SEBI has tightened rules on unauthorized trading in stocks exchanges
SEBI rules are quite clear that each trade has to be authorized by the client if the dealer/trader are executing trades on behalf of the clients. In internet trading, the client executes the trade; so question of authorization does not arise. SEBI regulations pertain to authorization of trades where the trader/dealer is affiliated to the broker executing trades.
Effective 2017, SEBI made it mandatory that every order must be documented and every trade must be backed by proof of order placement by the client. SEBI has given a choice to the broker that such records can be in the form of email, phone call, mobile SMS etc. Such authorizations will only be valid if done from the registered email or mobile number and all calls must be accepted on recorded lines only.
What to do when there is an unauthorized trade in your account?
In a competitive broking scenario, traders and dealers are often under pressure to generate volumes. This leads to some dealers putting unauthorized trades in accounts where there is margin available. As a client, here is what you need to do when there is an unauthorized trade in your account.
- Brokers send you the contract note on the evening when there is a trade in the account. If you have not put a trade and you get a contract note, you can be sure that something is amiss. You must immediately check and write a mail to your broker.
- At times you may have put an order to buy 500 shares but you realize that they have purchased 1000 shares in your account and squared off 500 shares intraday. Such errors do happen but if you see the pattern repeating, it is an unauthorized trade.
- There is an important point to remember here. When you get the contract note and do not raise any objection within a week, the order is deemed to be authorized by you. Hence the onus is on you to ensure that the moment you find any unauthorized trade; immediately notify the broker and document it.
- Whom should you complain to and how should you complain? Don’t just restrict yourself to a phone call. Write a detailed email to the broking head and also give a written complaint at the office and take acknowledgement.
- Most brokers have TAT (turnaround time) for resolving complaints of 3-4 days. If you don’t hear from the broking head by then, the next step is to escalate the matter to the compliance officer of the broker and also to the CEO simultaneously. The broker is obliged to provide contact details in the contract note.
- If the broker tries to give a template response saying that all is OK, insist that you want to see copies of the mail sent by you or SMS sent by you or recording of telephone conversation. At this point, most brokers agree to compensate for any losses.
- If, despite all these efforts you don’t see any progress, escalate to NSE/BSE where the trade was executed. Simultaneously, file an online complaint with SEBI SCORE system. When you file a complaint with the regulators, it is very important that you give granular details of the name of the dealer, time of the trade, date of the trade, affirmation that it was unauthorized, amount of loss, correspondence with broker etc.
Not all trades without consent are unauthorized. For example, if you have unpaid margins on T+2 date and if the stock price has fallen sharply, the broker is allowed to sell other shares in the pool to recover the loss. This will not qualify as an unauthorized trade. Similarly, if you have offered shares as margin for F&O trading, broker can sell your shares to make good the MTM loss without your permission. If the exchange/regulator suspects that you are indulging in circular trading, the broker can be instructed by the authorities to square up your trades without your approval.
The most important thing in addressing the issue of unauthorized trading is speed. The moment it comes to your notice, you must immediately bring to the notice of the broker and document the communication. If you find the broker not responsive to your complaint, it only means that unauthorized trading is an internal practice that is not frowned upon. In such cases, once your issue is resolved, it is best to close your trading account and shift to another broker.