Is Your Demat Account Safe from Fraud?

India is a fast-growing economy. The financial markets evolve with the increase in the size of the economy. New investors enter the market as more financial products are introduced. With the increase in the number of investors and service providers the chances of frauds and mismanagement increase too. In a number of incidents, the stockbroker has been found to be involved in scams. In certain cases, stockbrokers have also been found to have sold the client’s holdings without his/her knowledge. Considering instances of malpractices, how safe is your demat account?

It is important to understand the structure of demat accounts and some recent developments to gauge the safety of the demat account.

Securities are held by Depositories

When you buy securities through a depository participant, the role of DP is limited to facilitating the transaction. The DP doesn’t store the securities. They are securely held by depositories. There are two main depositories in India—Central Depository Services Ltd and National Securities Depository Ltd. Both the depository services are backed by reputed financial institutions. When you give a sell order, the DP forwards the request to the depository and the shares change hands accordingly. This arrangement protects the investor’s holdings in the case the DP has to wind up operations or is ordered to close down due to mismanagement.

Limited authority on holdings

Along with mismanagement, some stockbrokers also indulge in outright fraud. In certain cases, stockbrokers were allowed to use the client’s holdings as collateral for margin requirements. The investors used to give a broad Power of Attorney to the depository participant or DP. After a few instances of fraudulent transactions by some DPs came to light, the Securities and Exchange Board of India drafted norms for standardised PoA agreements. Stockbrokers are now only allowed to have a limited power of attorney. The broker can only sell to the extent of the recovery amount due.

After the market regulator’s guidelines on the supervision of stockbrokers, the chances of misuse of funds lying in the trading account or shares held in the demat account have reduced drastically. Depositories and the strict regulatory framework make your demat account extremely safe from frauds but an investor should always be vigilant.

• Most demat accounts are opened simultaneously with online trading accounts. When using an online trading account, it is important to keep your username, password and other details secure. Don’t set simple passwords like date of birth or name for access. Change the access details at regular intervals and avoid accessing your demat account through public networks.
• All the transactions through an online trading account is recorded electronically. Check your holding records and transactions periodically and flag any discrepancies. Ask the stockbroker to send the electronic contract note and reconcile the information with the demat statement.
• With the advent of instant messaging apps, many people have stopped reading an SMS. If you are an investor, read all the messages sent by the stockbroker. The details of all the transactions related to the demat account are sent through SMS by the broker. Additionally, even the stock exchanges have started sending SMS, reducing the chances of frauds considerably.
• If a situation arises where you will have to leave your demat account idle for a long period, you can opt to keep your demat account in safe custody. Keeping the demat account in safe custody ensures that no unauthorised transactions take place.
• It is common for bank account holders to freeze the debit card or account in the case of fraud or loss of card. Similarly, in a last-ditch effort, you can choose to freeze your demat account to stop any unauthorised transactions. After freezing the demat account, you can inform the exchanges and the regulator and get the issue rectified.

Conclusion

The introduction of dematerialised shares and electronic trading has made investing safe and secure to a large extent. All the transactions leave an electronic trail which is easy to follow. However, to avoid unpleasant circumstances like frauds and forgery while investing, opt for a credible stockbroker. IIFL Demat and Trading account offers you utmost security along with quality research and analysis. With an IIFL Demat and Trading account, you do not have to pay any fee for opening an account.