How to Protect Demat Account from Fraud

India is one of the fast-growing economies in the world, and the financial markets evolve with the increase in the size of the economy. New investors enter the market as more financial products are introduced with the growing economy. However, with the increase in the number of investors and service providers, the chances of fraud and mismanagement rise. In a number of incidents, the stockbroker has been involved in scams such as selling the clients’ holdings without their knowledge. Considering instances of malpractices, the question arises: How safe is your demat account? It is important to understand the structure of demat accounts and some recent trading developments to gauge the safety of the demat account.

Depositories hold securities

When you buy securities through a depository participant, the role of DP is limited to facilitating the transaction and not storing the securities. Depositories securely hold the securities on behalf of every investor.

Best ways to protect your demat account form fraud

Along with mismanagement, some stockbrokers also indulge in outright fraud. Previously, stockbrokers used the client’s holdings as collateral for margin requirements in certain cases. It was because the investors used to give a broad Power of Attorney to the depository participant or DP. After a few instances of such fraudulent transactions by some DPs came to light, the Securities and Exchange Board of India drafted norms for standardised POA agreements. Now stockbrokers are only allowed to have a limited power of attorney. The broker can only sell to the extent of the recovery amount due.

After the market regulator’s guidelines on the supervision of stockbrokers, the chances of misuse of funds lying in the Trading Account or shares held in the demat account have reduced drastically. However, there are a few things you should consider for making your demat account further protected from frauds:

• Most demat accounts are opened simultaneously with online trading accounts. When using an Online trading account, it is important to keep your username, password and other details secure. Don’t set simple passwords like date of birth or name for access. Change the access details regularly and avoid accessing your Demat account through public networks.
• All the transactions through an online trading account are recorded electronically. Check your holding records and transactions periodically and flag any discrepancies. Ask the stockbroker to send the electronic contract note and cross-check the information with the Demat statement
• With the advent of instant messaging apps, many people have stopped reading SMS. If you are an investor, it is vital to read all the messages sent by the stockbroker and the stock exchanges. The details of all the transactions related to the Demat account are sent through SMS by the broker.
• If you have to leave your Demat account idle for a long period, you can opt to keep your Demat account in safe custody to ensure that no unauthorised transactions occur.
• It is common for bank account holders to freeze the debit card or account in the case of fraud or loss of the debit card. Similarly, you can choose to freeze your Demat account to stop any unauthorised transactions. After freezing the Demat account, you can inform the exchanges and the regulator to rectify the issue before you unfreeze your Demat account.

Conclusion

The introduction of dematerialised shares and electronic trading has made investing safe and secure to a large extent. All the transactions leave an electronic trail that is easy to regulate and monitor by the stock exchanges. However, it is important to opt for a credible stockbroker to avoid unpleasant circumstances like frauds and forgery while investing.

IIFL Demat and Trading account offer investors utmost security along with quality research and analysis. With an IIFL Demat and Trading account, you do not have to pay any fee for opening an account. Begin your safe and secure trading journey with IIFL today.