When you open a Demat account with an online broker like Zerodha, 5Paisa, Fyers or any other, it is important to sign a Power of Attorney form also known as POA form. However you do not know why you need to sign such a form at first place.
It might resonate to you as a very significant document. You may have a lot of questions on why exactly you are signing this piece of document known as POA.
In this post we will know about important aspects related to Power Of Attorney (POA). I will try to answer most basic at the same time most important FAQs on POA.
Let us understand the basics and then we’ll move on to other major reason for using POA by brokers.
What is Power Of Attorney (POA)?
A power of attorney or POA is a legal document giving legal authority to another person to operate your account as per the instruction contained in the (POA) power of attorney. To put it differently you are just giving the broker an authority to execute trades on your behalf.
Almost all investor who opens the Trading and Demat account for delivery based trading, gives limited POA to the broker. It is a normal practice to provide PoA or Power of Attorney to your broker who can execute a trade on your behalf over the phone or even square off positions in your account if there is a requirement for margins.
There is no way to be online without a POA, every online broker in the India would require you to submit POA to them.
What are the types of power of attorney?
There are two types of Power of Attorney (POA) in India:
- Specific (POA) or Limited (POA) Power of Attorney :
Specific PoA or Limited PoA could give authority to someone for a limited range of powers. This type of PoA makes for any specific purpose. In Case of share market it is very helpful in trade settlements. This usually ends at a time mentioned in the PoA document.
While giving PoA to your stock broker, please make sure your broker is registered with SEBI. Do not give POA in the name of any other person like dealers, employees, associates etc.
This type of POA is usually given by normal clients(you) to your stock broker. It is a limited purpose POA where the broker has specific rights like transfer of securities to a stock exchange when you sell shares or pledge the securities with the broker for a limited time.
- General Power of Attorney (POA):
General Power of Attorney(POA) authorizes the person to perform all generic activities on the behalf of the original holder. For the purpose of dealing in securities market you should not give General PoA. General PoA holders have more range of powers.
What Is the difference between trading account & demat account?
As an illustration suppose you buy a share of HDFC Bank from your trading account through call to your broker or by using a terminal. Once bought and the transaction is completed the work of trading account is finished.
This shares you bought will require a place to get stored, now this shares will get stored in your Demat account.
So whenever you want to sell your shares, you can easily sell those from your trading account and it gets debited from your Demat account. Trading account is where you execute your buy and sell trades.
The demat account is where your shares are held. Read more about trading and demat account difference.
There are two depositories offering you DEMAT account & there is no difference in terms of operation.
- National Securities Depository Limited (NSDL)
- Central Depository Services (India) Limited (CDSL)
A Depository is a financial intermediary which offers the service of Demat account. No you do not need to go to them directly for opening Demat account. Just contact your broker where your trading account is opened or you are about to open.
Why POA is required?
Whenever you buy shares whether online or through offline account, the shares naturally get transferred to your demat account. You don’t need a POA to do this.
However when you sell shares or want to pledge them, that is when the shares are going out of your demat account, this is when the POA is required if it has to be done online.
The PoA is used to execute your sell trades, or to square off stocks in case of non-repayment of trading dues, like margin shortfall in case you’ve pledged stock and the position goes against you.
You can sell share either by using Delivery Instruction Slip(DIS) or by giving POA. You need to fill up relevant details in DIS & give it to your broker. who will then debit the shares from the dematerialized account.
On the negative side this is very slow process in era of digitalisation. It is almost rarely done nowadays. By authorizing the broker to debit the shares directly after you sell the shares in the dematerialized account is much easier and convenient.
So when you sell shares, your broker will debit them directly as you have given Power Of Attorney (POA) to do this.
In case you want to pledge them for getting margin for trading F&O the POA is used to debit the shares from your demat account. This ensures that the entire process is online and less complex.
What is the need of POA in a Demat account?
conventionally (offline method), you would have to send the delivery instruction slip(DIS) to the brokers office. Once the slip is received at the broker, he would debit your demat account.
Some of the issues with this method were:
Expensive – As slips had to be physically delivered, in this the courier/transport cost is also involved.
Risk of Auction – if the slip doesn’t reach in the specific time, risk of auction penalty.
But now with online broking the above method is no more workable. POA was bought for better operation of the demat account.
By giving the power of attorney (POA), whenever you sell shares the broker would uses it to debit the shares from your demat account and provide it to the exchange.
POA is also used to debit shares from your demat account when you aim to pledge them to get collateral margin for trading futures and options.
Important Points for Power Of Attorney (POA) In Share Market :
- Demat POA is voluntary not mandatory.
- There are no POA Charges involved.
- POA doesn’t need to be on the stamp paper.
- POA is only needed to sell orders. For a buy orders, POA is not needed.
- For F&O trading Demat POA is not needed.
- Brokers & depository both will send real-time alerts for any transactions happened, in your demat account.
- Until you revoke or close the demat account, Demat POA is valid.
- In case you are short of margin in your demat account, your broker could sell your demat holding to recover the money without informing you in advance. This is part of the PoA agreement.
FAQ’s On Power Of Attorney (POA):
Is a POA compulsory?
No, it’s not compulsory, but required for smooth operation of demat account. Remember it is required only for the demat account.
Why is POA Mandatory?
POA is mandatory for the online selling of shares you bought in delivery. It is required for smooth operation of the Demat account.
Is nomination required to be witnessed?
Yes, the nomination needs to be witnessed the document by 2 nominees with their respective signatures.
Will the account be activated without POA Documents?
Yes, the account will be activated without the POA. However, it is not possible to sell the shares online without the submission of POA.
When should be the POA submitted?
The POA should be submitted within 1 week, post account opening.
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 (for delivery) it goes to your Demat account.
This happens automatically, only 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.
Purpose of POA?
While trading futures and options or intraday equity trading, there is no requirement of the POA. Although it is not a mandatory document to be signed, it is required for smooth operation of your demat account.
If you have not submitted the PoA form, you will not be able to see the shares you have purchased under holdings. You will also not be able to sell them.
In case of shortage of margin or failure of payment for the securities purchased, will the PoA holder have rights to dispose off securities in the account?
Yes, but they have a limited extent of recovering the dues. They can dispose off the securities to the extent of recovery of money due from the account holder.
SEBI guidelines also mentions that you should give specific POA which is revocable. You can revoke the rights that you have given to your broker.
The broker will only have specific rights, like transfer of shares to a stock exchange, when you sell shares or pledge the securities with the broker for a limited time.
The broker in no way can stop you from operating your account. So it is safe to give your broker a limited POA for accessing your Demat account.
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 decreases the cost associated with execution of a sell order,also the risk of auction.
Further it helps to avoid penalty expenses to stock exchange. Moreover it speeds up the process and is also very convenient. You do not have to go around for submitting delivery instruction slips as everything is done online by click of a button in seconds.
You can also check the guidelines on NSE website regarding POA here. Hopefully this clarifies your doubts about POA.
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