Opening a demat account is the first and foremost thing to do in order to transact in the Indian
financial market. Demat account can be opened with a broker or depository participant. They act as the middlemen between you and the stock exchange. It is only because of the broker that you are able to purchase or sell shares in the stock exchange.

While filling the demat account form, it is mandatory to sign a Power of Attorney (POA). While signing the POA, investors often think why they are made to sign a different document and there will be all sorts of questions in the mind. In this article, you will learn various aspects related to Power of Attorney which will help in clearing a lot of your doubts and confusion about it.

Let us begin by learning what is power of attorney.

What Is Power Of Attorney (POA)?

A Power of Attorney is a legal document that gives authority to another person to operate your demat account according to the instructions mentioned in the POA. In simple words, with POA, you give the broker the authority to carry out trades on your behalf.

Whenever you open a trading and a demat account, you give limited POA to the broker to execute trades on your behalf. The POA gives the trader the right to conduct the trade on the basis of instructions given on a phone call or squaring off the positions when there is a margin requirement. Every broker requires you to submit a POA and you should not get worried while signing the POA documents as it is a normal practice.

Let us now learn about the various types of Power of Attorney.

Types of Power of Attorney

• • Specific POA or Limited POA
    Specific or Limited POA gives the authority for accessing limited powers. In the share market, this type of POA is very significant because it helps in trade settlements. The POA must be given to a stockbroker after ensuring that he is registered with the SEBI. Make sure you give the POA in the name of the stockbroker only and not in the name of any other person like associates, employees, dealers, etc. By giving Specific POA or Limited POA to your stockbroker, you give him the right to transfer the shares you sell on the stock exchange or pledge the securities for a specific period of time.
  • General Power of Attorney
    General Power of Attorney gives the authority to the other person to carry out all the generic activities on behalf of the account holder. There is no requirement to give General POA to the broker when you are just dealing in shares or securities.

Let us now learn why POA is required.

Why POA is Required?

When a purchase transaction is carried out through the demat account, there is no requirement of the POA. However, when the shares are sold or pledged, POA is required because the shares are going out of the demat account. The POA is required to execute the sell order or to square off a position on the non-payment of the margin. The shares can be sold by giving POA or by using the Delivery Instruction Slip. POA is used in the online process while Delivery Instruction Slip is an offline mode of selling shares and it is getting outdated. Therefore, when your broker has POA with him, he will be able to directly debit the shares from your demat account or pledge them for margin purposes for trading. POA makes the online process hassle-free and simplified.

Importance of POA in Demat Account

Instead of giving POA to the broker, you can sell your shares using the Delivery Instruction Slip (DIS). However, this is an old and offline method. While using DIS, you have to visit the broker’s office and submit the slip to him, only then the shares would get debited from your demat account. This method is expensive as you physically go to the broker’s office or transport it using the courier. POA on the other hand, instantly allows broker to sell the shares from your demat account using the online mode. In addition, DIS mode has the risk of auction of shares if the slip does not reach the broker’s office on time. This risk of auction is not there in POA.

Conclusion

Giving POA is not compulsory but by giving it you ensure smooth operations of demat account. It is mandatory for online selling of shares otherwise your demat account can get deactivated. Therefore, it is not wrong to say that by giving limited POA to the broker for online or offline accounts, you ensure speedy processing of transactions in your demat account. If you want to trade in the share market, you can get in touch with the most reliable and number one broking firm of India, Kotak Securities.

Published: 2020-02-22 00:13:16