Pls don’t choose broker on the basis of annual payment. I opened Demate and Trading account in IIFL 5 years back with 555 one time charge. but after 2 years, they changed their policy and convert all accounts in yearly charges.
For a large portfolio value aren’t you worried about safety of portfolio since you will have to give a POA to the broker? In case there is unauthorized debit in your portfolio, CDSL will put the blame on the broker since they have the POA and broker may or may not have the internal control systems in place to trace the unauthorized activity. Even if they can, it will be a while before you get your assets back. if at all you can actually get it back even after following the trail. The trail may even go cold at some point.
IMO, keeping trading and custody with two separate entities is safer. Have you considered a custodian for your account? Since they handle institutional assets, they are good at keeping your assets safe (even if these are electronic).
I don’t want to leave my assets with a broker and give the broker a POA just so that it is easy for the broker to sell your shares.
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@Nikhil.A
May be you are the right person to address this concern. I have account in zerodha and had not considered this risk very seriously so far. Would like to hear from you regarding this and how you can establish this trust.
Br,
Sudheendra
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How do you credit and debit shares from you demat account, if you do not give POA to the broker?
As far as custodian are concerned you are suggesting that we should not trust the broker but should trust the custodian. Why so?
I see a lot of people talking about VTC orders. So, yes, VTC orders are on our list of things to do and we too want to make the same available soon. But we want to make sure there are no technical or compliance related issues that crop up once we make it available to the public, hence it’s taking time.
@Yogesh_s
Giving PoA to your broker is the only way you can place online trades. If you don’t give us PoA, the only way for you to sell shares through us is provide a DIS each time you want to sell a security. That would completely defeat the purpose of online trading.
As for a custodian, it’s still a matter of trust.
@sudhe09
Continuing from my response to @Yogesh_s, the PoA given to the broker is a limited PoA that allows us to debit shares only in case there is a sell instruction from you. So you needn’t worry. There are various safeguards put in place by the government and the exchanges to safeguard investors. 
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@Nikhil.A you are right about the limited POA and various safeguards placed by government and exchanges. Even technology oriented brokers like Zerodha will have their own access control mechanisms to prevent any unauthorized access to the demat account.
Having said that, I have no trust in our government’s ability to catch a thief should a fraud happen at any level. Even if they catch the thief, only my great grand children will recover my assets. I have lost money in NSEL scam. that’s a robbery in broad daylight and thousands of crores of institutional money is at stake and still there is no closure even after 3 years. That has made me paranoid about safety of electronic assets. Although a fraud is a rare event, it’s implication are severe since 95% of my assets are in equities.
A POA is also needed for a custodian account so there is no alternative to POA even with a custodian. The difference is a custodian’s primary function is safe custody of assets so that’s give me enough confidence that my assets will be safe. they cost about 2-3 lakh per year in fixed costs so your portfolio has to be big enough to justify costs.
A discount broker with a well capitalized custodian is a good combination.
I have found an alternative to custodian and DIS. Here is how it works
- Open demat account without POA in a too-big-to-fail bank like HDFC.
- open a trading account and demat account (with POA) with a discount broker .
- Broker will deliver all BUY orders to HDFC demat
- At the time of selling, transfer shares from HDFC demat to broker demat using SPEED-e.
- Sell using discount broker.
With this arrangement, you can freeze your account using SPEED-e and only unfreeze the ISIN that you want to sell. That’s an additional level of safety. Also a large bank has a history of keeping safe custody of assets so I am assuming it is safer than a broker (brokers will disagree with this statement).
In case of a fraud, investor has a strong case as there is no POA given to HDFC, account is frozen and a large bank can afford to just reimburse the investor and write off the fraud amount to protect it’s reputation. SEBI will also take notice of a complaint against a large DP like HDFC compared to a small DP. None of this is true with a small broker.
In the normal course of business this arrangement is tedious and costly (step 4, HDFC will charge you 0.04%) but it is still 100% online and treat the costs like an insurance premium.
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@Yogesh_s That’s a very well thought out system to say the least!
Just one thing though. The broker would deliver shares to the demat account with him. You’ll have to then move the shares to the HDFC demat account. This is because mapping 2 demat accounts to one trading account though technically possible isn’t a practical solution. Other than that, you have a nearly airtight solution to secure your securities.
At Zerodha, this could be made way simpler. You can have a custodian account with IL&FS, one of the largest DPs in the country and map it with your trading account here and trade seamlessly.
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Great write-up @Yogesh_s
I have few question (just trying to better understand)
My understanding is Speed-e facility at ICICI Demat is called E-Instruction.
How does freezing/unfreezing of ISIN works?
There is a login of SPEED-e on NSDL website, but can I login into it? ICICI Demat has not given any information about this to me.
Zerodha has implemented this system for me. They were very proactive in making changes in their back office system to map one trading account as primary to credit all BUY orders and another one as secondary with POA that I can use for selling. I am actually getting my ISINs delivered to my primary demat account on T+2 day automatically. Only for selling, I have to initiate the transfer manually on T-1 day. In fact, just today the arrangement is active.
A custodian is a good option but my portfolio is not big enough to justify 2-3 lakh cost per year. I will think about it when I get there. I in fact tried to open a custodian account with IL&FS but they are saying that NSE no longer offers CP code to individuals. they are only assigning a CP code to a SEBI registered entity like an advisor or a PMS.
Arrangement with a large bank should cool my nerves for the time being When I get even more paranoid, I will switch to a custodian.
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ICICI does not offer NSDL’s SPEED-e to it’s clients. HDFC bank offers that.
SPEED-e is not offered by all DPs. there is a list of DPs on NSDL site that offers SPEED-e. ICICI is in that list but the DP ID is different than what is used by IDirect.
E-Instruction has the ability to transfer shares but no facility to freeze the account. It is ICICI’s home grown system.
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While opening my trading account with Zerodha, I wanted to keep and link my existing demat a/c with IL&FS with Zerodha trading a/c but I was not allowed the same by Zerodha executives stating that now they have their own DP and they don’t work with IL&FS and If I open only trading a/c with Zerodha, I won’t be able to trade esp. sell securities online.
I tried to make sense to them that how it’s allowed by other brokers and even with this arrangement I can trade (buy/sell) online but they won’t understand a thing as may be their incentives are aligned to they not understanding it. When they can’t explain the things, they will resort to their last weapon: “Sir, What can we do, It’s Govt/SEBI regulation”
Now that you are here, Could you please explain this?
Thanks,
Aksh
Hi @Yogesh_s,
I think your apprehensions are well placed esp. regarding the Govt. machinery about their real intentions, reliability and even ability to bring fraudsters to the books real fast and to render efficacious justice to the victims. Now that you have initiated this discussion, let me share even my experiences and apprehensions about the same. I earlier, talked about such concerns/issues on this thread but there were not many takers as may be they were too busy raking in the mullahs.
Earlier, I had 3 in 1 Account with IDBI Capital and I faced lots of issues with their web trading s/w which would hang just with little increase of load even at closing hours and behave very weirdly. Sometimes it executed orders even without my placing the same and sometimes executed the same orders twice. When I approached their concerned team regarding these issues, I always got some nonsensical answers like: “You must have placed these orders Sir, How can the system make such errors?” When I insisted that, show me the transaction logs or asked some tough questions, like how would your system ensure that, with increase of load at some rush hours, like in panic situation, it doesn’t hang or misbehave etc. that they don’t have even basic safety features like locking/unlocking securities/funds at least to check/safe guard in case of such system misbehaviour, they won’t have a damn clue about any of these.
At last, I got tired of explaining to the IDBI Capital folks regarding such issues and bugs, stopped using their web software and switched over to SAS Online who offers Desktop trading s/w which is far better but nonetheless doesn’t have such basic safety features. In fact none of the online brokers that I know of has such basic safety features. May be @Nikhil.A can throw some light if Zerodha has such safety features.
@Nikhil.A, As you rightly mentioned that POA given to a broker is limited POA which allows the broker to trade on behalf of the clients upon his instructions. How these instructions are recorded/logged and how a client can access such instructions later in case of any issues? Also can you please throw some more light regarding safeguards placed by Govt. in this regard?
Thanks,
Aksh
Hi @cool_aksh,
We used to be partnered with IL&FS and used them as our DP until last September. Beyond that, we merely stopped supporting IL&FS demat account opening as we got our own DP. Nothing more.
If you want to open an IL&FS demat and have it mapped to a Zerodha trading account, you’d have to open an account with IL&FS, obtain CMR and provide the same to us for mapping. It’s like you going to ICICI and asking them to open a Zerodha Zecurities Pvt. Ltd., demat account for you. You wouldn’t be obliged. But if you wanted to map a Zerodha demat you already have with their trading account, they’d not deny you.
@cool_aksh Every order you place is tagged with an order ID by the exchange and the terminal. You can see these order IDs if you look for the order details on your terminal. Each order ID can be used to track where the order was placed from. So, there’s no way an unautorised trade could be hidden, because the source of the order, along with the IP address used, is always recorded.
Also, I’d like to re-iterate my earlier point about trust. In India, you have to choose a broker you trust to trade through. Look at their profitability and financial strength. This is easily accessible from the MCA website. The regulations surrounding broking are so stringent that you needn’t worry about anything other than a broker going bankrupt. Even in this case, investor protection funds have been put in place to ensure the safety of your assets.
This is my unbiased opinion. Were I speaking as a retail investor, I’d tell you the same, probably armed with less information.
I was planning to close down my ICICI direct and kotak account. The last few posts in this thread scared me. It appears , for people who dont trade, ( and a large allocation of their net worth to equity) it would be better to stick to a provider backed by a big bank. I have one question. What happens to our holding if the broker goes bankrupt?. Considering these are held in NSDL, will still affect the investors?
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It’s perfectly safe to trade through most brokers including Zerodha. The question is the safety of the demat account. Even the demat accounts are safe and MAY NOT be misused given the stringent limits provided by government and exchanges. However, they CAN BE misused by DPs, depositories, custodians etc if there is a lack of internal control mechanisms. In case of a misuse, there are severe penalties. that’s an incentive for the entity (broker, DP etc) to implement safeguards in place.
My only point is a broker’s focus is to provide tools to encourage clients to trade and their typical clients may not have a large demat balance. For discount brokers, their focus is to reduce costs and IMO that’s one reason they started their own DP operations instead of paying a fee to IL&FS. But in the process they also took the responsibility of keeping a safe custody of client assets and I am skeptical if these brokers actually understand that they have taken over that responsibility from IL&FS and have put in enough checks and balances to fulfill that responsibility. A POA also transfers the responsibility of safekeeping from NSDL/CDSL to the broker/DP.
A large bank or a custodian has all the checks and balances in place to PREVENT misuse as safety of client’s assets is one of their PRIMARY function and they have gone though enough frauds in the past so their systems are already fixed.
If a broker or a DP goes bankrupt, investor’s assets are safe as long as they are not held in the pool account of the broker or DP. Assets should be held in investor’s own demat. NSDL/CDSL will transfer the acount to another DP. There will be some time lag for that to happen but I am assuming that should be quick.
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Hi @Nikhil.A
Can you tell me how to check profitability here… i was not able to find the appropriate link
Considering the financial health of Zerodha…
I believe it should be safe…than many other players in industry