By 
The democratisation of equity investing in India through accessible trading apps has brought millions of new participants into the market – and along with genuine investors, it has attracted a sophisticated ecosystem of fraudsters targeting those who are new to digital financial services. The demat account, which holds the entirety of an investor’s equity wealth in electronic form, is a valuable target. Understanding the threat landscape, recognising common fraud patterns, and implementing account security measures are no longer optional activities for digitally active investors in India – they are essential disciplines.
Common Fraud Patterns Targeting Indian Investors
Investment fraud in India has come a long way since the days of pump and dump through hardcopy newsletters and cold calling. Today fraud operators take advantage of newer channels such as WhatsApp groups, Telegram channels, Instagram accounts and YouTube videos to target would-be victims. The script is similar – the fraud operator poses as an expert who has delivered exceptional returns through stock tips or options trading or some algorithmically generated system, with testimonials (often fabricated) from followers who have made a fortune by following the operator’s advice. The operator invites would-be followers to join a paid group where they get tips that deliver, till the operator cuts off or the strategy fails due to a mathematical inevitability.
SEBI has taken action against unregistered investment advisors and unauthorized trading signal providers, but the scale and velocity at which these operators proliferate presents a perpetual challenge. The best protection remains investor awareness – there is no legitimate expert who provides guaranteed returns, and high returns always come with risks that the operator is likely to have kept hidden, and the basic requirement of SEBI registration for any investment advisor who takes payment for providing advice.
Protecting Your Account From Unauthorised Access
The protection of your electronic account requires several measures that investors should take to protect their accounts from unauthorized access.
Two-factor authentication which requires a password and a one-time password either on the registered mobile number or authenticator application is the first level of protection. Brokers usually require two-factor authentication for logins and sometimes for other account operations as well, but it is important to ensure that two-factor authentication is enabled and that the registered mobile number is current and accessible only to the investor.
Fishing for OTPs (One-Time Passwords) is a common tactic used by fraudsters who pose as brokers, depositories or SEBI and seek to extract the OTP that is sent to the registered mobile number as a text message or call. Reputable institutions never ask for OTPs over the phone or through SMS or email. Any request for OTP or account details or a one-time link to log in should be treated as suspicious and investigated before taking any action.
Understanding Power of Attorney and Its Implications
When opening an account with a full-service broker, the investor is asked to sign a power of attorney which authorizes the broker to operate on the depository account for the purpose of settlement of trades – that is, to debit shares when sold and pledge securities for margin purposes. However, the investor should ensure that the PoA (Power of Attorney) is limited to the purposes of trade settlement and does not give the broker carte blanche authority to sell securities at their discretion.
SEBI has mandated that the investor authorizes individual trades through CDSL TPIN or the NSDL equivalent for equity delivery trades, thus requiring the investor’s explicit confirmation for debits to the account. This protects the investor from unauthorized sales of securities by the broker as the confirmation is effectively a mandate for each debit. Investors should ensure that their broker’s settlement process adheres to these requirements and that the transaction statement from the depository is reconciled with the contract notes provided by the broker.
Steps to Take If Fraud or Unauthorised Activity Is Detected
If an investor discovers that unauthorised transactions have been made in their account, the first step is to contact the broker’s customer service to block the account to prevent further transactions. The investor should also file a complaint with the depository (NSDL or CDSL) and with SEBI via the SCORES platform and file a police complaint with the cybercrime cell that has jurisdiction over digital financial fraud. Preservation of documents, including screenshots of transactions, communication with the broker and any suspicious messages received before the fraud, is critical, as the resolution process can be time-consuming and may require evidence to support the complaint.
The investor should be aware that the resolution process can take a while, but reporting promptly can help in recovering any losses and preventing further losses. Investor protection funds maintained by the exchanges can compensate investors for losses due to broker default, but the process of claiming from these funds is complicated and should be considered a last resort.
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