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5 strategies to safeguard against Demat account frauds

demat account, demat account frauds, demat account charges, demat account benefits, How to safeguard against demat account fraud, shares, bonds, ETFs, gold bonds, mutual funds

Since the dematerialization of shares certificates, there has been a surge of investors who have entered the stock market and have utilized the convenience that it offers. It allows the seamless transfer of shares, bonds, ETFs, gold bonds and mutual funds. The 2 depositories of India, namely CDSL or NSDL, are responsible for the safekeeping of your shares and securities. However, CDSL or NSDL does not directly interact with Demat account holders. They issue Depository Participant (DP) licenses to stockbrokers and intermediaries who then provide access to customers to open demat accounts.

The fraudulent incidents related to Demat accounts have been increasing in the last decade. However, instances of fraud have soured the experience for some. There have been several instances where brokers have transferred ETF units to use them as collateral for margin funds on trade without the consent of investors. The most infamous one being the recent incident with Allied Financial Services that pledged Dalmia Bharat's MF units. Albeit, the matter is being heard in the Supreme Court on charges of fraud and collusion. It is a significant matter. Several other incidents raised concerns about the safety of Demat accounts. What precautions can one take to guard against such fraud? Here are some safety measures that Demant account holders can take.

1. Make sure you keep a record of your account statements. What your passbook is to your bank account, DP holding and transaction statements are to your Demat account. A holding statements lists your shareholdings in various scrips in your Demat account, on a periodic basis. A transaction statement of your Demat account gives details of all share credits and debits that takes place in your account during a particular period and allows investors to reconcile activity taking place in your Demat account with actual records. You can obtain this electronically from your broker's back-office software.

2. The Debit Instruction Slip (DIS) booklet for the Demat account is just equivalent of your bank cheque book. While transferring your shares from one Demat account to another, you must sign the DIS. Hence you must ensure that you don’t leave your DIS booklet around or leave your signed DIS booklet with your broker, to avoid any chances of fraud.

3. While opening Demat account with your broker, you must ensure that the broker is not directly or indirectly involved in proprietary trading. Involving in these trading activities; eventually, the broker has vested interest with your holding and points to conflicts of the interest. To avoid this, make sure the broker is not involved with proprietary trading activity. This is very important and retail investors much be aware of such activities.

4. In online trading accounts, brokers can access Demat accounts with PoA (Power of Attorney) agreements. These POAs remained a significant threat to the increasing Demat related frauds in the country. In the past, a general-purpose agreement would be sufficient to transfer the sale of funds but, with the new rule, it is not possible. While signing PoA with your broker, insist on limited purpose PoA, as the brokers would have to obtain consent from their investors to sell or transfer funds or securities. This practice makes it a lot safer for you. The PoA can be revoked at any given time without notice except in the case of outstanding dues.

5. Very often, people fly abroad and leave their Demat account neglected. Under these situations, you can give a signed application to the DP to freeze the Demat account until you access or back. When the Demat account is frozen, it continues to receive corporate actions like dividends, bonus and splits and only debits to the Demat account that is barred. The freeze facility is something you must use when your Demat account is likely to be idle for long.

The bonus strategy to all but entirely ignored is – To immediately inform the DP in the event of a change of email or mobile number. To be aware of the debit intimations, you should keep your contact details updated to have a proper track of your hard-earned invested money.

These are small steps, but they go a long way in ensuring that your account is safe and it will contribute towards making the Demat account safer and get irregularities in your Demat account rectified on time. Overall, I'd say the instances of wrongdoing and fraud have reduced significantly from the yesteryears. However, demat account holders should not take it for granted. It is very important to deal with as a stockbroker who has your best interests in mind.

(By Tejas Khoday, Co-Founder & CEO, FYERS)