One indicator of the sort of issues that investors face with brokers is evident from the list of violations listed out by the National Securities Depository Limited (NSDL) and the fact that it has found it fit to increase the penalties imposed on depository participants (DPs) for these violations. It is important to note that many active traders have demat accounts with broker DPs rather than bank DPs and that the Securities and Exchange Board of India (SEBI) also continues to observe misuse of investors’ accounts or the opening of accounts in fictitious names.
The NSDL has listed out 51 violations that will attract a higher penalty from May 2009 in case of repeat offences; only a few of these relate to dealings with investors, but they are a good indicator of how the system can be abused.
In fact, many of the penalties levied by NSDL, even for repeat offences, seem rather paltry, given their potential for misuse or obfuscation of audit trails. For instance:
• DP accounts are apparently opened with unsigned agreements or without adequate proof of identity or address or even without a verification record.
• Supplementary agreements or undertakings are obtained from investors which could contain clauses contradictory to the terms of the prescribed agreement / power of attorney executed in favour of the DP. Or, the terms of the prescribed agreement are altered.
• Accounts are opened in the name of partnerships or proprietary concerns which are not allowed as per the rules.
• Correct Permanent Account Numbers (PAN) of the Income Tax Department are not obtained from the client and the account is not frozen for debit (the penalty is only Rs500) or incorrect PAN entered into the records (only Rs50 per record).
• Invalid/ factually incorrect or meaningless data entered under demographic details attracts a fine of only Rs500, but it could obfuscate trails to fake accounts.
• Sending securities for demat without defacing the share certificate attracts a fine of Rs100 only.
• Investors’ account debited without proper authorisation, inadequate control over instruction slips, failure to execute investors’ instructions or executing them wrongly.