The Securities and Exchange Board of India (SEBI) has done well to bring out a discussion paper on power-of-attorney (PoA) mandates. Given reports of widespread misuse, it is only fitting that SEBI, in its role of furthering investor education, should lay down the minimum safeguards to be incorporated in such authorisations.
Unfortunately, financial literacy, globally, and especially in India, is woefully inadequate. The net result is a large number of, not only individuals but corporates (and if the recent financial crisis is any indication) and sophisticated financial players undertake financial transactions without understanding their full implications.
In such a scenario, SEBIs role, as guardian of investors interests, to educate investors, especially retail investors to whom it owes a higher duty, of the pitfalls in dealing in financial markets is paramount. One such pitfall arises from liberal, and often poorly-thought-out, grant of PoA mandates.
A PoA is a legal authority given to another person/entity to act on your behalf, strictly in accordance with the authorisation given to it. Hence it must be very carefully worded and even more carefully delegated.
The SEBI paper spells out the basic requirements to be incorporated in PoA mandates to be granted to stock brokers/ depository participants. Cautionary advice such as the PoA shall not be executed in the name of any employee or representative of the stock broker and/or depository participant, but only in the name of the concerned entity and the PoA should be executed and stamped as per the rules /law prevailing in the place where the PoA is executed or the place where the PoA is kept as a record, as applicable may seem basic to a person who has some knowledge of law but not to the vast majority who transact in our capital markets.
It is common knowledge that most people sign documents, whether loan documents of banks, or subscribe to initial public offerings without reading the related prospectus. True, a fool and his money are easily parted. But it is the regulators job to teach investors not to make such parting easier. The discussion paper is a welcome step in that direction.