CDSL’s New System For Sale Of Equities Has Teething Issues
A system introduced by Central Depository Services (India) Ltd. that lets individuals sell equity shares without giving their brokers power of attorney went live on Monday, crashed and had to be temporarily rolled back, a senior executive at a leading brokerage told BloombergQuint.
As a result, brokerages that had tried to implement the system had to revert to the earlier process. Another attempt to move to the new system will be made Wednesday, the executive cited earlier said on the condition of anonymity as he isn’t permitted to speak to the media.
BloombergQuint is awaiting a response to a query sent to CDSL.
How The System Works
In a recent blog post, the discount broking firm Zerodha explained how the new system is meant to work, and circumstances that necessitated its implementation.
Individuals who have accounts with brokers also have demat accounts with depositories to hold owned shares in electronic form. During the onboarding process to create the account, most individuals sign an agreement granting the brokerage power of attorney. This was needed to facilitate the debiting of shares from the demat account by the broker when the individual placed an order to sell.
Regulations require the power of attorney to be signed in physical form. And as a result, brokers that initiated a completely online onboarding process still had to get a physically signed power of attorney agreement. To get around this inconvenience, CDSL last year introduced what is called an electronic delivery instruction slip, or e-DIS.
Using this process, individuals could use a PIN on their online brokerage accounts or mobile applications to place a cash-and-carry sell order, which results in physical delivery of shares.
However, it was found that the depository CDSL couldn’t validate whether the correct PIN was being entered because it was happening on the broker’s trading platform.
The new system, which was meant to go live on Monday, required the use of a CDSL TPIN, which is generated by the depository. This TPIN would have to be used to authorise the sale of securities in advance, which takes place on CDSL’s platform. The authorisation would be in place for 90 days.
For instance, if an individual has 100 shares of company ‘XYZ’, he/she can use the CDSL TPIN to authorise the sale of all 100 shares. Over the next 90 days, the individual can sell some or all of their shares at once or in tranches.
Prickly Issue Of Power Of Attorney
An incident involving Karvy Stock Broking Ltd. brought to light the potential for misuse of the power of attorney. The Securities and Exchange Board of India barred the broker from taking new clients after it was found that Karvy credited funds raised by pledging client securities to six of its own bank accounts.
“The bigger thing that the new system is solving is that now it doesn’t allow brokers to move securities from the client’s demat account without their knowledge or approval,” Nithin Kamath, founder and chief executive officer of Zerodha, told BloombergQuint over the phone. “Only those securities that an individual has signed off on can be moved by the depository participant.”