in your account. Nothing should go out or flow into your account without your knowledge. If you observe any such transaction which is unknown to you, immediately catch hold of your broker or sub broker. It can be a fraudulent transaction.

What is the delivery instruction slip (DIS)?

Delivery instruction slip (DIS) is the most important document in investment matters. As an investor you know that a demat account is an account in which the shares and other securities are kept in electronic form as balance in the account which can be later sold or transferred by the demat account holder as per requirement. The transfer of shares or any kind of transaction in the demat account is done through delivery instruction slip (DIS) which is as good as a cheque of your bank account.

In simpler terms, DIS is used to facilitate and authorize the transfer or sale of shares from one account to another. In order to conduct a transaction, you are required to submit a DIS slip to your Demat account provider. On completing this authorization step, the shares will be transferred from one account to another.

Why is custody of these delivery slips important for an investor?

Since DIS is as good as a cheque book of a bank account, you need to take certain precautions to save yourself from being conned. Soon after opening a demat account, ensure and insist on a DIS book. Avoid using loose slips. Ensure that DIS numbers are pre-printed and DP takes acknowledgment for the DIS booklet issued to investors. You should also check that your account number is pre-stamped.

Never leave a signed blank DIS with the broker. Keep your DIS book under lock and key when not in use like you do with your bank account cheque book. If only one entry is made in the DIS book, strike out remaining space to prevent misuse by any one.

You should personally fill in the target account-id and all details in the DIS. If the DIS booklet is lost / stolen / not traceable, the same must be intimated to the DP immediately in writing.

Remember, it can prove a major source of fraud if misused.

Meanwhile, I have also observed that a good number of our local investors handover power of attorney to brokers to operate their accounts. By virtue of this legal document they authorise their brokers to operate their demat account. Legally, power of attorney is the document which gives immense power to the holder and can act on your behalf in his own style.

I am not trying to say that one should not give this legal authority to a broker or a sub broker. But there are certain things which an investor should consider before handing over the power of attorney to them. Don’t give this attorney for infinite amount of time. Always limit the powers to the holder, like the broker should only be allowed to make investments with available amounts in the account. Never allow him to use leveraging without taking your consent.

How can an investor convey online instructions about a transaction to his broker or sub broker?

You can conduct online transactions in your demat account through e- DIS (electronic- Delivery Instruction Slip). You can sell your stocks through e- DIS in real-time without submitting the physical delivery instruction slip (DIS) or the power of the Attorney (POA) form. You can sell your holdings with your brokers with an OTP confirmation that’s just as valid and legal as the DIS. It is completely secure though an OTP based authentication. The e-DIS facility is applicable only for delivery trades and not intraday orders.

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