My neighbor of many years had about 900 shares of xyz (pre split) so now he should be having 4500 shares. His portfolio was not too great, but this share somehow he listened to me and held on from 1980 onwards…so it had grown.

He had a very ambitious broker – and my genius neighbor opened a demat account there – and he had not asked me. He was a big broker – into a lots of related and unrelated business, so I am not naming them.

One day he came to me – a little agitated saying ‘My 100 shares of xyz are missing’ – even at that stage this meant about Rs. 70,000 and was not a small amount for a retired person. I said ‘Elucidate’.

He said..the manager working at the brokerage house said ‘I will buy and sell shares of xyz – and you will make some money.’ I said ‘You should have told me BEFORE, not after you sign some stupid Power of Attorney’ …he showed me some transactions – but all were squared off, and my neighbor should have had 900 shares – now he had 800.

I told my neighbor to go there on Monday morning….by Wednesday the shares were BACK in the statement.

I KNOW the broker had used these shares to do a pay in (either for himself or somebody else!)- when my neighbor threatened POLICE ACTION (this old man is good at screaming!) he was paid Rs. 20,000 to keep his MOUTH SHUT.

ha ha ha…

Why am I making you laugh?

Now there is a company called MF Global. Sorry there was a company called MF Global which used all its CUSTODIAL assets to make a margin payment, and then went bankrupt.

Long ago – sometime in the 1990s I lost a lot of money to a broker named Viswapriya Financial services (controlled by R Subramanian of Subhiksha fame) when they gave away CLIENT shares to the exchange and then defaulted.

Now if a company in many businesses decides to use the equity shares that it holds in the MUTUAL FUND business to pay for its MARGIN CALL what happens to your units?

Well like in case of MF Global you can:

a) twitch your thumb

b) suck your thumb

c) write letters to SEBI, PM’s office, IRDA, Ministry of Finance, PFRDA, ….etc.

d) thank your stars that they took only your shares and not your NPS account also

e) cry

Well, somebody had asked me ‘What if the mutual fund turns bankrupt’ well here up above is the answer.

In a classroom I am supposed to say: “Trustees are independent people who see every transaction – so that they are sure that the end unit holder is benefited in every transaction”

It is even easy to write that – everybody will be happy too. However what I have a sinister sense of joy writing about ‘worst case scenario’

this is an old 2011 article, but nothing changes. If your broker has your PoA and needs your share it is likely that he will ‘borrow’ – legally or illegaly and temporarily or permanently.

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  1. Hello Sir,

    Whats the way out of this? Most of the folks have Demat & Investment account with the same company.

    Sorry to ask a stupid question but have seen giving you heads up frequently but couldnt find a reliable answer.

    Maybe a post from you will help.

    Thanks,
    HM

  2. I remember this incident from your earlier post!! The shares were of your favourite bank (Split into Rs. 2 FV subsequently)!

    Only protection against such malpractice is to be alert of the balance share quantities. These days both NSE and BSE send SMS on every credit/debit into your demat a/c, please be alert to any unexpected withdrawals. A recommendation is to not overtrade so as to be bombarded with such SMSes and then start treating them as ‘noise’!

    If you don’t intend to trade for long times (> 6 months) you can even ‘freeze’ your demat account. Please check with your DP provider for details.

  3. could you please eloborate ” If your broker has your PoA” . My understanding i sthat if the shares are present in DP account , it is safe . please confirm is that right (yes it needs monitoring though) . but does a broker has right to pledge our shares and still see in DP account?

  4. I also read one of your comments about how astonished you are that some people keep portfolios of 5crs or more with the same broker who buys for you. Given that most people now buy online (and give mandate for operating on his behalf), how can one ensure that his holdings are safe until he alone sells them.

    Do you recommend to go with a big house? (Although I am not sure how to define a good big brokerage).

  5. Radhakrishnan Subramanian

    I would like to share the following processes which should additionally help an investor to keep a tag on his holdings:

    1. NSDL and CDSL send a consolidated statement of all the holdings of an investor, accross Dps.

    2. The brokers are now required to keep a record of instruction by customers for executing a trade, such as voice recording, email, etc.

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