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8 pointers to safeguard your Demat Account from misuse and fraud  

  • Karunesh Dev
  • 24 Nov
  • 7 minutes

With increasing awareness and focus of multiple stakeholders apart from the government, financialisation of assets has really taken off in the last couple of years. In addition to this, due to Covid induced work from home routine, the post pandemic era resulted in a huge retail participation boom. This led to opening up of Demat accounts in large numbers.

These first time investors have taken quite a liking to the convenience that comes with the electronic form of buying and selling securities online. However, this has also given fraudsters an opportunity to carry out their activities by targeting customers, specifically the ones who are not very careful. 

Here, we will share tips on how best you can safeguard your Demat account and ensure that it is not misused or prey to any frauds.

What is a Demat account?

As you are aware, a Demat account stores securities like shares, bonds, ETFs, mutual funds and other assets in dematerialised or electronic form. 

Your demat account is actually with either the National Securities Depository Limited (NSDL) or Central Depository Services Limited (CDSL), which were started, largely with the backing of National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). 

NSDL and CDSL give Depository Participant (DP) licenses to brokers, intermediaries and agencies. These in turn, hold, administer and manage the shares or securities on behalf of NSDL or CDSL.

Thus, relatively speaking, your shares are safe in the Demat account and are governed by SEBI guidelines and regulations. However, there have been many instances of misuse, selling of shares in client accounts, use of securities in client accounts as collateral etc. 

Read more: Fee and charges associated with your Demat Account

This brings us to the need to safeguard Demat accounts.

8 pointers to safeguard your Demat accounts from misuse, fraud or scam

Although the threat cannot be done away with entirely, there are a few steps which can ensure a high level of security and safety. Some of these measures are discussed here:

1. Never write down your login details

This is a very basic fact but still ignored by many. Login information is to be remembered and not written / noted anywhere. Neither should it be shared with others. Logging in from a secured network as well as from a safe environment is a must (do not use unsecured data networks in airports, hotels or cafes). Keeping your email id and phone number updated and active at all times is definitely a necessity.

2. Regularly check your Demat account

Even if you consider yourself a ‘long term’ investor, checking the demat account at least twice a month is advisable. You can just go through the investments and past transactions in order to ensure safety and for preventing any misuse.

3.Ensure password protection at all times

Having a strong password is a no brainer. In fact, most of the accounts now have a two – factor password protection feature which adds to the safety. However, always think of scamsters as being one step ahead and thus keep really strong passwords. Changing the password at regular intervals is advisable and recommended. Keeping a track of sms messages and phone SIM protection is also a vital part of your demat account security check. 

4. Maintain a transactional record for cross verification

Keeping a track of last transactions and matching these with the electronic contract notes should be a general practice. You can identify any missing transactions by way of this account reconciliation. This can be highlighted immediately to the demat company for corrective action.

5. Opt for an established broking house

With many first-time investors entering stock markets, picking a good brokerage becomes a tough choice. It is essential to go with a broking firm that has been in the business for some time, has a proven track record, and is trustworthy. Also, look for the broker’s vested interest in any involvement in proprietary trading. In case there is, it is best avoided because this can be a potential conflict of interest case. 

6. Carefully use Power of Attorney (PoA)

In most cases of scams or fraud in Demat accounts, this has been the primary tool for client account misuse. Although now there is a stringent rule governing PoA, a general purpose agreement in use earlier made a transfer of funds very easy for the broker / agent. A limited-purpose PoA in place now makes it difficult for the broker/agent to carry out any material transaction on behalf of the client. It is an effective safety measure for client protection.   

7. Avoid non-usage of account for a longer duration

In case you are not going to use or check your Demat account for a considerable period, it will be best to request an account freeze’. This means that no funds can be utilized from your account for making ‘buy’ transactions and even the ‘sell’ option gets blocked. The ‘freeze’ option also ensures that you are getting the benefit of all the corporate actions on the shares you hold. For example dividends, bonus splits etc. The request for ‘freezing’ the account can be submitted in the office or online.   

8. Secure your Debit Instruction Slip (DIS) booklet

Though online use has made DIS less common, it is still the equivalent of a Bank chequebook. In case of a transfer of shares from one demat account to another, the DIS needs to be filled and signed. The DIS booklet should not be left unattended to or handed over unsigned, to the broker, under any circumstances.

Conclusion

Demat accounts, like any other type of financial or banking accounts, are still prone to threats, whether online or offline, by way of fraud, misuse, hacking etc. The regulator, stock exchanges, related agencies and Demat providers have implemented various measures for making the entire value chain investor friendly and safe. However, it is the customer who gets impacted the most in case of any mis-adventure.

FAQs

1. Is a Demat account safe in India?

A Demat account comes with various safety features like secure log in, Two – factor authentication, time based OTP etc. However, it is in the interest of users to be vigilant in its use and safe upkeep.

2. How can I choose a good Demat account?

Safety, security and ease of use should be kept in mind along with various charges. A thorough research and comparison of features and benefits will definitely help.

3. I am not a trader – should I still check my demat account regularly?

Whether you are a trader or investor, it is in your interest to login regularly and monitor the account transactions. This will save you from any potential threat of fraud or misuse.

4. Is it mandatory to reconcile transactions with the electronic contract notes?

This again, is a good practice to follow and is not mandatory. It simply involves matching your account activity with the account statement next day. It rules out a possible miss on your or Demat provider’s behalf.

5. What should I check about the Broking firm?

You should look for its market standing, parentage, years in business, and customer feedback . A close scrutiny for validating the broker’s credentials will ensure future peace of mind.

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Karunesh Dev