SEBI Circular on DDPI  and relevant Q&A

SEBI issued a circular on April 4, 2022 about Execution of Demat Debit and Pledge Instructions (DDPI) replacing power-of-attorneys (POA) that are usually given by investors to stock-brokers and depository participants.

From July 1, stockbrokers will not be able to collect POAs from new clients they onboard. Instead their clients will need execute a document known as a “DDPI”

What does DDPI mean for stockbrokers? What happens after July 1? Is this an additional compliance burden for stockbrokers?

In this FAQ we seek to demystify SEBI’s Circular on Execution of DDPI for stockbrokers – from a legal and operational perspective.

What is the role of Demat Debit and Pledge Instruction (DDPI)?

Earlier, SEBI allowed stockbrokers to collect a Power of Attorney (“PoA”) from clients/investors. This PoA would authorize stockbrokers to perform key activities on behalf of their clients  in the course of day to day operations – namely transfer of shares/stocks/securities and pledging/re-pleding of securities.

In case clients did not give a PoA, stockbrokers would need to collect an authorization slip each time they wanted to perform a transaction on behalf of a client. Naturally, doing this for every client on a regular basis would be a massive operational nightmare for both stockbrokers and clients.

To avoid this, almost all stockbrokers (especially large ones operating digital interfaces) would collect a “Power of Attorney” from their clients.

Under the DDPI Circular – SEBI has done away with the Power of Attorney from July 1.

Instead of the Power of Attorney, clients will now need to execute a Demat Debit and Pledge Instruction (DDPI) to authorize stockbrokers to perform transactions on their behalf on a day to day basis.

Note: DDPI does not invalidate existing PoAs. Stockbrokers would only need to collect DDPI from new customers that they onboard after July 1. The authorization given by existing customers via PoA would still be valid.

Ok, so a DDPI is a new type of document – but it essentially performs the same function as the PoA. What changes for stockbrokers?

Functionally, the DDPI performs the EXACTLY  same function as the PoA.

However, operationally, the DDPI changes the game – it can be digitally signed.

 

 

SEBI provides explicit permission for the DDPI to be digitally signed. This was not possible for PoAs. The POA requires Wet – signature to be held as legally valid.

So what if the DDPI can be digitally signed?

Under Schedule I of the IT Act, powers-of-attorney were excluded from the ambit of documents that could be digitally signed.

For stockbrokers, this meant that the execution of the PoA was physically signed (Wet-signatures required).

In the last half a decade, most stockbrokers – from mid-size ones to large ones – digitally transformed their onboarding processes in an unprecedented way. However the PoA process was still physical due to Schedule I of the IT Act – creating serious operational hassles for digitally minded stockbrokers.

 

The new DDPI circular converts compliance into opportunity – with the “authorization” document now officially permitted to be digitally signed or “eSigned”.

 

But wait, the DDPI needs to be stamped – won’t this still be physical?

Good catch. Simple eSign is not enough. Unlike other documents in the stockbroker flow – both the PoA – and now the DDPI – needed to be stamped.

Physical stamping is a logistics nightmare:

Maintaining a network of stamp vendors to procure stamp papers

Coordinating with stamp vendors to maintain a regular supply

Purchasing stamp paper

Defacing the stamp paper appropriately

Attaching the stamp paper to the DDPI

Stockbrokers can overcome these challenges by incorporating digital stamping of DDPI documents in their onboarding process.

How does digital stamping work?

Digital customer onboarding is not an Aadhaar eSign game anymore – its a complete digital paperwork game.

 

Stockbrokers will need a solution that:

Provides seamless Aadhaar eSign with multiple backup options

Provides legally compliant digital stamping that integrates smoothly with the digital signing journey

Has a UI/UX that prevents customer drop offs

The eSign solutions commonly used by stockbrokers currently  are just that – eSign solutions. They provide very simple API calls that enable customers to apply a basic Aadhaar eSign on stock broking paperwork.

My current eSign solution tells me they already have digital stamping capabilities or are building it.

Stockbrokers will need to use DDPI from July 1. That’s less than 80 days away.

For the current legal system in India, a complete digital stamping solution needs to:

Have a procurement process for physical stamp papers

Have a process to legally deface stamp procured physical stamp papers

Have a quality check process for defective/incorrectly defaced stamp papers

Have a fool-proof system to digitize physical stamp papers

Have a digital system to recover stamp papers in case customer does not complete the eSign – to prevent wastage and revenue loss

Have a guaranteed TAT commitment for provision of digital stamp papers – to give predictability to your onboarding operations

The above steps are not simply a “feature add-on” that can be built in a few sleepless nights. They require a dedicated operations team, a solid tech backend that supports stamp digitization and a trusted, pan-India network of stamp vendors that have gone through adequate KYC checks.

No matter what your “eSign vendor” promises you – they cannot build this overnight.

Ok, now what? Am I consigned to physical flows?

You can choose one of three options:

1. Go with physical DDPI + physical stamping just like you did with PoAs
2.  Ask your current eSign vendor to add an operations team, a compliance team, onboard and do KYC for a dedicated network of stamp vendors, build a digital backbone in compliance with the IT and Stamp acts, maintain dedicated support for stamping etc.
3. Switch from eSign to complete Document Infrastructure which has eSign and eStamp built into a unified, easy-to-integrate flow.

3rd Option  sounds  long term and permanent solution.

 

Updates on 30.06.2022.

 

The SEBI wide its Circular issued on 30th June 2022 has extended the Due Date for DDPI applicability by 01st September 2022. Meaning thereby that the New Clients On-boarding can be done by the Stock brokers by taking existing POA till 31st August 2022.