How to Protect Demat Account from Fraud

20 September 2022
5 min read

You can store shares and other assets in an electronic format using a Demat Account, also referred to as a Dematerialized Account. While trading online, customers can trade more easily because shares are purchased and stored in a Demat Account.

All of a person's holdings in stocks, government securities, exchange-traded funds, bonds, and mutual funds are combined in a Demat Account.

Speaking about the Demat Account Frauds, investors who owned shares in these two Depository Participants were very concerned when SEBI tried to order some infamous brokers to close down their Demat operations in the wake of the IPO scam back in some past year.

The main worry was whether all of their Demat shares would disappear entirely. That shouldn't be a surprise since no one physically maintains share certificates in the Demat scenario. Only a retaining statement and a payment statement are available. These investors, many of whom were large investors, were understandably highly concerned that they had ended up losing all of their holdings.

The number of fraudulent Demat account incidents has increased in the last decade. There are some risks associated with an electronic account, despite its convenience.

Demat account frauds have risen significantly in recent years, partly because more and more new investors are entering the market and are ill-equipped to defend themselves.

Stock market officials and brokerage firms constantly develop unique and inventive ways to prevent fraudulent activities. Still, the account holder must also adhere to the fundamental steps to ensure that he makes no mistakes that could cost him significantly.

You can effectively lower the risk of Demat account fraud with a few easy steps. Here are some precautions Demat account holders can take to protect their Demat Accounts against fraud.

Best Ways to Protect Your Demat Account from Frauds

Following are some precautions and safety measures that Demat account holders can take to combat Demat Account Fraud-

1) Always Be Cautious & Do Not Forget About Your Demat Account

Sometimes people relocate abroad and conveniently forget about their Demat account. This careless action puts you at risk of phishing or other scams.

It is always best to request that your depository participant freeze your Demat account if you are moving and do not intend to use it for an extended period. This will prevent access from being granted until you request it again.

2) Safeguard Your LOGIN Information

Keep your login information securely. The best option is to remember them and not record them anywhere. Additionally, it is advisable to change the login password frequently.

3) A Powerful Password

Each Demat account has a special password that must be protected. The password can be changed as well. Select a strong password rather than a simple and obvious one. Also, avoid using public WiFi and other unsafe networks to access your Demat accounts.

4) Maintain A Record of Your Account Statements

Keep your email and phone number current, and carefully review all statements and SMS that the depository sends you. All transactions in your Demat account should be compared to your trading activity, and you should report any anomalies immediately to the depository.

5) Inspection of The Brokerage Firm

The popularity of stock trading among the general public has increased the number of brokerage firms daily. However, it is crucial to conduct a thorough investigation of the firm, including information about its history, performance history, reputation, and market credibility, before choosing it.

Additionally, it is crucial to confirm that the broker is not engaged in any form of proprietary trading. You can refrain from opening Demat account if the company engages in proprietary trading, as there may be a conflict of interest that would harm your interests. To prevent Demat fraud, brokerage firms must be appropriately verified.

6) Power Of Attorney

Brokers with PoA (Power of Attorney) agreements can access Demat accounts in online trading accounts. These POAs pose a severe threat to the nation's growing Demat-related frauds. Before the new rule, the sale of funds could be transferred using a general-purpose agreement, but now it cannot be done.

Insist on a limited purpose PoA when you sign a Power of Attorney with your broker. This is because brokers need the investor's permission before selling or transferring funds or securities. This procedure greatly increases your safety. Except for unpaid dues, the PoA may be rescinded at any time without prior notice.

7) Secure Your DIS (Debit Instruction Slip) Booklet

The Demat account's Debit Instruction Slip (DIS) booklet is like your bank chequebook. You must sign the DIS before transferring your shares between Demat accounts. To prevent fraud, you must make sure that you don't leave your signed DIS booklet with your broker or anywhere else.

Is Demat Account Safe?

Safety is one of the top priorities in every aspect of a person's life. And it becomes even more critical when it comes to protecting your investments or financial resources. As a result, investors frequently wonder whether a Demat account is secure even before entering the stock market and opening one.

When you open an account with a Depository Participant, they are registered with one of the two depositories, and both NSE and BSE support and oversee those depositories. On top of that, SEBI supervises the entire framework. This guarantees the security of the Demat account and makes it simple for you to carry on with your stock market trading activities.

There are few chances of fraud in your Demat account thanks to all the rules and SEBI's close monitoring. Therefore, Demat account opening is safe. The SEBI has also assured that a client is not compelled to sign a power of attorney with the stockbroker to provide additional safety. However, it is up to you as the user to take precautions to protect your account.

You may also want to know How to Open Demat Account Online

Conclusion

Frauds involving Demat accounts may occur in one way or another. But by having a defence against Demat account fraud, you can significantly lower the likelihood of becoming a victim by following these easy steps.

Although Demat accounts are typically very secure, you should always be on the lookout to protect your hard-earned money.

Disclaimer

The stocks mentioned in this article are not recommendations. Please conduct your own research and due diligence before investing. Investment in securities market are subject to market risks, read all the related documents carefully before investing. Please read the Risk Disclosure documents carefully before investing in Equity Shares, Derivatives, Mutual fund, and/or other instruments traded on the Stock Exchanges. As investments are subject to market risks and price fluctuation risk, there is no assurance or guarantee that the investment objectives shall be achieved. NBT do not guarantee any assured returns on any investments. Past performance of securities/instruments is not indicative of their future performance.
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