Whenever you go in for a trading account you will see that it requires opening of a Demat account with the broker and signing a limited purpose Power of Attorney (POA) in favor of the agent which would be the broker. Ever wondered why you need to sign a POA? Let us try to understand why a POA is required for a Demat account.
What is POA?
A power of attorney or POA is nothing but a written permission or authorisation given by you to your broker to represent you, the client, or act on your behalf in personal affairs, business, or any other legal matter specified in the POA.
Here you will be the principal, grantor, or donor of the POA and the broker will be your agent. But remember it is a limited purpose POA where the broker has specific rights – transfer securities to a stock exchange when you sell shares or pledge the securities with the broker for a limited time.
What is the need of POA?
The Demat account stores the shares that you buy – both online and offline. So, when you buy any share (of course for delivery) it goes to your Demat account.
This happens automatically and does not need any interference. Problem arises when you need to sell them or may be pledge them. An outflow of shares from your Demat account does not happen automatically when you sell them online. This is where a POA is required.
For offline sale of shares, you will need to sign a delivery instruction slip that has to be submitted to the broker on time for release of shares from your Demat account for sale.
The process is cumbersome, time consuming and had the risk of option if the instruction slip is not deposited on time. But online broking has made it all easy. But the broker can’t still access your Demat account unless you give them a written authority to do so. This is what the POA does. It gives the broker the authority access your Demat account and release the shares being sold.
What are the benefit of POA?
Though not compulsory POA helps in the smooth operation of your online trading account especially when you sell shares. It helps in easy transaction through your account. It reduces the cost associated with execution of a sell order, reduces the risk of auction, helps to avoid penalty expenses to stock exchange, speeds up the process and is also very convenient. You do not have to run around for submitting delivery instruction slips.
Remember a POA is an authorization that you give to another person to act on your behalf. It can be misused against you. But for a Demat account operation, you will only have to sign a limited POA with authorization to carry out only specific action – access your Demat account for releasing shares when they are sold. Be careful to read the papers before you sign them.
SEBI guidelines state that you should give specific POA which is revocable (you can revoke the rights that you have given). The broker will have only specific rights – transfer securities to a stock exchange when you sell shares or pledge the securities with the broker for a limited time. The broker can in no way bar you from operating your account. So it is safe to give your broker a limited POA for accessing your Demat account.