As questions tumble out and clients wonder what will happen next with regards to Karvy crisis, it is important to understand the nature of the relationship between the stock investor and his stock broker.

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Corporate Lawyer, HP Ranina in an interview with CNBC-TV18 spoke at length about what are the dos and don'ts of engagement between the investor and stock broker and the lessons, we as well as regulators need to learn from this crisis.

Ranina said, “The power of attorney is given by the client to the broker to sell on the client’s behalf. So if the client gives instructions to the broker to buy or sell then the power of attorney will be used, but the power of attorney cannot be used by the broker for his own dealings, which are not authorized by the client.”

“I do not think the law has to be changed. The only issue is how the power of attorney is to be worded. The client has to be extremely careful and before he gives power of attorney, he must read every word of it to make sure that it will be used by the broker only when the client himself gives the instructions to buy or sell and then if the broker still misuses that power that would be a criminal breach of trust and broker could be sued or arrested for a criminal offence,” he added.

Speaking about banks’ claims, he said, “The banks are right. If the banks were given the impression that Karvy had the right to use the shares then the bankers did no wrong; they gave the loan and they entitled the securities on the basis of the loan given. So the bankers are absolutely right.”

With regards to the regulators involved, he said, “Two regulators are involved but apart from regulators the real issue is about the broker who has committed a breach of trust if he has pledged the shares belonging to client without the permission of the client. As far as regulators are concerned, the RBI is clear; they have allowed the finance companies to raise loans against properly pledged shares."