Caveat Emptor: scrutinise before you sign

Before I begin, I suggest that you forward this post to anyone who trades in shares or patronises a brokerage firm; this could save them a lot of trouble.

Whenever I'm asked to sign a document, I read it carefully and ask for clarifications. It puts marketing people off, since they're in a rush to close the deal and move on, but this habit has served me well. However, there was one occasion when I signed without reading, when opening a trading account. Why? Because the document was 30+ pages thick. Never again, though:

The Documents:

It was in March, I think, that someone from the brokerage firm I patronise came over to get some documents signed. My father signed the documents that were presented to him, and I was called over to sign my set. On reading carefully, I realised that:

1. The first document allowed the brokerage firm to finance my transactions if I planned to trade without accepting delivery of the stocks, i.e. if I was a day trader and wanted to take the risk. I'm a value investor, but wanted to give day trading a shot, so I was okay with this. Shares that receive financing are kept in the Margin trading account.

2. The second was a "power of attorney" document, which would allow the brokerage firm in question to sell my shares in order to recover any dues. Something similar to:

If the Client executes a power of attorney in relation to the operation of its bank account, the Member shall be authorised to directly operate the bank account of the Client to the extent necessary to credit and debit the proceeds/dues from the various transaction that are carried out by the Member on behalf of the Client, and also to debit.

(i) Margin due or shortfall in Margin due from the Client, and
(ii) any other charges or dues from the Client...

...Member will not be liable in any manner for any loss or claim that may arise due to any blocking of funds that may be erroneously instructed by the member to the designated bank.

I didn't need the financing, and there was no way that I was going to sign the power of attorney statement; I refused to sign. Both documents were supposedly dependent on each other, so I got neither. I made my father cut his signature too, and the document became null and void.

The representative said that the brokerage firm would not be able to trade our shares without this. I told him to close our accounts. The broker later said that these were not needed, and we could continue to trade, even if we hadn't signed the documents. So the representative was bullshitting.

It seems that when I signed the 30+ page document, I had signed the power of attorney to the Member/Brokerage firm. It was only because the brokerage was changing its name that I needed to sign these documents again. I didn't, so I retained complete control of my holdings.

This Month

I received a statement from the broker with a listing of all my shares. I realised that they were held in the Margin account and not the DP account, and asked for an explanation. I also received a statement that two shares of a particular script had been sold without my authorisation.

The explanation
: prices of that script had fallen, and the balance in my margin account was negative because of some charges levied, so they sold the shares to compensate for the loss.

My case is simple, and strong:

1. The shares were kept in the margin trading account without my authorisation. They had previously been in the DP account. I didn't ask for financing, and hadn't signed the agreement.
2. Two shares were sold without my authorisation, and since I hadn't signed the power of attorney agreement, they had no right to sell them.
3. I received no intimation of the fact that the my balance was negative. I'd have sent a cheque immediately. Previously, they used to charge interest. I had no problems with that.

The broker has agreed to compensate me for the two shares, and pay the difference for the repurchase, failing which I shall consider legal action. I've given him a deadline, and you may expect an update on Tuesday.

A family friend who had signed over the power of attorney found that his broker had traded on his behalf without authorisation, and lost money, in order to meet brokerage targets set by the firm. I suggest that you check whether you have signed over the power of attorney or not.

(Shreya, Have you? And what are my legal options, counsellor?)

Related article by Sucheta Dalal

Since we're talking about stocks, Ranbaxy looks like a contrarian investment to me. Risky, but could be worth it at these levels, and given the decline because of the bad news. And I found this stocks related blog interesting. Also this one. Both via Technorati.

Addendum

Last-to-last night, I heard something on CNBC-TV18 about SEBI asking a particular brokerage firm for clarifications on the Power of Attorney they make clients sign. This was just a headline and was never followed. Either the news was unsubstantiated, or buried. Nothing on moneycontrol.com either, though I did find this article. Relevant portion:

The other rampant method is by retaining shares bought on behalf of the client in the broker's account. Here the client gives an undertaking that he is buyng the shares to sell them off quickly. The broker 'retains' and manages the client's portfolio. In this system, the shares do not even reach the demat account of the investor.
3 Comments:
Blogger mungojerrie said...

gah okay/ TERRIBLY out of my league but contracts basically work like this-
1. It doesnt matter where you sign on the contract doc. You're still considered to be signing to entire contract. So your sign could be on the first page, the middle page or the last page and it would make no diff. Sometimes they even ask you to sign on every page, or on every esp.-important page (this in fact is one of the sugg to make click-wrap electronic consumer agreements safer) A contract is basically supposed to indicate that youve agreed on something and your signature is just proof of that. If the POA you're talking abt was a part of the main contract, then signing the first part of the contract would mean you'd have signed the POA as well. but since you Didnt...
2. well evidently the man's in the wrong bc you didnt authorise him to transfer the shares to the margin trading account (or sell them, obviously). unless theres some technical detail that im unaware of.
3. If however the POA is a separate contract (I'm clueless about this, really) then itd be poss to shift your shares without giving the guy the right to sell.

As for reading huge contracts. Okay this is again not something I'd be willing to bet my life on, yet- but I think when you read a contract there are certain parts which are just more relevant than the other parts. you begin with your whereas clauses that describe the conds under which you're entering it, then there are the definitions, the representations and warranties, the obligations of the parties under the contract and the other standard stuff like procedure in case of breach...

Look for the reps and warranties
and the obligations of parties under the contract. It'll cut down how much you have to read... and i suspect the defins and procedure wont usually have too much dicey stuff.

but! me no know law. please to consult proper lawyer person :P

November 25, 2005 11:33 PM  
Blogger mungojerrie said...

k i just read the sucheta dalal article. if your poa Was "slipped in inconspicuously" it wouldnt be fair. there are probably some regulations that disallow it. In cons.protection law you're not allowed to do that- slip in a blatantly unfair clause that is. caveat emptor is old law and increasingly its being recognised that the consumer has weaker bargaining power- esp where standard form contracts are concerned.
BUT like i said, stock markets have an overwhelming number of regulations and I dont know anything about them. consult attorney *) you're in the right and all!

November 26, 2005 12:30 AM  
Blogger Nikhil Pahwa said...

Well, the POA was a seperate contract, as was Margin financing one. So, even though I'd signed the 30 page one, due to a change in SEBI regulations, they needed me to authorise these seperately.

I didn't sign both, so it wasn't right for them to shift or sell.

He tried to slip it in inconspicuously, but that didn't work. Let's see what he says tomorrow. I'm a bit of a hardass when something like this happens. I'll probably go to consumer court on this, if they dont concede.

Do check your T&C too. That was the main purpose of this post. From what I've read now, it seems quite a few people are at risk. Posting a link to a moneycontrol.com article.

November 26, 2005 11:03 PM  

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