What could have happened… this MOFS novice would have learnt F&O or some trading at the cost of this person.
Cases of Unauthorized Trading were quite prevalent during early 2000s since trading in shares and debentures was largely routed through Offline mode (placing a trade via broker either by going to the brokerage house or on call), while online trading was not so popular back then. Hence, an investor would have to rely on their respective brokers for trade related information.
However, the story has a somewhat one sided perspective. Although the compliance norms were not so “stringent” at that time, it is still not possible that any broker could have got away with selling huge amount of securities without notifying the client. Surely, Mr. Mohan Raj would have received some intimation which he somehow missed. Shares from an account are either sold or liquidated. In case the shares are sold the client receives the money in his account in 2 or 3 business days. And it is liquidated if there is a standing debit in the client’s account for more than 5 days. The case with Mr. Mohan Raj was the latter one otherwise he wouldn’t have said that his money got “wiped out”.
Considering that his shares were liquidated, he would have received debit notifications from the back office or head office either on call or e-mail and only after no response from his end would the shares have been sold. He could have filed a case of Fraud and Unauthorized Trading against the company and won, had he not received any notifications from their end.
Talking about present day scenario, since 2012 Compliance Norms as per SEBI have become very strict and require a broker to place Pre Trade Confirmation, During the trade confirmation and Post Trade confirmation with the client followed by a security check call and series of SMSs and E-mails on registered id. Moreover, now the online model has become the most preferred mode of trading, hence there is a negligible chance for an unauthorized dealing in any account.
I know of a friend of mine an elderly gentleman who had a similar fate with another well respected brokerage. This person didnot check his account at all for a long period of time and he had gone abroad after signing many papers. I think it was a ?PMS account with trading option. The amount was about 30 lacs and by the time he returned the account had turned negative. My friend was not financially literate and they showed him all the email statements(he didnot check his mail when he was abroad) they sent and all the legal documents he signed earlier. I think this is possible in a trading account and when we take loan against stocks, where we give them full authorization to operate. What are the safety measures we have to adopt when we do pure investment? Is it ok to do auto allocation of the shares in the demat allocation page in icicidirect?
Hi Saji, what is auto allocation of shares?
Before we sell any share, it has to be allocated in the demat allocation page in icicidirect. If it is pledged it cannot be allocated. By default it is not allocated, we have to manually allocate or take the option of auto- allocation
Thanks for the clarification
Thanks @vij for sharing the article. It’s worth it. I think every investor should read the article very carefully, try to live through it and let it sink in. Knowing well how our system works on ground and having dealt with SEBI in the past, I can vouch for every detail provided in the article and very emphatically relate to disgruntled Investor Wing Commander (Retd), CR Mohan Raj VM’s frustrating experience with the system.
Well, if one has experience dealing with the system at ground level, one would rather call them Realist or may be Idealist. IMO there is so much truth, however bitter it may seem, in whatever Moneylife writes
I would say, It’s quite possible. Frauds have no boundaries. The article clearly mentions that it was the case of forged POA, the investor won the case in consumer court and SEBI apparently didn’t do anything meaningful in the complaint and I would quite relate with that. And make no mistake, this kind of frauds are quite possible even today and who knows it may be going on somewhere with somebody while I write this.
I think the problem is that we presume and take too many things for granted that it takes cookie to crumble for the reality to sink in. Only if we think/ponder and live through the things and try to understand the nuances of how the system works that we may get more real sense of it. I think it’s naive for a commoner to believe that system is there to and would protect him.
Friends- Big broking firms while opening the account , will sign a POA , which links your demat and trading account. This gives the authority to the broker to sell your shares from your demat account and initiate a auto delivery of your shares , whenever they want to clear your trading dues.
In case of market crash, generally brokers who have HO in Mumbai during 2008 , initiated a auto sell of the client shares without consulting the client. This is because they first will save their skin . Nobody is bothered abt the client.
In my view, moneylife adopts highly conservative approach and thats why they are skeptical about a lot which looks pessimistic to a comman man. Elroy Dimson defines “Risk Means More Things Can Happen Than Will Happen” and this quote is the mantra of Howard Mark’s investment philosophy. All great investors are pessimistic towards many ideas and say “NO” but highly optimistic about few ideas they really understand. Berkshire Hathway holding 86 billion cash (27% of networth) is also a pessimistic approach. Let’s accept pessimism.
I assume that it can cna happen if you have leverage, and the broker can square off without giving you info, as per some std initial agreement.
Question is, can this happen when you have the whole portfolio without any leverage?
Broker may buy your behalf and create leverage
How can they do this without our consent? Did we sign any papers to this effect while joining?
If you hold a demat account with a brokerage, but you don’t trade and do only buy / sell on delivery basis. Can they sell the shares without your consent?
Further of late, seeing that balance cash is being diverted to buy liquid funds directly without the consent of the account owner
Is it safe if one is having 3 a/c linked i.e bank a/c, trading a/c & demat a/c linked since money on trade should go to bank a/c …
Try having bank account , trading account and demat account separate. Having given a auto debit mandate from the bank to the broker for your trading account can be very risky. Nowadays you have brokers offering 3 in 1 account , many stating that demat is free . Believe me nothing is free and linking the accounts is more in the interest of the broker than client.
Do you guys think going with a broker who is also a big bank like ICICI/kotak is safer?
Also, I think these things happen more when the accounts are dormant. My father had a small unauthorized trading done by IIFL when the account was dormant for 4 years.
Icici seems to be pretty clean. No issues for last 13 years
Thought it would be worthwhile to share how I have structured my investments with respect to accounts for some folks here and also get some feedback on whether this is a ‘safe’ construct.
My primary demat, trading and savings account are all with ICICI. It has been so since around 2005 (although I had just entered college then). I have the same setup for my wife ie 3 in 1 account.
Apart from this I have an account with Yes bank and IIFL (this was opened in the days when YES Securities did not exist). I used to hold shares in it but no more. I have kept this as a backup to buy in case ICICI is down for some unkown reason and offcourse when things are on a fire sale.
In addition when I speculated I used to use RKSV but only Nifty futures and rarely options. My lifetime options book has been in red. I have moved on from this years ago. But I stil have a Zerodha account for equities, fno and even commodity (I am resisting signing a POA and want to use it only for futures trade just in case of extreme events.). The only reason I maintain this is for the rare chance when I buy or sell futures.
I have spread my savings with multiple banks and dont hold much in my ICICI linked account purposely.
I agree that ICICIDIRECT is the costliest out there. But it has two distinct advantages - convenience and reliability.
I have had 5 ICICI direct accounts in my family for about 2 decades. I am
totally satisfied. Never experienced any safety issue. However, I handle
all accounts my self.Would never authorize any of the relationship
managers etc of ICICI to trade on my behalf.