Each one of you when opening a demat account with an online broker would have had to sign a POA (Power of Attorney). Sounds like a very serious document and hence arises a lot of questions from investors on why exactly you are signing this piece of document. My first recall of the acronym POA was from the movie Baazigar, where Shah Rukh Khan and the villain both at various times in the movie use it to transfer all assets into their name. I will write down in this blog what a POA is, what can be done with it and what are its various uses.
When you buy shares, be it in an online or offline account, the shares are automatically transferred to your demat account, you don’t need a POA to do this.
When you sell shares or want to pledge them, that is when the shares are going out of your demat account, this is when the POA is required if it has to be done online.
Traditionally (offline method), you would have to send the delivery instruction slip asking to debit the shares from your demat and send it to the brokers office. Once the slip is received at the broker, he would debit your demat account. Some of the issues with this method were: Costlier (slips had to be physically delivered and hence the courier/transport cost), Risk of Auction (if the slip doesn’t reach in the stipulated time, risk of auction penalty) and generally more cumbersome.
With the advent of online broking the above method was no more viable. POA was introduced for smooth operation of the demat account. With the power of the POA, everytime you sell shares the broker uses it to debit the shares from your demat account and provide it to the exchange. POA is also used to debit shares from your demat account when you intend to pledge them to get collateral margin for trading futures and options. Find following a brief about what a POA is and why it is required:
What is a POA?
Power of Attorney (POA) is a legal document giving legal authority to another person to operate your account (in this case the demat account) as per the instructions contained.
Is a POA compulsory?
No, it’s not compulsory, but required for smooth operation of demat account. Remember it is required only for the demat account.
Different types of POA?
Specific/Limited and General POA. Specific POA states the limited range of powers of the POA whereas General POA is generic. The POA given to Zerodha is specific and mentions the various powers on the POA. Ensure that when signing the POA, it is only in the name of a SEBI registered stock broker and no one else.
Use of POA?
While trading futures and options or intraday equity trading, there is no requirement of the POA. But whenever you sell shares from your demat account or want to pledge them for getting margin for trading F&O, the POA is used to debit the shares from your demat account. This ensures that the entire process is online and less cumbersome.
POA, though not a mandatory document to be signed, is required for smooth operation of your demat account. Hopefully this clarifies your doubts about POA.