Prelude
Back in the days, when everything was 'on paper', and technology was still taking its baby steps, share certificates changing hands proved the ownership of a shareholder. As shares in dematerialized (or Demat) form became common, possession and ownership of shares became digitalized. A modern Demat account enables the user to hold shares, bonds, ETFs, gold bonds, and mutual funds in a single place. This enables the identity of ownership and is also now mandated by regulatory bodies such as SEBI
The Prevalent Situation Right
India has an ever-increasing and rapidly-burgeoning economy, continues to add many investors with greater potential to invest & multiply their savings. The chances of fraud and mismanagement also rise with the increasing number of investors and brokers. The most infamous incident happened in the case of Allied Financial Services, a renowned broker that has pledged Dalmia Bharat's mutual fund units in the course of an internal issue. The matter escalation saw a hearing in the Supreme Court on charges of fraud and collusion.
No matter how secure or foolproof the system and controls might seem, fraudsters always seem to find a way out to strip innocent investors of their hard-earned and carefully-invested funds. Small steps taken with utmost care go a long way in eradicating any chances of fraudulent activities taking place.
Understanding the Nitty-Gritty
The role of brokers is of utmost importance while understanding the nature of transactions that are being carried out. Depository Participants (DP) are only allowed to facilitate transactions and not store securities.
Besides mismanaging the holdings, a few brokers have also engaged in fraudulent practices outright in the recent past. Brokers have been accused to have held clients’ portfolios as collateral since the investors were being signed up only after getting a Power of Attorney (PoA) as a part of the initial user agreement.
Hence it is vital to opt for a broker having good credentials in the industry to avoid any unforeseen circumstances while investing such as financial fraud and forgery of confidential information.
Measures to Protect Oneself from Fraud
Considered a gateway to one’s shares ownership, a Demat account needs to be secured well to stay safe from any fraud. Let’s have a glance at a few key measures to ensure the same: -
Securing your account – Keeping it safe
As with any other virtual platform, keeping user credentials safe and strong is one of the most vital solutions to safeguard oneself from any fraud. A strong combination of varied characters in a password and enabling two-factor authentication are the primary steps the trader/shareholder needs to ensure. Apart from that, maintaining documentation relating to user identity is also paramount to Demat account safety.
Apart from that, general awareness such as refraining from sharing OTPs, avoiding screen-sharing access to unauthorized personnel, using VPN while logging on to public networks, and regularly checking one’s Demat account for any suspicious activities are some other common precautions to be taken while engaging in operations of a Demat account.
A sample screengrab of a two-factor authentication screen looks like this: -
Freezing Demat Account during Inactivity
Demat account can also be frozen temporarily in safe custody to ensure that no unauthorized transactions occur when the user is not going to use it for a limited period. This drastically reduces the risk of phishing or scam frauds by third-party scamsters when the Demat account is likely to be idle for a longer timeframe.
Demat accounts only debar debits during the time of freezing the same. It continues to receive other benefits like dividends, bonuses, right issues, and share-splits during the aforesaid period. The process of freezing is quite simple and can be done with a single tap, as in the case of any bank account as well. The Demat account can also be immediately de-frozen once the investor wishes to resume regular trading.
Tracking one’s account statements.
A DP holding and transaction statement is to a Demat account similar to what a passbook to a bank account is. SEBI consider it mandatory for the DP (NSDL or CDSL) to send the investor an intimation over SMS when shares are debited/credited to a Demat account. An audit trail is left behind after each Demat transaction, so it becomes quite easy for the brokers to locate how and where the shares were transferred in the past. A holding statement summarizes all the shareholdings held in a Demat account on a particular date, whereas a transaction statement is a summary of all the share credits and debits that take place in your Demat account on a particular date.Regular traders must reconcile their contract notes, trading ledgers, and Demat accounts periodically between suitable time intervals.
When the brokerage firm asks to keep the shares in the brokers’ account for an extended period in exchange for potential benefits, the investor should look to avoid such malicious offers and vouch for utmost transparency from the broker.
A sample screenshot of an SMS message sent by CDSL – a Depository Participant given as under: -
Limit the Access & Authorization to Broker
Limiting the authority of the broker over the shareholdings of an investor can go a long way in drastically reducing the frauds since many frauds usually are perpetrated from the broker’s end owing to misunderstandings or lack of clear instructions from the investor’s end.
The Debit Instruction Slip (DIS) booklet is the equivalent of a bank chequebook. It must be kept in safe custody and no signed slips are to be left with the broker. Loose DIS slips shall never be used and the broker must insist on slip booklets that are pre-printed with the Demat Account number of the account holder.
Access to Power of Attorney to the broker shall be limited with restraints by signing a limited-purpose PoA rather than an all-purpose/general PoA. This enables the broker to debit a Demat account only for settlement-related transactions, which makes it a lot safer for the end investor. One need to check this with their broker.
Summing it up
With the advent of modern technology in investing, the introduction of dematerialization and electronic trading has made investing a far safer and more secure activity than it was earlier. The threat of Demat account fraud can be eradicated by simply being regular in checking updates, keeping vital documents under safe custody, and cross-checking the trustworthiness of the broker before opening a Demat account. Investors staying vigilant and being careful of minor yet essential things can go a long way in improving user safety and consequently investors’ confidence alike!